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Understanding your realization rate is an absolute must know for solo and small firm attorneys who want grow and maintain profitable law practices, according to Ann Guinn, success strategist for small firms and national speaker at G&P Associates.
During a recent webinar in partnership with LexisNexis Firm Manager, Ethical Billing for the Small Firm, Ms. Guinn said that, unfortunately, many attorneys she encounters admit they either don’t know what their realization rate is, or even worse, are working with a realization rate that is far too low for their law firm to thrive.
Any realization rate below 90 percent is just too low, says Ms. Guinn. The goal is to aim for a realization rate of 90 percent or better, if possible.
“A low realization rate means that you aren’t getting paid for the legal services you provide, says Ms. Guinn, and that can be a direct result of how you manage the financial side of your practice.”
The kneejerk reaction some attorneys do in response to this is pull out their red pens and start discounting their services. However, she cautions, this is a big mistake.
Ms. Guinn asks attorneys to put things in perspective. In other words, how would clients in good standing feel if they found out that other clients received discounts just for balking at their bills? The reality is it’s a losing scenario all around and there’s a better way to address the situation.
This begins by keeping track of all timekeepers’ contributions to the firm to ensure the firm’s realization rate is being met at the highest level possible. Something as simple as using legal practice management software can help attorneys evaluate each person’s contribution to the firm in terms of billable hours worked compared to the firm’s billable hours budget, revenues generated by timekeeper, and the realization rate.
In addition to taking a more holistic look at firm-wide billable contributions, Ms. Guinn outlined four ways law firms can immediately raise their realization rate:
- Don’t Take on Clients Who Can’t Afford to Pay. Sometimes the best thing an attorney can do for themselves and for the client is to refer them to a nonprofit legal services clinic, the local bar’s referral hotline, or a lesser-priced or pro bono attorney who handles the sorts of issues this client has at a lower fee than the attorney can manage. This also applies to taking on bad cases.
- Demonstrate the Value of Your Work. There’s always a possibility a client fails to understand the value of the work being produced on their behalf. It’s important to illustrate either on monthly billing invoices or through personal conversations not just the finished product, but how much effort went into achieving the end result.
- Set Clear Payment Expectations. At the end of the day, the law firm is a business and businesses need regular cash flow in order to operate and stay in business. Make sure to set expectations with clients at the outset of the engagement and also be sure to communicate any law firm billing policies to them regarding the fee agreement.
- Enforce Past Due Collections. If a client fails to pay their bills on time, attorneys shouldn’t be afraid to enforce the law firm’s billing policies. The same applies to following up with a client, if necessary, who has failed to pay their bill even after having a conversation with them about it. The reality is, by failing to do so, everybody loses.
For those wondering how to calculate their firm’s realization rate, Ms. Guinn offered the simple formula below:
Divide Gross Fees Collected (e.g. $ 156,000/year time) divided by (total hours billed (e.g.1050) X attorney’s hourly rate (e.g. $ 200)) = 74% realization rate
In the above example, when the realization gets closer to 90 percent, the hourly billing rate decreases to $220/per hour.
In the end, says Ms. Guinn, it’s all about better managing the business side of the firm and this starts first and foremost, by regularly demonstrating the value of the work being provided and keeping close track of all billable work provided by the firm and getting paid for it in reasonable timeframe.
