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At law firms across the United States, the calls are going out. Some lawyers adopt a pleading tone on the phone. Others pin their hopes on a sense of camaraderie, presenting it as a personal favor. But the underlying message is always the same: It’s time to pay up. It’s bill-collecting season, the time of year when law firms gently remind their corporate clients that payment for legal services is due. But while this end-of-year ritual is as customary as the holiday party at most firms, there’s a sense of anxiety surrounding this year’s drive, as partners nervously eye their stacks of outstanding receipts. “The difference this year is that the combination of the economy and Sept. 11 is going to make people a little more concerned about whether clients will have the cash to pay for legal services,” says Heller Ehrman White & McAuliffe Chairman Barry Levin in San Francisco. Accounts receivables, the money that the firm is owed, are currently at target levels at Heller Ehrman, says Levin. But “that only gives me so much comfort,” he remarks. At some firms, signs of trouble are already emerging. Management at San Francisco-based Gordon & Rees and Palo Alto, Calif.-based Cooley Godward, while playing down the issue, acknowledge that it’s taking some clients longer to pay than usual. “What concerns me is that we have a slight increase in our accounts receivables over 90 days,” explains Gordon & Rees Managing Partner Michael Lucey. “It hasn’t been a huge increase, but it’s enough to get on my radar screen.” As occurs every October, Gordon & Rees redoubled its bill collecting effort, sending letters to clients “until you’re blue in the face,” as Lucey put it. At other firms, like Cooley and Menlo Park, Calif.-based Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, attorneys have tried to prevent an accounts receivables debacle by staying on top of their bills earlier in the year — sending out more e-mails, making more phone calls and dedicating more time to monitoring receivables internally. “Since the middle of the second quarter we’ve really made every month a mini-, year-end collection drive,” says Gunderson Managing Partner Steven Franklin. Unlike most businesses in the United States, law firms operate on a cash basis: Revenue is not recognized until the payment has been received (as opposed to at the time of sale or service). This means that no matter how many hours a firm bills throughout the year, the bottom line doesn’t budge until the checks come in. If payments aren’t collected by year’s end, a firm’s yearly financial performance suffers accordingly. Over the past decade, says consultant Peter Zeughauser, law firms have gotten much better at billing their clients on a monthly basis. But once the bills go out, it takes at least 30 days before the firms see a check. Often times, it can take even longer, making a year-end mop-up operation necessary. And as any lawyer will attest, once a bill has been outstanding for 90 days, the likelihood of actually collecting greatly diminishes. The fact that companies are taking longer to pay their bills this year is not surprising, given the deteriorating state of the economy. When a business has less money coming in, typically there’s less going out for all the vendors and service providers it owes money to. “Lots of people are in cash management mode,” acknowledges Pillsbury Winthrop Managing Partner Marina Park in Palo Alto. Clients are “slowing down payments; going from a 30-day payment cycle to a 45-day cycle.” Law firms that have a high number of clients in the technology and dot-com sector are especially vulnerable. As many tech companies run into difficulties and file for Chapter 11 or Chapter 7 bankruptcy protection, their debt payments are delayed as the court takes control. This can throw a wrench into the accounts receivables of any law firm unfortunate enough to be a creditor. In the worst cases, a firm may never get paid at all. Gunderson expects its write-offs this year to be twice its historical levels, says Franklin, though he adds that revenues are on track to meet expectations. Even companies that haven’t gone under face difficulties remunerating their counsel. According to a survey conducted by VentureOne and PricewaterhouseCoopers, venture capital funding dollars for the first three quarters of the year are down 65 percent compared with the same period in 2000. The victims of this funding dry spell aren’t only two-person startups working out of a relative’s shabby garage. Established, so-called later-stage companies that have been operating for some time are having trouble getting much-needed additional rounds of funding, says Nick Sturiale of venture capital firm Sevin Rosen Funds, which has offices in Texas and California. For the law firms that have billed hours to these businesses, this is not good news. “Companies may have thought they were going to get additional financing,” says Heller Ehrman’s Levin. “And some of those things aren’t happening.” All of this spells trouble for law firms going into the new year. “There’s a big need for cash flow in December and January,” explains Gordon & Rees’ Lucey. In addition to the usual costs of operations, a number of other expenses, such as raises and associate bonuses, come due at the start of the year. And of course, partners draw their profit around this time as well. In a year when firmwide revenues may be down, a high rate of uncollected bills could add another dent to partner profits. Typically, less profits per partner means increased partner mobility as the disgruntled defect to greener pastures. But with the job market so tight, it’s unclear how things will play out at the start of 2002. A number of San Francisco Bay Area firms have already taken steps to adjust to the economic downturn, most notably through associate layoffs. But if this year’s bill-collecting drive should come up significantly short, a fresh round of cost-cutting measures could be around the corner. If business picks up next year, however, some expect the firms to be able to weather whatever financial shortcomings turn up in this year’s earnings. “My sense is that behavior is going to be dictated less by this year’s results than by what they [the firms] think the business environment is going to be like next year,” says Gunderson’s Franklin. “I think it will be forward looking, not backwards looking.”

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