When it comes to law firm revenue and profitability, there’s an important lesson all firms need to remember: it’s not what you bill that matters, but what you collect.
Unfortunately, realization rates among law firms have fallen to the lowest levels in years — as low as 84 percent, according to the “2014 Report on the State of the Legal Market” issued by Georgetown University Law Center and Peer Monitor. Historically, law firm realization rates have ranged between 90 and 95 percent.
Some experts attribute these low realization rates to the struggles many firms are still facing trying to climb out of the hole created by the Great Recession. Realization rates had been declining gradually over time, but this accelerated during and after the recession. Along with a significant drop in demand for legal services in some practice areas and the inability of many firms to raise hourly rates, have put a serious financial squeeze on many law firms.
How to Increase Realization Rates
There’s not a whole lot most firms can do to increase demand for their services. And with real wages remaining stagnant among large sections of the population, few firms have the pricing power they did back before the recession.
But while there may be little you can do about demand or pricing, there are steps you can take to increase your realization rates. First, you need to understand the difference between the two main types of law firm realization.
- Billing realization - How much time recorded by lawyers was actually billed? For a variety of reasons, it’s not uncommon for law firms to write down a percentage of the time lawyers record on client work when billing clients. If a lawyer records 10 hours of billable time for a client but the firm only bills the client for seven hours, the billing realization rate for this client is 70 percent.
In addition, it’s also not uncommon for lawyers to not record all of the time they spend on client work. This may be due to poor timekeeping practices — for example, not recording time until the end of the day, or even the next day — or a hesitancy by some lawyers (especially new ones) to record all of their hours.
Improving billing realization is a two-step process. First, create policies that dictate when and under what circumstances lawyers are allowed to write down the time they spend on client work, as well as how much they can write down. And require lawyers to provide a written explanation of the circumstances surrounding any write-downs and why the write-down occurred.
Next, tighten up your firm’s timekeeping practices. Provide training for all new attorneys on how they are to track and record their time, and teach them the importance of accurate time tracking and keeping. Also consider using timekeeping software that automates the process, thus making it easier for attorneys to track their time accurately.
- Collections realization - How much money billed to clients was actually collected? Businesses in every industry deal with the problem of uncollected accounts receivable and bad debt. But every dollar your firm bills that isn’t collected is a dollar of lost revenue. If not monitored closely, this lost revenue can significantly impact your bottom line profitability.
The first step in improving collections realization is to get a handle on the current payment status of all of your firm’s clients. The best way to do this is to create an accounts receivable aging report, which will track and measure the payment status of all your clients. Accounts are broken out by the number of days since the invoice was issued (such as 0-30 days, 31-60, 61-90 days, and beyond 90 days) and the amounts due so you can spot potential collection problems early and focus your efforts on these accounts.
Your accounting department should contact late-paying clients (by phone and/or email) the first day that payment is late. Studies have shown that the longer law firm receivables go uncollected, the less likely they are to ever be remitted, either partially or in full. So day 45 is not the time to contact a client about a payment that was due on day 30.
Start with a gentle reminder that payment is now past due — this is usually sufficient to prompt most clients to pay. Firmer communications may become necessary if payment is not forthcoming within a reasonable amount of time, including dunning letters informing clients that your firm may take action to protect its rights if payment isn’t received by a certain deadline.
Formalize Your Billing Procedures
It’s also important to establish formal billing procedures that all attorneys must follow. For example, set monthly deadlines for when bills must be submitted and/or designate specific days each month when attorneys should do their billing.
Also, don’t let too much time elapse between the delivery of legal services to clients and the delivery of their bill. “Out of sight, out of mind” is something to keep in mind here. If weeks (or months) go by after services are delivered before clients receive a bill, they may have forgotten exactly what you did for them.
Finally, be sure you demonstrate to your clients the value of the legal services your firm provides to them. This will result in a more positive experience with your firm, which should also help improve realization rates.
Having the right banking relationship is a key component to your firm's success. At City National, the bankers in our Legal Services Group have spent years learning the infrastructure needed to fully support the financial requirements of law firms.
To learn more about how our Legal Services Group can help your legal firm and its partners and associates with automated processes, treasury management, bank account solutions and more, please call (213) 673-9500 and ask to speak to one of our Legal Services experts.
|City National, as a matter of policy, does not give tax, accounting, regulatory or legal advice. The effectiveness of the strategies presented in this document will depend on the unique characteristics of your situation and on a number of complex factors. Rules in the areas of law, tax and accounting are subject to change and open to varying interpretations. The strategies presented in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. The strategies were not written to support the promotion or marketing to another person any transaction or matter addressed. Before implementation, you should consult with your other advisors on the tax, accounting and legal implications of the proposed strategies based on your particular circumstances.|