Law Firm Profitability: The Realization Rate
The Realization Rate: This important data point, once you set up your law practice on a good accounting platform and time and billing software, can really make a difference in your practice’s profitability.
I’ve written several articles regarding the different metrics you should track. See last week’s post which was about the utilization rate.
It’s about to get “real” when talking about the realization rate
The realization rate is the hours invoiced divided by the hours worked on a case. Think of it in terms of an attorney that works 12 hours on a matter. He or she invoices for 10.5 hours and charges a fee of $350 an hour. The calculation for your worked realization rate is:
Hours worked on client file: 12 hrs.
Hourly rate: $350.00
Total possible billing: $4,200.00
Hours written down: 1.5
Hours invoiced: 10.5 hrs.
Billed hours x Rate $3,675.00
Worked Utilization Rate: 88%
Collected Realization Rate
Another metric you can check for and analyze is the collected realization rate. That’s the rate that is calculated using paid invoices. I think that will give you a more true picture of the law firm.
Attorneys will also credit stale balances that are left unpaid. This can really mess with the realization rates. When invoices get older, attorneys, surprisingly, write them off. That affects your realization rates dramatically. So tracking this metric by the collected rate and really affect the realization percentage.
Calculating/tracking the rates within a firm
A realization rate is more of a rate your accountant would track. Unlike the utilization rate, where we made it a competition, realization rates are more manageable individually.
Attorneys that are new to the firm may not understand the issue of chargeable time and non chargeable time or even what is expected at the firm. Success at the larger firm with multiple staff members is setting expectations up front so there is no "guessing" at what the firm is seeking. I like to see these rates at or over 90%.
Ways for Improvement in Realization, Time Tracking and Invoicing
Step 1 - Track this rate individually
Many of the software products for time and billing provide reports on hours tracked vs hours billed. Create a spreadsheet to track or use a tool. We love Reach Reporting as it allows for us to design individual dashboards for each attorney on staff. Utilization and Realization rates are just a few of the items on our designed Attorney Dashboard.
Step 2 - Use the templates
Within LeanLaw (see post on billing tab) to standardize the billing language throughout your practice. Creating clear, concise verbiage is a win for the law firm. When a customer of the law firm understands the well-drafted invoice, they may be less likely to complain or ask for a reduction. Avoid using acronyms and abbreviations.
Step 3 - Make your invoicing easy to understand
Nothing opens the door for a complaint from your customer like unclear invoicing. Be sure to avoid combining tasks performed into one line item on your invoice. I've seen some invoices with paragraphs on one line item. It is best to itemize each activity performed so that the customer of the law firm understands the work performed.
Step 4 - Track Time Daily
Be sure to track your time immediately. This is where the tool/app LeanLaw practically pays for itself. Trying to remember work performed, even at the end of a busy day can lead to missed hours invoiced to your customers. Staying on top of recording the hours is essential to keeping the realization rate on the upswing!
Step 5 - Change up your billing method
Use packages and flat fee billing or subscriptions instead of the hourly billing method. The accounting industry has really embraced this change. I have mentioned this before and it really can increase revenue once you have created a method (depending on your law firm practice area). I have seen this done effectively within the immigration law firm industry, for example. I think all types of law practices should embrace this method. The client is aware of the costs upfront and is much happier than the open-ended hourly rate method.
"As with last year, the most critical finding in this report is that lawyers spend only 2.3 hours (29% of an eight-hour workday) on billable tasks. When factoring in realization and collection rates, firms only collect an average of 1.6 hours of billable time per day, leaving us with the question: What happens to the remaining six hours?"
*Quote from Law Technology Today referring to Clio Legal Trends Report
I hope this post is beneficial in helping you to grow your law practice. This is just one metric and one advisory service we provide to the clients of Artesani Bookkeeping. Want to learn more?
If you’re an accountant or bookkeeper and want to collaborate and learn, please join our Facebook group QB Community Live! It’s a safe place to ask any question. I co-admin group, and I’m here to help. Our motto is, Together We All Succeed! #TWA$