If I could have only one KPI to evaluate the health and financial performance of a law firm, it would be realization. The overall realization rate for your firm is the amount of money collected divided by the value of the billable time captured.
To turn realization into real insight, break it down into its three component parts:
- Worked Realization: how much of each attorney’s working day turns into billable hours? Although many attorneys work much longer hours, the simplest way to calculate is assume an 8 hour day for each working day, divided by the number of billable hours captured, and you’ve got a worked realization %. We’re not trying to perfectly capture the ratio, but instead create a metric that can be tracked across attorneys, departments and over time for comparison.
- Billed Realization: what portion of the billable time that was captured makes it on a bill to a client? This takes write ups/downs into account.
- Paid Realization: what percentage of that billed time is then paid by the client? This, of course, takes write-offs into account.
The worked, billed and paid components of realization tracks the performance of your firm through the entire cycle. However, when seeing the numbers in isolation, it’s hard to make sense of them. If you have a 40% worked realization, is that good or bad? What about 95% billed realization or an 89% paid realization?
It’s when you track the numbers over time that they really develop meaning. Seeing each month of the current year compared to the monthly periods of the last couple of years makes the trends obvious. I prefer seeing it monthly because it shows the seasonality inherent in any of your practice areas. Seeing how you’ve done so far this year compared to the last two years makes it easy to forecast the remainder of the year.
So, are those numbers good?
I threw out some example realization numbers above. What really matters for your firm is how they change over time, but it’s useful to understand the context of the legal industry:
- 40% worked: the average in small firms is 31% according to Clio (which is going to be small firms), while Thomson Reuters reports 77% in large law (both based on 8 hour work day).
- 95% billed: TR reports 85% billed realization in large law in the first half of 2021.
- 89% paid: depends on practice area. In 2020, you go from a low of 78% collection rate in bankruptcy to 97% in worker’s comp. In the middle of the road, practice areas like business, corporate, IP, and real estate all hover around 92%. Thomson Reuters reported an industry wide paid realization of 90.6% for 2021.
Presenting this information visually, you instantly communicate deep analysis that would be challenging to pull out of traditional paginated reports lined up across the conference room table. Realization is just one example of the power of DataQ.