Five ways to boost your firm’s realization rates

Keeping margins at a healthy level is a constant challenge for law firms.

One factor impacting this is low realization rates – the percent of the fee that firms actually collect. According to Thomson Reuters Peer Monitor, today’s rates are the lowest on record, having dropped 10 percentage points, from 93 percent to 83 percent, over the last decade.[1] With limits on the amount firms have been able to raise their rates (an average of only 3.6 a year over the same period, says Peer Monitor), such low realization rates translate into a significant loss in profitability.

The best ways to boost realization rates are to:

1. Standardize the firm's billing workflow processes (which will make invoicing and collections systems more efficient.)

2. Ensure that attorneys working on a matter are included in the billing workflow.

In terms of real dollars and cents, the drop in realization rates from 93 to 83 percent means that now, instead of collecting $93,000 on every $100,000 a firm bills, it collects only $83,000. However, it seems that hope trumps experience at most firms. In a survey by Altman Weil, more than 68 percent of respondents said they expected their firm’s effective realization rates to be up in 2015.[2] Yet, in the very same survey, more than half of the respondents thought decreased realization rates were a permanent trend.

Are your firm’s realization rates where you want them to be? Wherever your numbers fall, there is probably room for improvement. Here are five ways to improve them:

1. Make it easy for clients to pay promptly.

By enhancing billing workflows, firms are able to bill clients accurately and in a timely manner. Inefficient workflows typically delay the payment process as the services provided have the tendency to lessen over a given time period. The ability to audit activities to help keep track of and bill for services can help ensure that firms are not absorbing costs that should be paid by clients. A prompt, accurate invoice makes it easier for a client to process payment quicker.

2. Keep attorneys involved in the process.

It may seem like a no-brainer, but because they have the relationship with the client, attorneys should be involved in the collection process. At most firms, the collection process is managed by accounts payable (AP), and in some cases legal assistants, administrative assistants or clerical staff. Typically, AP manages the billing workflow, tracks the amounts owed by each client and sends a monthly bill. When payments are late, additional notices are sent. At some point, an admin may start calling the client to “remind” them payment is due. But it’s the attorney(s) and associates working on the client’s matter that have the key relationship(s) with the client. They are trusted advisers whose services the client is buying. Because of this valuable relationship and the frequent communication between attorney and client, attorneys may need to become involved and reach out to the client regarding outstanding invoices.

3. Describe the standard payment process in all engagement letters.

Law firms represent various clients ranging from individuals to global corporations. Traditionally, the payment process is defined in the engagement letter, but these processes can sometimes vary from one client to the next. That makes collections cumbersome and difficult to manage. Establishing a standard payment process and policy, and instituting a workflow that helps ensure that policy is defined in the engagement letter, gives everyone at the firm, as well as the client, a consistent, clear understanding of the billing and collections expectations. 

4. Educate attorneys on the financial impact of late payments.

While attorneys represent their clients’ legal requirements and provide great value, they typically do not focus on the financial impact to the firm of late payment. Educate your partners and attorneys on both the financial benefits of timely payment and the ramifications of late payment. Consider implementing an automated reporting system that alerts attorneys of the status of their clients’ payments. You may also want to consider rewarding attorneys for timely collections and penalizing attorneys when their clients pay late.

5. Incorporate collections cyclically.

Once a client is established and legal services commence, the initial billing starts. The cycle on a legal matter may be as brief as a single invoice for one week’s work, or it may continue for many years. But, especially in longer engagements, having a standard workflow that handles billing as a cycle and subsequent collections as a continuous process can improve payment rates. It will also help ensure consistent communication about outstanding bills throughout the year.