Can You Improve Your Firm’s Realization Rate?aderantuser
A discussion of your firm’s billing rates, discounts or alternative fee arrangements (AFAs) can remain mostly academic, unless you take into account what portion of the time spent and fees billed that you will actually collect from your clients. The ABA Law Practice Today explained that a firm’s realization rate “reflects agreed-upon discounts from standard rates, write-downs (fee reductions taken before sending the bill) and write-offs (fee reductions after sending the bill).” More specifically, a firm’s billing realization rate reflects the percentage of time spent on a matter that is actually billed to the client. The collection realization rate is simply the percentage of billings actually collected.
A decline in your realization rate can sometimes be indicative of larger problems in your firm and, as the ABA Law Practice Magazine notes, time and effort written-off by your firm can have a number of causes. Sometimes “it represents time invested that is not well spent; in other situations, it is time that cannot be justified based on the intrinsic value of the work or the arrangement with the client. Some lawyers have to write off time due to inefficient work or poor practice methods.”
Unfortunately for most firms, time and billing realization rates have been steadily dropping. According to the 2015 Report on the State of the Legal Market from Georgetown University, billing realization fell from 93.5% to 86.7% over the ten-year period, and collected realization declined from 92.7% to 83.0%. This is the lowest collected realization rate on record, having dropped below the previous low of 83.3% recorded in Q1 and Q2 2014. To get some perspective on the magnitude of this decline, consider that the near 10% drop in collected realization means firms are losing almost $10 million for every $100 million in recorded time. (See graphic below).
Source: 2015 Report on the State of the Legal Market, Georgetown Law
The significant decline in realization rates has increased the need for firms to improve their processes for billings, discounts, and of course, collections. A recent post from CNB News and Insights suggested that firms closely examine three aspects of their practice to improve their realization rate:
- Firms should create clear policies and procedures for write-downs and require their lawyers to explain the reasons for doing so in writing.
- Firms should improve timekeeping procedures and consider technology applications that specialize in “making it easier for attorneys to track their time accurately.”
- Firms should follow best-practices in their collections. This includes being prompt with billings, tracking all past-due accounts with detailed aging reports, regularly contacting late-paying clients, being aggressive when necessary and constantly reinforcing value to your clients.
The key to higher billing and collection realization rates for your firm is communication. Be sure to communicate write-down policies to your lawyers and staff, and provide adequate training for these situations. You also need systems that clearly track time and billing information and communicate that to your users.
Perhaps most importantly, communicate with your clients. Pursue slow or late payers persistently and methodically, but continue to emphasize the value you provide to them. Realization rates may be dropping across the legal industry, but they can increase at your firm by implementing a few strategic policies and practices.