November 16, 2006
Law Firm Standard Rate Realization
Average reported realization in the Juris Law Firm Economic Survey of midsized law firms, was 91.6 percent.
Invisible expenses, a phrase coined by William F. Breman at Altman Weil, Inc., accounts for the fact that only 95.4 percent of the time value of work performed for billable clients at rates agreed upon is being billed. Billing attorneys, on average, write off 4.6% before clients ever see their bill. Then only 96 percent of the remaining billed amount is ever collected. When combined, these two components of overall realization represent the 91.6 percent picked up in the Juris survey.
The situation is worse. There is another component of overall realization that, unfortunately, usually goes unmeasured and unreported. It has a name, “Standard Rate Realization”. It is the lost value because of negotiated rates that are below the firm's standard rates.
As we analyzed the Juris survey information, it became apparent that lower performing firms had a higher discrepancy between their reported standard rates and their realized effective rate. Since the average billing realization showed little reported variance regardless of quartiles of performance measured in terms of per-partner income, the culprit has to be the firm's standard rate realization. Lower performing firms are billing clients at rates well below their standard rates. They are doing deals. They are increasing standard rates but not adjusting rates of existing clients. Their billing systems and procedures are out of synch with firm intentions.
The message here is do not leave standard rate realization unmeasured. How do you do that? Most full-featured time and billing systems will measure and track the time value of work performed by both standard rate and negotiated rate values. You need to set goals and measure and hold people accountable at both the origination and billing attorney levels for the difference between negotiated rates and the firm’s standard rates. In addition, for the drill-down information needed to investigate and correct problem areas, you need to have measured the difference at the client, matter, and working attorney levels. Measuring and comparing both values at the practice class level is important for firm planning purposes. If your time and billing system does not track both standard and negotiated time values, replacing it with one that does should pay back the added investment many times over and for years to come.
Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.
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Filed under Law Firm Bus Model by Tom Collins