In a perfect world, every moment we spend on a matter would be billed and paid promptly in full. However, due to a variety of factors this is most often not the case. Large or small, law firms face the same challenges in terms of realising the full extent of their profits. So how do successful firms manage to keep their realisation rates at an acceptable level? And how can your firm maximise its realisation?
While in theory, 100 per cent of billed time should make its way into your pocket, inefficiency, client demand for discounts and freebies, scope creep and unpaid invoices all negatively impact realisation, causing profit leak.
Realisation has little to do with the extent of your marketing efforts to bring in work. Rather, it gauges the operational efficiency of a firm, assisting partners and managers to better understand what they are getting back from their hours worked, where too many write-offs are occurring and how to price projects appropriately.
So what can firms do to maximise profit realisation?
1. Monitor practice group and fee-earner realisation rates
Most firms can access extensive profitability metric data through their practice management or accounting software. Make it a goal to review realisation rates for each team once a month in order to identify where improvements can be made. Ideally, firms should maintain a minimum of 85 per cent realisation. Figures below this usually indicate excessive write-offs or a high fee debt.
2. Improve operational efficiency
Consider using a know-how legal resourcing solution to enable fee earners to upskill their knowledge in an unfamiliar area of law and draft documents quicker than ever before, maximising their billable output. Such a resource can also improve the autonomy of junior staff to research and advise clients themselves, freeing up higher fee earners to focus on their own file load.
3. Train fee earners on project management
Partners and associates need to be skilled at pricing, negotiating with clients and adhering strictly to the scope of work quoted. Hold regular training sessions for senior fee earners on these project management techniques. In addition, gather, analyse and make available data on previous engagements to assist in quoting future matters.
4. Examine your collections
Your firm’s ability to collect what it has billed to a client is quite often a measure of that client’s satisfaction with your product or how that product is presented on the bill. Make no mistake: clients do not equate effort with value. Consultant John Chisholm insightfully observed: “Your clients don’t buy time from you. They never have and they never will.” Rather, clients associate value with intellectual capital, and what they expect depends to a large degree on how well the fee earner communicated the scope of work, approach and pricing structure at the outset.
Firms that work smarter instead of harder not only maximise their profits but also demonstrate that they value their employees’ time. Consistently training fee earners to optimise their operational efficiency will enhance their value as assets to the firm, building a stronger and more profitable business.