Ralph Waldo Emerson once said: “Money often costs too much.”
It is, unfortunately, true that you have to work over $1.00 worth of time to collect $1.00. The question is: how much more? How do you measure this?
One of the ways of measuring the cost of making money is to look at your realization rate. Accordingly our next cash flow report is:
#7 – Realization Rate
A lawyer’s realization rate is the percentage of actual income paid to the firm for the billable hours of each timekeeper. For example:
Let’s look at Partner X:
- Assume Partner X bills 200 hours per month
- at $200 per hour
- for a total amount billed of $40,000. ($200 x 200 = $40,000)
- Of that amount, 10 hours are written down (taken off the books) for various reasons, and
- clients pay a total of $30,000.
- Partner X’s realization rate is 75% ($30,000 /$40,000 x 100).
Now let’s look at Partner Z:
- Partner Z bills 150 hours
- at $200 per month ($200 x 150 = $30,000)
- but she has no “write downs”
- and her clients pay 95% of her billings for a total of $28,500.
- Although Partner X bills more hours his low realization rate means that Partner Z is generating almost as much income for the firm with far fewer hours billed.
Your computer-based time & billing program should be able to create a realization report for you. Examine the results and use it to help guide any discussion of compensation for partners and associates. A low realization rate indicates that a lawyer is using resources of the firm inefficiently – which is usually a sign of poor client or file selection.
Benchmark: Realization rates should be no lower than 90% .