The Firms

December 10, 2008 9:30 AM

Collecting, But Hardly Calm and Cool

Posted by Susan Beck

In a normal year, December is nerve-racking. Firms are hustling to get clients to pay their bills, and making that year-end push to fill the coffers. Some firms have traditionally pulled in as much as 30 percent of their revenue in the year's last month.

This December, nerves are worse than racked, they're frayed. The pain is acute at firms that do a lot of corporate financing, M&A, and private equity deals, and not just because there's no new work. Making matters worse: Firms that were working on one of the many deals or financings that's been postponed or terminated may never get paid for the significant hours they did log. That's because in most instances, law firms don't get paid until a deal closes.

"There are a large number of deals in some areas, such as capital markets, that will never be billable," says Mel Immergut, the chairman of Milbank, Tweed, Hadley & McCloy. Firms can try to negotiate a broken deal fee, he says, but have to accept a deep discount. "Sometimes you can get paid a little bit, but not one hundred percent."

When a deal fails, the law firms generally don't have a contractual right to any money. And that can make for messy negotiations. These days most firms don't want to drive too hard a bargain with clients they want to hold onto.

"If it's an ongoing client we may be a bit more generous," says one partner. "We'll ask them to pay us a fraction of the fees, but there's an understanding that when the market turns around they owe us."

But, these days, who knows if the contact person at your client will even be around when the market turns--let alone next week. In fact, the person you're negotiating with now may be a stranger who has taken over in one of the many corporate restructurings. "If a group has blown up, it's difficult to collect," says a lawyer at one financial institution.

The cold hard fact is that with so many firms begging for work, lawyers don't have too many bargaining chits. "Law firms don't have a lot of leverage here," says one lawyer. Firms that lay down tough payment terms may find themselves passed over in the future in favor of one of the hordes of hungry firms offering discounted rates.

At least one firm has taken steps to make representing a company or issuer less risky. "Years ago we started getting a little smarter, and asked our issuer clients to pay us monthly," says a partner at this firm, which she didn't want identified publicly and which appears to be in the minority. Most partners
The Am Law Daily spoke to say they don't get monthly payments when they represent companies in these deals.

Representing underwriters and investment banks is even riskier. "We never get paid as we go along," says this partner about underwriter work. "If the deal doesn't close, the underwriter hasn't made any money."

For matters billed on a regular basis, like standard corporate work and litigation, firms stand on firmer ground, although payment isn't assured this year. September was particularly scary, says Jay Zimmerman, the chairman of Bingham McCutchen.

"Even the best clients were holding payment," he says. "Everybody was sitting on cash and we had a build up in receivables."  Since then, he says, the money has been flowing in fairly normally. "The September bills did get paid. October turned out to be very good and November is looking very good."

Zimmerman says Bingham did a few things differently this year to keep collections on track. "We were very aggressive in analyzing the quality of our inventory and writing it off," he says. "Historically we did some of that early, but this year we had the discipline to do that from the very start. We made sure the inventory was cleaner than it ever had been.” If a client didn't look credit worthy, he says, the firm might stop working for it.

"In general, clients are paying slower," says a partner at another major firm. And an accounting professional at yet another major law firm says she has seen the average age of receivables increase by about 30 days.

Still another manager says he's seen that figure rise about 10 percent. This partner says his firm is more closely monitoring each partner's inventory:  "It used to be if we saw a balance in the millions and it was outstanding 60 to 90 days, we'd ask questions.” Now, he says, they approach the partner if a few hundred thousand dollars has been due for 60 days. "If the partner is not paying attention, we'll pull in people higher up on the food chain, like the practice group chairman," he says.

What if a client says it simply doesn't have the cash? "If it's a client you have a relationship with, you work with the client," says one law firm leader. "The name in this game, particularly in times like this, is keep relationships strong. What we've found is that if you're willing to work with a client, they remember."

For the more troubled receivables, some firms use high-end collection agencies. "They're very professional and sophisticated," says one partner about these bill collectors, who typically work for a commission. The client doesn't know that they're being contacted by an agency; the person on the phone appears to be an employee of the firm. "They're a great tool to have. They can do a lot of legwork and research," says the partner. He notes that they've used professional collectors in the past, but they're relying on them a lot more this year.

Still, there's only so much a firm can do to try make December merry, especially for those that relied heavily on Wall Street's financing machine. "We're worried," says one partner whose firm has typically pulled in 25 percent of its revenue in December. "In terms of end of year pop, there won't be a lot."

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