Clio：2024年中型律師事務所的法律趨勢 Legal Trends for Mid-Sized Law Firms

2024

publishedbyclio

Tableof

Contents

INTRODUCTION

6Mid-sizedfirmsversussmallerfirms

7Newthisyear

8Datasources

PART1

9THESTATEOFLEGALPRACTICE:HOWAREMID-SIZEDFIRMS

MEASURINGUP?

11Lawyershavematchedrateswithinflation,butnon-lawyersarewaybehind

13Mid-sizedfirmsaren’topeningmanymorecasesrelativeto2016

16Billingandcollectionperformanceisstrongamongmid-sizedfirms

18Keyperformanceindicators

PART2

26LOCKUP

28Whylockupmatters

29Measuringlockup

30Realizationlockup

32Collectionlockup

33Totallockup

34Featuresandworkflowsassociatedwithreducedlockup

36Howmid-sizedlawfirmscanreducelockup

PART3

37GETTINGPAIDFASTER

39Clientsandmid-sizedfirmsagree:billingtakestoolong

41Whygettingpaidfastermattersformid-sizedlawfirms

42Onlinepaymentsgetfirmspaidfaster

44Clientsalsowanttopayonline

2|LegalTrendsforMid-SizedLawFirms

45Useofonlinepaymentsbetweenmid-sizedlawfirmsandsmallerlawfirms

48Payingbycreditcard

49Howmid-sizedlawfirmscangetpaidfaster

PART4

51THERISEOFARTIFICIALINTELLIGENCE(AI)

52Lawyersinmid-sizedandsmallerfirmshavesimilarattitudestowardsAIuse

53AIcopyrightandbarassociationissuesaretopofmindforlawyersin

midsizedfirms

57UsingAItoolsinpractice

58Whatwouldmid-sizedandsmallerfirmswanttouseAIforinthefuture?

60WhyAImattersformid-sizedfirms

61DoAIattitudesdifferbetweenlawyersinmid-sizedfirmsand

potentialclients?

62ThefutureofAIformid-sizedfirm

s

65Clio’sinvestmentinmid-sizedlawfirms

APPENDIXA

66APPDATACOLLECTION

67Appdatacollection

APPENDIXB

69SURVEYDESIGN

70Surveydesign

3|LegalTrendsforMid-SizedLawFirms

Introduction

4|LegalTrendsforMid-SizedLawFirms

Introduction

Toremaincompetitive,mid-sizedfirmswillneedtoovercomethechallengesassociatedwith

complexanddiverseorganizationalstructures.

Amonglawfirmsofallsizes,mid-sizedfirmshave

traditionallyenjoyedanadvantageouspositionattheintersectionofsizeanddiversityofwork.Asthese

firmsgrowandexpand,theyhaveenjoyedthebenefitofincreasedresources,allowingthemtotakeonmorework,expandtheiroverhead,andserviceclients

acrossavarietyofpracticeareas.

And,withrapidadvancementsinnewsystemsandtechnologiesover

thepastyear,thelegalprofessionhasseentremendousgrowth.Indeed,lawyersinmid-sizedfirmsarebillingmorehoursandcollectingmorerevenuethaneverbefore,whiletheavailabilityofmoretoolsand

opportunitiesforinnovationcreateendlesspossibilitiesformodernlawfirms.

Butaremid-sizedfirmstakingadvantageoftheseopportunities?While

mid-sizedfirmsareseeingsuccessintermsofbillablehoursandcollectedrevenue,theiroverallperformanceinbillingandcollectionssuggests

thatmanyfirmsarefailingtooptimizetheirworkflows.

5|LegalTrendsforMid-SizedLawFirms

Introduction

Wealsoseegreaterpessimismamongmid-sizedfirmswhenweexploreattitudestowardsthearrivalofartificialintelligence(AI)—andwithit,theriskthatsomefirmsmayfailtoremaincompetitiveamongstanewgenerationofAI-enabledfirms.

Tokeeppace,mid-sizedfirmswillneedtoovercomethechallengesassociatedwithcomplexanddiverseorganizationalstructures.

Adaptingandevolvingtoimproveprocesses—whetherthatinvolvesnewbillingmethodsorembracingtherolethatAIcanplayin

automatinglegalworkflows—isequallycritical.

The2024LegalTrendsforMid-SizedLawFirmsreportlooksatwhat

distinguishesmid-sizedlawfirmsfromsmallerpractices.Sincenoone-

size-fits-allmeasureofsuccessexists,thisreportprovidesinsightinto

keytrendsacrossmultipleperspectives—includingfinancialperformance,productivity,andclientexpectationsregardingonlinepayments.

Byanalyzingtheseinsights,weidentifywheremid-sizedlawfirmsoftenfacetheirgreatestchallengesandhowtheycanworktowardovercomingthem.

MID-SIZEDFIRMSVERSUSSMALLERFIRMS

Thisreportdefinesmid-sizedlawfirmsasthosewith20ormore

employees.Wecomparethiscohortto“smallerfirms,”orthosewith

fewerthan20employees.Thesearebroadgroupstocompare,butindoingso,we’vebeenabletoshedlightondistricttrendsdistinguishing

thesetwocohorts.Whilenofirmsizeisobjectivelybetterthantheother,thereisnodenyingthatasthestructureandmakeupoffirmsdiffer,

thecircumstancesforthosewhoworkinthemdifferaswell.

However,thefindingsinthisreportdon’tjustapplytomid-sizedfirms—theycanbeusefulforanyfirmthatoperatessimilarly,withhigher

overhead,entrenchedprocesses,andmoremanagerialsupervision.

6|LegalTrendsforMid-SizedLawFirms

Introduction

Thefindingsinthisreportdon’tjustapplytomid-sizedfirms—theycanbeusefulforanyfirmthatoperatessimilarly,withhigheroverhead,

entrenchedprocesses,andmoremanagerialsupervision.

NEWTHISYEAR

We’veintroducedanumberofnewanalysesforthe2024LegalTrendsReportforMid-SizedLawFirms,summarizedasfollows:

EXPANDEDANALYSISOFTHESTATEOFLEGALPRACTICE

We’vebroadenedouranalysisofbusinessperformancetoincludedataasfarbackas2016.Thisexpandedhistoricalviewallowsustoidentifylonger-termtrendsthatprovideamorerobustpictureofhowfartheindustryhascome—andputsintoperspectivemorerecentchanges

relativetopastperformance.

ANEWMETRICFORFIRMPERFORMANCE:LOCKUP

We’veintroducedtheconceptof“l(fā)ockup”asameasureoflawfirmcash

flow.Thismetricincludesbothrealizationlockup,whichlooksathow

muchofafirm’srevenuesitsinanunbilledstate,andcollectionlockup,

whichmeasureshowmuchofafirm’srevenuehasbeenbilledbutremainsunpaid.Reducingtotallockupincreasescashflow,whichisinturnkey

toinvestinginbetterlawfirmprocesses.

7|LegalTrendsforMid-SizedLawFirms

Introduction

PERCEPTIONSONAIINLEGALPRACTICE

Inoursurveysoflegalprofessionalsandthegeneralpopulation,we’veundertakenanextensivestudythatlooksatnewimportantperspectivesontheuseofAIforlegalpractice.WithAI’srapidearlypublicadoption,thisdatagivesinsightintowherethelegalindustryisatincomparison,andwherethegreatestopportunitieslieforfutureinnovation.

DATASOURCES

The2024LegalTrendsforMid-SizedLawFirmsreportusesarangeof

methodologicalapproachesanddatasourcestodeliverthebestinsightsaboutthestateoflegalpracticeandstrategiesforfuturegrowth.

CLIODATA

We’veanalyzedaggregatedandanonymizeddatafromtensofthousands

oflegalprofessionalsintheUnitedStates,segmentedbasedonfirmsize,

toobservedifferencesinusagepatternsamongmid-sizedfirmsandsmallerfirms.Thisdataprovidesimportantinsightsabouthowtechnologyisbeingusedbylegalprofessionals,aswellasitsimpactonfirmperformance.

SURVEYOFLEGALPROFESSIONALS

Wesurveyed1,446legalprofessionals,segmentedbasedonfirmsize,

todistinguishandcompareresponsesbetweenmid-sizedfirmsand

smallerfirms,fromMay31toJuly20,2023.Thelegalprofessionalswe

surveyedincludedlawyersaswellassupportstaff—suchasparalegalsandadministrators—whoareengagedinthemanagementsideoftheirpractice.

SURVEYOFTHEGENERALPOPULATION

Wesurveyed1,012adultsintheU.S.generalpopulationfromJune13

toJune22,2023.Thissurveywasdesignedtogaugeattitudes,opinions,preferences,andbehaviorsregardingthelegalprofessionamong

individualswhohavehiredlawyersinthepastorwhomaybecome

potentiallegalclientsinthefuture.ThissampleisrepresentativeoftheU.S.populationbyage,gender,region,income,andrace/ethnicitybasedonthemostrecentU.S.censusstatistics.

8|LegalTrendsforMid-SizedLawFirms

Part1

Thestateoflegalpractice:Howaremid-sizedfirms measuringup?

9|LegalTrendsforMid-SizedLawFirms

Part1:Thestateoflegalpractice:Howaremid-sizedfirmsmeasuringup?

BylookingataggregatedandanonymizeddatafromtensofthousandsoflegalprofessionalsusingClio,we’vebenchmarkedmajortrendsinbusinessperformancethroughoutthelegalindustrysince2016.

Forlawyersinmid-sizedfirms,thisdataprovidesvaluableinsightintounderstandinghowtheirbusinessescomparetoothersintheindustry,whileidentifyingkeyfactorsforassessmentandimprovement.

10|LegalTrendsforMid-SizedLawFirms

Part1:Thestateoflegalpractice:Howaremid-sizedfirmsmeasuringup?

LAWYERSHAVEMATCHEDRATESWITH

INFLATION,BUTNON-LAWYERSAREWAYBEHIND

Chancesare,youfelttheimpactofinflationin2023.Whetherpurchasinggroceries,officesupplies,orlegalservices,theincreasedcostofgoods

andservicesisevident.

Serviceproviders—includinglawfirms—arealsoundoubtedly

experiencingtheimpactofinflation,andmanyhaveadjustedtheir

hourlyratestocompensateforeconomicchanges.Aswesawinlastyear’s2023LegalTrendsforMid-SizedLawFirmsreport,mid-sizedfirmsraised

theirhourlyratesatafasterpacethansmallerfirmsandtheCPI,likelyinresponsetothechallengesoftheCOVID-19pandemicandcostsresultingfromrisinginterestratesandinflation.

ByOctoberof2023,theCPInarrowlysurpassedtheaveragehourlyrateformid-sizedfirms.

11|LegalTrendsforMid-SizedLawFirms

Part1:Thestateoflegalpractice:Howaremid-sizedfirmsmeasuringup?

Whilelawyersinmid-sizedfirmsarebillingatahigheraveragehourlyratethaneverat$353perhour,theCPIcaughtuptotheaveragehourlyrateformid-sizedlawfirmsandnarrowlysurpasseditinOctober2023.

Howdosmallerfirms’hourlyratescomparetotheCPI?SinceOctober2021,smallerfirms’hourlyrateshavefailedtokeeppacewiththe

CPI.Theseresultsarenotnecessarilysurprising,asmanysolospride

themselvesonrunningleanerbusinessesandprovidingmoreaffordablelegalservices,whichcouldleavethemmorehesitanttoraisetheir

hourlyrates.

Withmid-sizedfirmsincreasingratestokeepupwithinflationand

smallerfirmsmaintainingmoreconsistentrates,growingcompetitionfromsmallerfirmsmayrequiremid-sizedfirmstothinkcriticallybeforeraisingtheirrates.Forexample,mid-sizedfirmsexperiencingincreasedcompetitionfromsmallerfirmsmaybebetterservedbynotraisingtheirrates,orbyraisingtheirratesataslowerpace.

12|LegalTrendsforMid-SizedLawFirms

Part1:Thestateoflegalpractice:Howaremid-sizedfirmsmeasuringup?

MID-SIZEDFIRMSAREN’TOPENING

MANYMORECASESRELATIVETO2016

Whenthinkingaboutthesuccessofalawfirm,akeymeasureistheamountofworkthateachfirmmemberisabletotakeon.

Mid-sizedfirmmemberswhobilltheirtimehave,forthemostpart,takenonfewermattersatanygiventimewhencomparedto2016.Legalprofessionalsatsmallerfirmswhobilltheirtime,ontheotherhand,haveexperiencedcomparativegrowthinthenumberofcasesthey’vebeenabletotakeonovertime.

Mid-sizedlawfirmshave,forthemostpart,

takenonfewermattersatanygiventime

whencomparedto2016.

●

13|LegalTrendsforMid-SizedLawFirms

Part1:Thestateoflegalpractice:Howaremid-sizedfirmsmeasuringup?

Theseresultsmayindicatethatmid-sizedfirmsareactivelymanagingheadcountbasedontheamountofworkcoming(ornotcoming)

throughtheirdoors.Asaresult,weseeamoreconsistent,andsmaller,changeintheamountofmattersbeingworkedonbyeverytimekeeper.

Amongsmallerfirms,thegrowthinnewmattersmaybeexplainedbyincreasedcapacity—inotherwords,timekeepersinsmallerfirmsarefindingmoreefficienciesintheirwork,allowingtheirfirmstotake

onmorenewmatters.

Furthermore,mid-sizedfirmshaveconsistentlyheldahigherproportionofnon-attorneyactiveusersthansmallerfirms,suggestingthatmid-sizedfirmsmaybespreadinglaboracrossalargerbaseofemployees.

Whatdotheseresultsmeanformid-sizedlawfirms?Whiletheymaylookconcerningatfirstglance,takingonfewercasesovertimedoesnotnecessarilyindicatethatmid-sizedlawfirmsareunderperformingrelativetosmallerfirms.

14|LegalTrendsforMid-SizedLawFirms

Whenwelookattheperformanceofresponsiblelawyers(orthenumberofnewmattersthatindividuallawyersareputinchargeof),lawyersinmid-sizedfirmshave,forthemostpart,seenmoregrowthbetween2018and2022.Theseresultsmayindicatethat,historically,a“l(fā)eadlawyer”inamid-sizedfirmmaybetakingonahighernumberoffiles,withabulkoftheworkbeingperformedbyotherindividualtimekeepers.

Morerecently,however,growthinthenumberofmattersalawyer

isresponsibleforhasalignedmorecloselybetweenmid-sizedfirmsandsmallerfirms.Theseresultsaresurprising,giventheassumptionthatlawyersinsmallerfirmswouldhavefewerresourcesthan

lawyersinmid-sizedfirmstotakeonmorenewmatters.Onepotentialexplanationmaybethatsmallerfirmsarefindingefficienciesin

theirpracticesthatallowthemtotakeonmorecases,suchastheadoptionofautomationtechnologies.

15|LegalTrendsforMid-SizedLawFirms

Part1:Thestateoflegalpractice:Howaremid-sizedfirmsmeasuringup?

Alternatively,ourpreviousresearchsuggeststhat,asafirm’ssize

increases,theyaremorelikelytoidentifytheirprimaryclientsas

businessesratherthanindividuals.Inotherwords,lawyersinmid-sizedfirmsmaybeopeningfewercasesbecausetheyareofferingongoing

legalguidancetoanumberofbusinessclients.Smallerfirms,ontheotherhand,maybemorelikelytoserviceindividualclientswith

one-offlegalissues,thusrequiringthemtoopenmorematters.

Consideringwhetheryourfirmistakingonenoughnewcasesiscriticalforfirms,butmaynotnecessarilybecauseforconcern,especiallyamongmid-sizedlawfirms.Attheendoftheday,thenumberofnewmatters

afirmtakesonmaymeanlittleiftheyarestillbillingandcollectingatahealthylevel.

BILLINGANDCOLLECTIONPERFORMANCE

ISSTRONGAMONGMID-SIZEDFIRMS

Comparedto2016,mid-sizedlawfirmshaveexperiencedtremendousgrowthinthenumberofbillablehourscapturedbytheiremployees,capturingover60%morebillablehoursthanin2016.

Unsurprisingly,smallerfirmshavealsoenjoyedgrowthintheirbillablehourssince2016—thoughtheyhaveconsistentlytrailedbehindmid-sizedfirms’performanceinthisarea,capturingonlyhalfofthegrowthenjoyedbymid-sizedlawfirms.

Theaveragelawyerinamid-sizedlawfirmisearningmorefortheirfirmthaneverbefore,

billing140%moreandcollectingnearly180%morethanin2016.

16|LegalTrendsforMid-SizedLawFirms

Part1:Thestateoflegalpractice:Howaremid-sizedfirmsmeasuringup?

Theaveragelawyerinamid-sizedlawfirmisalsoearningmorefortheirfirmthaneverbefore,billingnearly160%moreandcollecting200%morethanin2016.Evenwhencontrollingforincreasesinhourlyrates,the

averagelawyerinamid-sizedfirmstillbillsover100%moreandcollectsnearly140%morefortheirfirmthantheydidin2016.And,basedon

projections,thistremendousgrowthisontracktocontinueinto2024.

17|LegalTrendsforMid-SizedLawFirms

Part1:Thestateoflegalpractice:Howaremid-sizedfirmsmeasuringup?

KEYPERFORMANCEINDICATORS

Clio’skeyperformanceindicators(KPIs)providebenchmarkinsightsintohowlawpracticesareperformingovertime,givingfirmsinsightintohowtomeasureandimprovetheirperformance.

EachKPIsignificantlyaffectsthenext,andwhenlookedattogether,theytellushowwellabusinessisperformingintermsofitsearningpotential.

Lawfirmsseekingto improvetheirrevenueshouldpayattentiontothreeKPIsinparticular:

?Utilizationrate,whichmeasuresthepercentageofaneight-hourworkdaythatgetsputtowardsbillablework.

?Realizationrate,whichmeasuresthepercentageofbillableworkthatgetsinvoicedtoclients.

?Collectionrate,whichmeasuresthepercentageofinvoicedworkthatgetspaid.

18|LegalTrendsforMid-SizedLawFirms

Part1:Thestateoflegalpractice:Howaremid-sizedfirmsmeasuringup?

EachKPIsignificantlyaffectsthenext,andwhenlookedattogether,theytellushowwellabusinessisperformingintermsofitsearningpotential.Forexample,evenifalawfirmhasahighutilizationrate,ifitsuffersfromlowrealizationandcollectionrates,itlimitshowwellthatlawfirmcancapitalizeontheworkperformedbyitsstaff.

UTILIZATIONRATESATMID-SIZEDFIRMSSUGGESTIMPROVEMENTSINFIRMPERFORMANCE

Since2016,utilizationrateshaverisensteadilyforbothmid-sized

andsmallerlawfirms.However,amongmid-sizedfirms,theyear-to-yearincreasesinutilizationrateshaveconsistentlyoutpacedthoseinsmallerfirms,aligningwiththesignificantincreasesinbillablehours.This

indicatesthatlawyersinmid-sizedfirmsarefindingmoreeffectivewaystostreamlinetheirworkdaysandputmoretimetowardbillablework.

Lawyersinmid-sizedfirmsarefindingmoreeffectivewaystostreamlinetheirworkdaysandputmoretimetowardsbillablework.

19|LegalTrendsforMid-SizedLawFirms

Part1:Thestateoflegalpractice:Howaremid-sizedfirmsmeasuringup?

SMALLERFIRMSCONSISTENTLYOUTPERFORMMID-SIZEDFIRMSONREALIZATIONRATES

Whilecomparativelystrongutilizationratessuggestthatmid-sizedfirmsarefindingwaystospendmoretimeonbillablework,theireffortsamounttolittleiftheyareunabletobillorcollectonthiswork.And,whenlookingatthegrowthinrealizationratesbetweenmid-sizedfirmsandsmaller

firms,mid-sizedfirmsappeartobehavinglesssuccesswhenitcomestoactuallyinvoicingbillablework.

Since2016,smallerfirmshaveconsistentlyoutperformedmid-sizedlawfirmsontheirrealizationrates.Inthe2023LegalTrendsforMid-SizedLawFirmsreport,wefoundthatthegapbetweentherealizationratesofmid-

sizedandsmallerfirmshadnarrowedovertime,andmid-sizedfirmsweregettingclosertomatchingtherealizationratesenjoyedbysmallerfirms.However,alargergaphasemergedin2023,assmallerfirms’realization

rateshavecontinuedtogrowwhilemid-sizedfirms’realizationrateshaveremainedflat.

20|LegalTrendsforMid-SizedLawFirms

Part1:Thestateoflegalpractice:Howaremid-sizedfirmsmeasuringup?

Mid-sizedfirmsappeartobehavinglesssuccesswhenitcomestoactuallyinvoicingbillablework.

21|LegalTrendsforMid-SizedLawFirms

Part1:Thestateoflegalpractice:Howaremid-sizedfirmsmeasuringup?

MID-SIZEDFIRMSAREFALLINGBEHINDSMALLERFIRMSONCOLLECTIONRATES

Whilecollectedamountstellusalotabouthowsuccessfullyafirmis

capturingpaymentsfortheirtime,it’salsoimportanttoconsideroverallcollectionrates—thatis,thepercentageofinvoicedworkthatactually

getspaidforbyclients.

Mid-sizedfirmsmaybecollectingmorethanever,butwhenitcomes

totheiroverallcollectionrate,smallerfirmsareactuallyoutperformingthem.However,ithasn’talwaysbeenthisway.Between2016and2019,

mid-sizedfirmswereoutperformingsmallerfirmsinthisarea.After2020,however,smallerfirmsbegantosurpassmid-sizedfirmsand,asof2023,areoutpacingmid-sizedfirmsinthisarea.

Whymightmid-sizedfirms’collectionratesbedropping?Onehypothesisisthat,asmid-sizedfirmstakeonmorecomplexworkandlarger

institutionalclients,thespeedandmanneratwhichtheymaybeabletocollectontheirworkdecreases.Forexample,corporateclientsmaybemorelikelytodrawoutpaymentsasapartoftheircorporatepaymentprocesses.Smallerfirms,whoaremorelikelytoworkwithindividualclients,mayhaveanadvantageinthisareaascloserclientrelationshipsandmorestraightforwardbillingprocessesenablethemtocollect

paymentsmoreefficiently.

Firmcomplexity—andthesilosassociatedwithit—mayalsobetoblame.Forexample,largerteamswithmoreprocessesandworkflowsmayalsohavetocontendwithdecreasedvisibilityandmorehurdlesblocking

theirabilitytofollowuponuncollectedpayments.

22|LegalTrendsforMid-SizedLawFirms

ANEEDTOCAPITALIZEONMID-SIZEDFIRMS’LEGALPRODUCTIVITY

Despitegenerallytakingonfewernewfilescomparedto2016,mid-sizedfirmsarecapturingmorebillablehoursandcollectingmoremoney

thanever.Coupledwithsteadilyincreasingutilizationrates,itappearsthatlawyersinmid-sizedfirmsareeffectivelycapitalizingonexistinglegalwork.

Adifferentstoryemergeswhenwelookathowefficientlymid-sizedlawfirmsarebillingandcollectingpaymentfortheirlegalservices.Whilemid-sizedfirmswereclosingthegapbetweentheirrealizationratesandtheleadingratesenjoyedbysmallerfirms,morerecentdatasuggeststhatthisperformancemaybestalling.Likewise,while

mid-sizedfirmsenjoyedaleadoncollectionratesagainstsmaller

firmsinthepast,since2020,smallerfirmshavesurpassedmid-sizedfirmsoncollectionrates.

23|LegalTrendsforMid-SizedLawFirms

Part1:Thestateoflegalpractice:Howaremid-sizedfirmsmeasuringup?

Ultimately,thenumberofhoursbilledortheamountcollectedneedstobeconsidered

againsttheoverallratesatwhichlawyers

billandcollectfortheirwork.

●

Iffirmsarebillingandcollectingmorethanever,whyshouldtheycareaboutlowerrealizationandcollectionrates?Ultimately,thenumberofhoursbilledortheamountcollectedneedstobeconsideredagainsttheoverallratesatwhichlawyersbillandcollectfortheirwork.Namely,iffirmssufferfromlowrealizationandcollectionrates,thosefirms

arenotfullycapitalizingontheworkperformedbytheirstaff.

Take,forexample,thevalueofthecomparativeutilizationratesamongmid-sizedfirmsandsmallerfirms.

Assuminganaveragehourlyrateof$300,whenwecomparetheutilizationratesamonglawyersinmid-sizedfirms(47%)andsmallerfirms(33%),

alawyerinamid-sizedfirmwillperform$336morebillableworkthanalawyerinasmallerfirmonagivenday.However,whenwefactorinthelowerrealizationandcollectionratesamonglawyersinmid-sizedfirms,thedifferenceincollectedamountforthatsameworkdropstoapproximately$173perday.

Overall,theaveragelawyerinamid-sizedfirmislosingoutonover$340inrevenueeachdaybasedonpoorbillingandcollectionpracticesalone.

24|LegalTrendsforMid-SizedLawFirms

Part1:Thestateoflegalpractice:Howaremid-sizedfirmsmeasuringup?

Thisexampleunderscorestheneedformid-sizedlawfirmstotake

chargeoftheirbillingandcollectionpractices.Totrulyreapthebenefitsofimprovedutilizationrates,mid-sizedfirmsneedtolookathowwelltheyarebilling,andcollectingonbilledamounts.Totakeitonestep

further,lawyersneedtoalsopayattentiontohowquicklyandconsistentlytheyaregettingpaid.Inthenextsection,weintroduceanewKPIcalled“l(fā)ockup”tohelpfirmsassesstheircashflow.

25|LegalTrendsforMid-SizedLawFirms

Part2

Lockup

26|LegalTrendsforMid-SizedLawFirms

Part2:Lockup

Inthe

2023LegalTrendsReport

,weintroducedtheconceptof“l(fā)ockup.”Thisaccountingtermhelps

lawfirmsassesscashflowintheirbusinessesby

showinghowmuchrevenue—measuredindaysofwork—isunbilledanduncollectedatanygiventime.

Knowinghowmanydays’worthofworkareheldinlockupgivesusanunderstandingofwhatcashflowlookslikeinalawfirm.Firmswith

ahighamountofrevenuestuckinlockup—relativetoexpectedannualearnings—haveslowercashflow.Ontheotherhand,firmsthatcanbilloutandcollectontheirworkmoreefficientlywillhavelessoftheir

revenueinlockup,whichwillseethemachievegreatercashflow.

Knowinghowmanydays’worthofworkareheldinlockupgivesusanunderstandingofwhatcashflowlookslikeinalawfirm.

27|LegalTrendsforMid-SizedLawFirms

?Realizationlockupistheamountofrevenue

thatisunbilledatanygiventime(alsoknownas“work-in-progresslockup”).

?Collectionlockupistheamountofrevenuethatisuncollectedatanygiventime(alsoknownas“debtorlockup”).

?Totallockupisacombinationofrevenueheldinbothrealizationandcollectionlockup.

Lockupconsistsofthree

measureswithinthe

billingprocess:

WHYLOCKUPMATTERS

Havingcashonhandmeansthatabusinesshastheworkingcapitaltocoverallofitsshort-andlong-termcostsandcanpaythemoutontime.And,whilecashflowisimportantforallbusinesses,stayingontopofcashflowisespeciallycriticalformid-sizedlawfirms.

Higheroverheadcosts—includinglargerstaffnumbers,officespace,

andtechnologyinfrastructure—makethechallengeofgettingpaid

promptlyofcriticalimportanceformid-sizedlawfirms.Whileincreasedbusinessinfrastructuremayprovidetheopportunitytogeneratemorerevenue,italsobringsincreasedliabilities.Failingtoensureconsistentcashflowinthesecircumstancescanbe,quitesimply,catastrophicformid-sizedlawfirms.

28|LegalTrendsforMid-SizedLawFirms

Part2:Lockup

Whileincreasedbusinessinfrastructuremayprovidetheopportunityto

generatemorerevenue,italsobringsincreasedliabilities.

MEASURINGLOCKUP

Calculatingrealizationandcollectionlockupallowslawfirmsto

determinehowmanydays’worthofunbilledoruncollectedworktheyarecarrying.Buthowisitdone?

Tocalculaterealizationlockup,divideyourfirm’sworkinprogress

(or,theamountofunbilledworkcarriedbyyourfirm)byyourpreviousyear’sfiscalcollections.Then,multiplytheresultingnumberby365

toobtainyourfirm’srealizationlockup—orthedaysofrevenuelockedinunbilledworkcarriedbyyourlawfirm.

Realizationlockup=(workinprogressdividedbypreviousfiscalyear’scollections)x365days

29|LegalTrendsforMid-SizedLawFirms

Part2:Lockup

Tocalculatecollectionlockup,divideyourfirm’saccountsreceivablebyyourpreviousyear’sfisca