Law firms are falling behind their clients when it comes to managing cash flow and mitigating the risks associated with offshore work, writes Kerry Agiasotis
When preparing and lodging international intellectual property applications on behalf of clients, many firms outsource the work to an offshore associate. This associate then bills the firm in their home currency leaving the Australian firm to on-bill the client for the costs.
Traditionally, the firm then estimates the foreign exchange equivalent and bills this amount to its client. Once these funds are received, the firm settles the offshore invoice, hoping that there has not been an adverse movement in foreign exchange rates since the time they billed their client. If this occurs the Australian firm may be left with insufficient funds after making the required foreign exchange, to meet the offshore supplier's invoice in full.
This leaves firms with one of two choices: re-bill the Australian client for the shortfall (and risk damaging the ongoing relationship) or meet the shortfall themselves (and erode profit margins). In the latter case, writing off even small individual shortfalls can quickly become a significant erosion of profit when duplicated across numerous clients or invoices.
And this offshore dilemma applies equally to any firm that is working with offshore associates, whether it be for IP applications or other services.
The truth in the last 12 months
Travelex's experience working with law firms across the globe is that many firms are not aware of the impact that volatile exchange rates can have on their business.
As with many other companies that have grown their business beyond Australia in recent years, many law firms have been happy to accept foreign exchange risk. This is principally because, until now, they have largely been on the right side of the equation because the Australian dollar has been appreciating relative to other currencies.
Unfortunately, the Global Financial Crisis has changed the landscape dramatically with the Australian dollar rising and falling dramatically over the last 12 months.
This situation has left many law firms with the unenviable situation of facing shortfalls when it comes time to pay their offshore associates somewhere between 60 and 90 days after billing their Australian client. The shortfalls can be dramatic, leaving firms with the possibility of completely eroding their margins on sub-contracted work. This is on top of the wasted time and resources expended rebilling clients or processing the foreign exchange write-off.
Some firms have sought to avoid the risks of currency fluctuations by settling the associates' invoice when it is received and then on-billing their client the Australian dollar equivalent amount. While this eliminates any foreign exchange risk, it leaves the firm with a cash flow issue, tying up valuable cash until the Australian client settles their invoice, which isn't always in due course.
The bottom line is that legal firms are about providing legal services and not about trying to speculate and predict the volatile movements in currency.
A simpler way?
In the context of the well known legal maxim: "The law does not concern itself with trifles", then neither should law firms. While there are many financial solutions available to mitigate foreign exchange risk, Travelex's experience was that none were tailored to the needs of legal firms.
Legal firms, and in particular IP firms, need a simple way to lock in a payment rate today for an invoice that they expect to pay in two, three or even four months' time when clients remit payment to them. The firm can then bill its customer for the correct amount. When the customer pays, the payment can then be sent to the offshore associate without any need for further exchange rate adjustments or risks.
It's a win-win situation for all: there is no foreign exchange risk, no need for manual reconciliation and adjustment; and the cash stays with the law firm until it is ready to release the payment. The Australian dollar and offshore payments match and there are no cash flow implications or shortfalls.
While the solution is simple, most payment systems being used by legal firms don't offer this type of flexibility. As a specialist payments and foreign exchange provider we recognise the unique issues facing legal firms. In an environment where legal firms are increasingly transacting offshore, and currency volatility looms large, there is no better time for firms to review their payment systems and processes and look to solutions that can help protect their bottom line.
Kerry Agiasotis is the regional divisional director for Travelex, Asia Pacific