The key to lock-up – what’s changed and why it’s crucial for law firms

Our 2024 Annual Law Firm Survey revealed key statistics and behavioural trends about lock-up in law firms:

Lock-up refers to the total sum of unbilled work in progress and debtors (excluding VAT). It’s a fundamental metric for UK law firms that greatly influences operations and stability.

Our 2024 survey introduced some new questions  to add further insight into how UK law firms manage and intend to improve lock-up performance over the next 12 months.

These included questions to measure lock-up targets, how lock-up targets had changed and assess how firms thought lock-up would improve or deteriorate in the current economic environment:

Lock-up targets improved across the board in 2024, with just under half of respondents saying they had a lock-up target of 75 days or less. This is largely driven by enhanced credit control functions and training to educate partners and fee earners about the importance of lock-up management.

Anecdotally however, the market seems to be polarising, with our discussions in the legal sector suggesting there are firms that do this very well and some that clearly don’t.

Compared to 2023, lock-up target days improved in 2024 with 46% of respondents saying their firm had a lock-up target of up to 75 days, compared to 31% in 2023. However, there is a divide in the market regarding how firms are actually performing: 45% of firms told us their lock-up had improved in the last 12 months against (43%) who said the situation had deteriorated.

Accelerated billing process and enhanced credit control functions in 2024 undoubtedly contributed to improvements in lock-up over the last 12 months, as did education and training on the importance of lock-up to partners and fee earners.

Overall, there is a sense of optimism, with only 9% of respondents thinking that lock-up will deteriorate over the next 12 months, compared with the 43% who thought lock-up had deteriorated over the past 12 months. Factors that contributed to a change in approach to managing lock-up in the last 12 months included:

• Accelerated billing processes (58%)
• Developed/enhanced credit control function (53%)
• Training to educate partners and fee earners (46%)
• Improved quality and transparency of information to partners and fee earners (39%)
• Lock-up performance now formally part of performance assessment (25%)
• Lock-up performance directly linked to remuneration (17%)
• Developed separate billing team (13%)
• Changed credit terms (12%)
• Introduced online payments (11%)
• Offered discount for prompt settlement (2%)

10% of respondents in this year’s survey said they had modelled the tax implications of HMRC’s basis period reform rules and would need additional funding, This is broadly similar to the prior year and encouraging now only 7% of firms have yet to consider next steps down from 16% last year.

Where funds are needed,  50% of these stating that funding would come from improvements in management of lock-up, with those presumably being the firms which thought their lock up would improve over the next 12 months. Although, it was also found that bank funding and partner capital were other key funding sources for the next 3 years, similar to the sources of funding identified in 2023.

External sources of funding are accompanied with an associated cost, which will ultimately affect a partner’s net take home pay, so using the tax rule changes to encourage an improvement on lock-up seems wise.

This is by no means a quick and easy fix and requires constant attention. But with renewed focus and a desire to reduce the cost of other forms of funding, this should hopefully enable further progress in this area, and over time, reduce the requirement for other funding.

Efficient lock-up management ensures quicker billing cycles and faster collection of receivables, reducing the gap between the time services are rendered and when payments are received. This improved cashflow enables firms to better manage their operational expenses, invest in growth opportunities and reduce reliance on external financing.

Also, by minimising the capital tied up in unpaid invoices, firms can enhance their liquidity and financial stability, directly contributing to higher profitability and more accurate financial forecasting. Effective lock-up management also demonstrates financial discipline to stakeholders and can positively influence firm valuation.

• Top tips from our experts for how to improve lock-up:
• Be proactive - e.g. agree the billing schedule up front with clients, monitor over-runs and have early conversations
• Prompt and regular invoicing – chase cash regularly
• Upload disbursements regularly to ensure all costs are billed
• Set up workflows in practice management systems to nudge behaviour
• Use business partners to work with fee earners to actively minimise lock-up and reduce barriers
• Provide training – many fee earners are put off billing because it’s time consuming and late billing causes recoverability issues
• Centralise terms & conditions, stating invoices are payable either on presentation or at a maximum of 30 days
• Hold fee earners and departments accountable
• Finance teams automatically email out raised invoices

The next step for firms is to actively monitor funding requirements and the split between sources of funding, as well as continue efforts to improve lock-up management.