Is Your Law Firm Successful?
Over the past five years, many law firms have seen their revenues increase by more than 100%, whereas others have had their business cut in half. There are multiple reasons that either trajectory could be happening for your firm. However, a recent study by Clio showed that the most prominent factor is your law firm’s utilization rate.
A law firm’s utilization rate is a way to measure how many hours a particular lawyer spends on billable work on any given day. According to the study, the average utilization rate across more than 1,000 law firms surveyed came out to 2.5 hours per day of billable work per attorney, or 31% (based on an 8-hour workday, which is not how all firms operate). The most successful firms, experiencing growth in revenue, had a slightly higher utilization rate at 33%. In contrast, firms with shrinking revenues reported utilization rates between 21-28%.
The difference between 21% and 33% is 12%, or roughly one hour of billable work per day. Attribute that number to every lawyer in your law firm, and multiply it by the number of workdays in the revenue year, and the dollars lost when efficiency is diminished add up quickly. For this reason, utilization rate has been the greatest factor in whether a law firm grows or shrinks, far more than whether or not it adds new lawyers to the workforce.
Utilization rate is not the only measure of success. The realization rate measures the amount a law firm invoices, as compared to the amount of billable work lawyers say they performed. The collection rate measures how much a law firm collects, as compared to the amount invoiced to clients. While utilization rate demonstrates how efficient each lawyer is, on average, at performing billable work, the realization and collection rates demonstrate how efficient the law firm is at tallying up the hours and collecting payment from clients.
It is important for law firms to keep tabs on all three rates and understand the differences, because each measure of efficiency can be improved to maximize overall growth and success. Each of the three is interrelated with the others, but can be observed by itself when necessary to isolate and focus on a particularly lagging measure.
Growing firms typically have a realization rate of around 90%, meaning that nine-tenths of the work performed is invoiced to the client. Stable firms have a slightly higher realization rate of around 92%. It’s worth noting that this is the only measure of success in which stable firms outdo growing firms, and it is likely attributable to the fact that stable firms remain stable by focusing on current clients and maximizing revenue from that source, while growing firms are constantly bringing in new business and might in the process forget about a few invoices due to current clients.
The big contrast is with shrinking firms, which start out with a realization rate around 86% when they start to slide downward, all the way to a rock-bottom realization rate of 77%. This means that at the firms with the lowest realization rates, almost one-quarter of billable work performed is never invoiced to clients, a huge loss of revenue that is completely fixable without hiring a single new attorney or bringing in a single new client.
Similarly, when it comes to collection rates, both growing and stable firms actually collect about 90% of invoiced charges, while firms with shrinking revenue hover around 81%. A 10% difference is massive when it comes to collection rates, because this represents the money that actually fills the firm’s coffers.
It’s clear from the data that growing and stable firms invoice for hours worked and collect payment at a higher rate than shrinking firms. So, while utilization rate is the greatest predictor of overall performance, paying more attention to realization and collection rates is also a surefire way to increase revenue and turn the tide for firms that are shrinking, or just experiencing slower growth than the managing partners would prefer. It doesn’t take much more in terms of resources to invoice for and collect on payments due to the firm. This task can be performed by an in-house office manager or bookkeeper, or outsourced to an accounting firm that specializes in law firm billing. Because the hourly rate for these personnel is often a fraction of a lawyer’s billable hourly rate, the return on investment is substantial.
And at the end of the day, maximizing all three rates makes a greater difference to success for a law firm than either raising hourly rates for its attorneys or hiring more attorneys. Maximize the efficiency of the lawyers already employed, and make sure that bills are created and paid for the hours they work; these are the keys to success.