To compete and thrive in a competitive market, law firms need to translate chargeable hours into revenue as quickly as possible. Keeping track of all billable work and getting paid in a reasonable timeframe is key to your survival. This makes realisation rates; the amount of work compared to how earnings are realised, one of the most important metrics your firm can track. It has a direct impact on the revenue and profitability of law firms.
Realisation is influenced by a variety of factors. Here are two types of realisation rates firm can track to ensure success:
Billing realisation rate (%)
You billing realisation rate can be calculated by taking the total amount in fees billed divided by total hours worked divided by the attorney’s standard rate. The billing realisation rate measures the difference between what you record as time and what percentage of that time is paid by the client.
For example, an attorney’s standard billing rate is €250 an hour, but he takes on a case for a fixed fee of €1000. If he works for 5 hours, his effective rate is €200/hour, and billing realisation rate is 80%. Had he delegated this job to a junior to do in 10 hours with a standard billing rate of €100, the realisation rate would have been 100%. Therefore, even though the case took more hours, you were able to realise the work at a better rate.
Tracking billing realisation can help identify issues in timekeeping, disadvantageous fixed rates and discounting, excessive write-downs (fee reductions taken before sending the bill) or ineffective delegation. To identify trends with the firm, billing realisation can be measured by the attorney or by matter.
Collection realisation rate (%)
The total billed fees divided by collected fees in a given time frame (i.e. monthly). To optimize collection realisation, firms need to shorten the accounts receivable lifecycle and reduce write-offs (fee reductions after sending the bill).
If you have a habit of providing write-offs to cost-sensitive clients, tracking collection realisation will provide you with more control over cash flow and ultimately, will save your firm money. For example, if a firm can decrease write-offs by five per cent on €200.000 of collections annually, this translates into an extra €10.000 in receipts for the firm. Collection realisation can also be tracked by the responsible attorney, matter, client, billing type (fixed or hourly) or practice area.
In summary, tracking realisation rates can help you take control of earnings and get paid sooner. For more tips on identifying your priorities and setting a strategy for growth, download our whitepaper, “Metrics for the successful law firm”.