How bad will the collections crunch be this year? Inventory is up, clients are taking longer to pay bills, and the coming weeks will be a critical time for law firms to turn client bills into cash.

Law firms are sitting on a growing pile of bills they haven't sent out or their clients haven't paid yet, but financial observers and at least one law firm leader said this kind of behavior isn't causing alarm bells to go off—yet.

The law firms surveyed by Citi Private Bank's Law Firm Group and Wells Fargo Legal Specialty Group reported that their inventories of unpaid bills have grown by 6.7% and 9%, respectively, compared with last year, in the first nine months of 2019.

"It's tricky," said Joe Mendola, senior director of sales at Wells Fargo Legal Specialty Group. "You can have inventory going up because firms are extremely busy. It doesn't always necessarily mean slow pay, but I think in this period, I think it's a combination of both."

Citi found that law firms are taking longer to send out the bill and to get paid by their clients. Across the U.S., the amount of time that has elapsed between law firms first recording their billable hours to getting paid has increased by 1.5%, according to Citi.

But in Washington, D.C. and southern California, that period has increased by 4.7% and 3.3%, respectively, said Gretta Rusanow, the head of advisory services within Citi Private Bank's Law Firm Group. As a result, the inventories for law firms in those areas grew 8%.

Even with these higher inventories, no one is panicking just yet. Both Mendola and Rusanow said the fourth quarter of any year is a major collection period for law firms, with Mendola noting that 30% to 35% of a firm's annual revenue might come in during the last three months of the year.

"The message we've been conveying is, it's an opportunity for firms to really focus on what is traditionally the strongest collection quarter of the year," Rusanow said. "There are firms that see a large portion of their revenue growth come in just the last few days of the calendar year."

Am Law 200 firm Dinsmore & Shohl is one of the many firms seeing an increase in inventory.

The inventory of unpaid legal bills has grown for the Cincinnati-based firm over the past 12 to 16 months, said Robert Lucas, the managing partner of the firm's Chicago office. While the firm's average collection time from clients has dropped, it's had to cajole some partners to ensure they're actually billing their clients as they work, he said.

"It's more, for us, staying on top of it and making sure any increases in our inventory are due to the fact that we are very productive and billing more time," Lucas said, who added that inventory rates can also adjust if a law firm has increased its billing rates.

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Slower Payments

One factor in the high inventory rate and the lengthening collection cycle is the time it takes clients to pay their bills. Rusanow and Mendola both said clients are taking longer to pay bills, with Rusanow describing how a 30-day pay cycle might become a 45 or 60-day pay cycle.

But partners feel like they can only do so much because the law is a relationship-heavy business, said Jay Benegal, senior vice president and legal industry specialist at Citizens Commercial Banking, a lender to large and midsize law firms.

"It's difficult for partners to chase down these clients for payment because they want to protect the relationship," Benegal said. "So they tread very carefully around the collections process, to the point where partners don't want to engage clients on the collections effort."

Benegal doesn't believe client behavior in stalling payments can be attributed to fears about a pending recession. Instead, it seems their business cycles have slowed down, which in turn leads to them paying their vendors—including their legal counsels—later, Benegal said. This slowdown is not isolated to any one sector or industry, he added.

It also might not be deliberate on the client's part. A lot of businesses use electronic billing systems, which might reject a legal bill from a law firm if it's not properly coded, Lucas and Rusanow said.

"You have to make sure all of your I's are dotted and all of your T's are crossed," Lucas said. "There can be a number of things that can contribute to a slower collection."

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