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Year-End Fee Collection Remain Steady in COVID-19 Era

January 1, 2021 | Posted in : Fee Agreement, Fee Collection, Fee Dispute, Fee Dispute Litigation / ADR, Fee Economics / Fee Market, Unpaid Fees

A recent Law.com story by Justin Henry, “Pandemic Be Damned, Year-End Collections Are Steady (So Far)” reports that despite the great anxiety that roiled the legal industry throughout 2020, fee collections at law firms have largely returned to pre-pandemic levels as the fourth quarter comes to a close, law firm leaders and industry observers said, thanks to the successful shift to remote work and a diversity of practice areas bringing in revenue.  As 2020 ends, many firms are now preserving resources to give themselves a head start in 2021.

The fourth quarter is always a high-pressure time to collect fees from clients, especially in a year defined by economic uncertainty.  But the legal industry had one of the most successful rebounds from the pandemic-fueled economic downturn that began in the spring, and the financial strain that many forecasted proved to be short-lived.

At many law firms, however, the results of 2020’s economic turmoil won’t be known until January, with much of collections coming in these last days of the year.  Asked to comment on the net impact of the COVID-19 pandemic on their firms’ bottom lines, many firm leaders said to call back in January.  “Our results depend on dollars in the door by a certain date and, not surprisingly, the last few weeks of the year are always important, but it’s always a little hard to predict,” said Tom Froehle, co-chair of Faegre Drinker Biddle & Reath, which formed in 2020 out of the combination of Faegre Baker Daniels and Drinker Biddle & Reath.

While instituting flexible fee arrangements has played an important role in firms maintaining close relationships with clients throughout the pandemic, firm leaders said for the most part they had returned to normal by the closing weeks of 2020, with the exception of a few more economically precarious practice areas.

G. Mark Thompson, president and CEO of Marshall Dennehey Warner Coleman & Goggin, said the “vast majority” of his firm’s clients that requested payment discounts and deferrals have returned to pre-COVID payment agreements. The firm’s hospital clients and municipal government clients were among those that asked for discounts and deferrals on their fee payments as a result of the pandemic and its financial impacts.

Thompson said while the firm’s hospital clients—which requested flexible fee arrangements due to a downturn in elective surgeries amid an inundation of COVID-19 patients—have returned to their pre-COVID payment rates, Marshall Dennehey’s base of municipal government clients haven’t yet returned to pre-COVID fee arrangements as a result of financial distress.  “That is going to remain a problem going forward,” Thompson said.  Thompson added that one of the ways Marshall Dennehey has braced itself for economic uncertainty is having a diversified set of practice areas.  “That’s given us a competitive advantage that we’re hoping to leverage and expand moving forward,” he said.

Brad Hildebrandt, chairman of Hildebrandt Consulting, said the majority of practice areas that struggled as a result of the pandemic-induced recession—like M&A work, business transactions and in-person litigation—have successfully rebounded by the fourth quarter as attorneys and their clients adapted to a virtual work environment.

The legal industry is historically one of the fastest to rebound from a recession, and this remained true in 2020, Hildebrandt said, due in large part to the reduction in expenses that came with the shift to remote work, combined with a diverse set of high-performing practice areas, like health care and bankruptcy.

“The way the large firms have performed is actually pretty remarkable,” Hildebrandt said.  “It turns out as the last quarter came about, many of the practices were showing a return, like M&A and private equity.  Most firms at the end of the year are going to have increased revenue or at least the same revenue, and profits are going to be very high.”  Some industry observers said firm leaders may be looking to hold onto partner distributions heading into 2021 so they can preserve cash flow into the first quarter, which is historically a lower-performing period—recession or not.

Jeff Lowe, global practice leader of legal search firm Major, Lindsey & Africa, said many firms are less concerned about end-of-year cash flow than they are about setting themselves up financially for a successful 2021.  “If you’ve already had a great year, it just puts pressure on your next year,” Lowe said.  “They would rather know they have accounts receivable coming in in January when it’s going to count toward next year.  It’s sort of like starting the new year with a head start.”