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Right-Size Law Firm Realization Rates to Improve Outcomes for Clients and Increase Revenue

May 1, 2024

Insight 3

“Realization” is the process of converting noncash assets into cash. For law firms, it’s turning billable hours into cash or revenue. It’s the same for all law firms, but there’s a difference in how firms measure realization rates that can improve client outcomes and increase revenue.

Many firms measure realization by the proportion of revenue collected from invoices. For example, if an attorney spends 20 hours on a matter at a rate of $500 per hour, the value of the work amounts to $10,000. But most firms don’t track nonbillable hours on timesheets, and firms don’t realize the total value of work performed for clients. For example, the attorney may have spent 25 or 30 hours on the case but only counted 20 billable hours.

Firm billing practices also frequently write down or discount invoices by a percentage of the value. In our example, the firm may bill the client only $9,000 for the matter and, after negotiation with the client, only collect $8,100. Most firms would calculate the realization rate of 90 percent from the proportion of the amount collected of $8,100 collected to the amount invoiced of $9,000.

The accurate measure of realization is the proportion of revenue generated from the total value of the work done on a matter. In this case, the firm generated $8,100 of income for $10,000 of work, which amounts to a realization rate of 81 percent.

Factors Impacting Realization

Beyond write-downs and discounting, many factors impact realization. Perhaps the most pertinent factor is recording billable and nonbillable time. Firm timekeepers, whether partners, associates, or staff, often track billable hours, not total hours spent on client matters. To get an accurate measure of realization, timekeepers must track all time, not just billable time to precisely measure the value of work.

Firms should go beyond calculating the realization rates for attorneys and other timekeepers. It should calculate the realization rate for clients, matters, and practice groups to get an accurate picture of revenue realization in proportion to the work performed across all firm segments.

Improving the realization rate will improve the firm’s profits. If the firm increases its realization rate from 81% to 90%, most of the money will be profit. Since the firm has already paid for office space and other overhead expenses, so every $ we collect more will go directly to profit.

Calculating the realization rates for all law firm segments allows firms to find inefficiencies in training and experience that will increase realization and revenue and advance partnership profits. Segmented realization rates can help root out inefficient workflows, matters, practice areas even clients reluctant to pay bills. For example, if a partner spends many nonbillable hours on a case, they may not utilize their experience, and the firm may not provide cost-efficient services to clients.

A firm does not want a $ 500-an-hour resource photocopying or performing basic legal research tasks for a client. Those tasks would be more cost-effective for the firm and the client if staff members and young associates performed them.

Law firm time, billing, and accounting tools are necessary to determine client budgets, calculate billable hours, generate invoices, and project and determine revenue. Still, they are not sufficient in themselves to specify realization rates. Firms need a real-time business intelligence (BI) tool that brings all the data into one platform.

With a BI tool, firms can calculate the realization rate of individual attorneys, staff members, clients, matters, and practice areas. A BI tool allows firms to set target billable hours that meet client budgets and project realization rates in real-time with alerts for deficiencies, allowing firms to take corrective action before billing clients.

Precise specializes in the business economics of law firms and is one of the world’s most experienced financial service providers for firms, corporate legal departments, and alternative legal service providers. Precise developed a service model especially suited for the legal industry and has created an advanced BI system for its analysts and clients.

See how to get real-time legal business data and direction to improve client outcomes and increase revenue. Contact Precise today!

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