April 18, 2005
How does your Realization Compare?
The mean average for realization is 91%. Put that in perspective. For a firm of 30 fee-earners, that means every year $900,000 of work product is never collected. That $900,000 is lost to write-offs, adjustments and bad debts. Approximately $30,000 per fee earner falls through the cracks. If your firm realization is lower than 91%, your losses are even greater. While this is one of the firm’s largest annual expenses, it never shows up on the profit and loss statement.
What can you do about it? Because of my presence in the legal community, I have often been drawn into conversations with corporate council. You would be surprised how often they ask me, "What is the deal with law firms?" "Why does it take a law firm 90 days to 120 days to get a bill to me?" Even though they are using your money, they don’t like it. The average firm has 78 days of unbilled fees in work-in-process, and it takes an additional 60 days on average to receive payment when that work is finally billed. That is 138 days from the time work is performed before the firm receives payment. The long billing and collection cycle is the biggest reason for a 9% loss between the value of work performed and the amount finally collected from the firm’s clients. A long billing cycle encourages disputes and write-offs. If you are last in line to receive payment, you are going to be the vendor who suffers the highest bad debts.
The first step in increasing realization is to shorten the billing cycle. There is no acceptable justification for 78 days of unbilled work. And a 60-day or greater collection period is the result of poor collection discipline and a lack of effective collection tools and procedures.
Is it worth doing something about? That $30,000 per year per fee earner comes right out of your pockets as partners. And it doesn’t have to be that way. Your business system should have the tools to reduce the billing cycle and speed up collections. Talk to your vendor. Ask about features to increase realization and, if necessary, ask your vendor to provide additional training aimed at reducing the gap between when work is performed and when it is collected.
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Filed under Law Firm Bus Model by Tom Collins