March 27, 2007
Rolling Realization Computation for Law Firms
Across the board, most midrange law firms fail to collect a material portion of their work product due to work flow, poor billing practices, and weak collection management.
Losses begin with poor time recording practices. After-the-fact accounting for work performed remains a badge of courage for a portion of the baby boomer generation. Some firms simply have not considered it important enough to require its professional staff to use modern technology to track and report time as work is performed. Work product is lost to imperfect memory, unless contemporaneous time tracking is standard operating procedure.
Additional losses are attributed to what some have labeled invisible expenses. If you had to show write-downs on your financial statements, how would they stack up against other expenses of the firm? The industry mean for realization of billable effort worked is around 90 percent. You may be better than average or worse. But, if on average you collect $15,000,000 in fees annually, that amount is net of write-downs, adjustments and uncollectible amounts of almost $1,700,000.
The answer is management. First and foremost, you have to have the information you need to manage, and that should come from your law office business system. You want to know who is writing off billable time, whose work is being written off and why. You must hold people accountable to justify their actions. That justification will point you to the solutions.
True realization is difficult to measure because of timing differences between billings and collections. If you want an accurate picture of what has been happening, use the backward-looking rolling computation method. The rolling computation method mines your financial database, extracting only fully paid bills and then measures each layer of realization:
o Pricing Realization: Lost revenue due to negotiated rates
o Billing Realization: Lost revenue due to write downs before the bill gets out the door
o Collection Realization: Lost revenue due to write offs, adjustments, and uncollected amounts after the client was billed
o Overall realization: The overall lost revenue due to all the above
Your reports should measure realization by matter, client, working attorney, billing attorney, originating attorney, practice class, etc. Rolling realization reports aren’t usually a standard report option, but your software vendor should be able to work with you to develop a set of custom reports that fits your particular firm. While this backward-looking report lags months behind current firm activity, it is often an eye-opener that identifies previously unaddressed problem areas that are reducing the income of every partner in the firm.
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
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