Theres a ray of light in the economic gloom affecting law firms: many corporate clients have plenty of cash and little debt, and are well-situated to get through the recession, according to the New York Times.
The concern in the legal community is that corporate clients will start demanding rate freezes or discounts, following the direct challenge spearheaded by the Association of Corporate Counsel (ACC) against law firm rates. (See They Say They Want a Revolution: Reconnecting Legal Costs to Value Delivered, subscription required.)
But Jason Trennert, managing partner and chief investment strategist at Strategas Research Partners in New York, who said his own rough examination of corporate balance sheets shows that “cash, as a percent of total assets, is as high as it’s been since the 1960s.”
- At Paychex the ratio of cash as a percent of total asserts has grown from 30% in 1988 to 70% by last year.
- Apples cash ration grew from 38% to 60% over the same time period.
- Microsofts cash on hand is so large that it could pay out the $20 billion cash component of its pending hostile takeover bid for Yahoo from its own reserves.
High cash ratios exist across many industries, including apparel, manufacturing, engineering, retail, healthcare and technology companies.
Meanwhile, a study by at Ohio State University shows that corporate debt has fallen sharply. The net debt ratio, or debt minus cash as a percent of total assets — fell so sharply that, by 2004, it was below zero, where it stayed at least through 2006.
“In other words,” the researchers noted, “on average, firms could have paid off their debt with their cash holdings.” Innovations like "just in time" supply chains and faster payment systems have cut accounts receivable, cut debt and raised cash reserves.
Ideally this means that corporations will spend their "overstuffed wallets" on litigation, mergers and acquisitions and corporate work done by law firms.
As recently as October 2007, an ACC/Serengeti survey revealed that corporations expect their law firms to increase their rates by 5.3% up to 6% on hourly rates in 2008. The same report found that the balance of fee-setting power favors law firms, hourly rates will continue to predominate, and cutting fees is not the top client priority.
Maybe 2008 wont be as hard on law firms as they expect.
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