Realization ' Another View

Before moving forward, a quick note about “utilization” vs. “realization”: Some firms just deal in realization figures; others use these two words interchangeably. This article deals with realization, and here's how we define the difference between the terms:

• Utilization is the amount of billable work an attorney performs, typically, in hours per year.
• Realization is the percentage of billable work perfomed which is actually billed and collected.

Realization, while a product of utilization, is the number that affects the bottom line.

Causes of Low Realization

Just as there are good and bad types of cholesterol, there are good (strategic) write-offs as well as bad (avoidable) write-offs. Write-offs that can and should be avoided fall into several different categories and can be caused by poor management, downright ornery clients, and other factors, including:

• Lack of courage: A billing attorney is afraid to stand behind the firm's work and doesn't bill the full amount for fear of upsetting the client.
• Underestimating: Some attorneys lock themselves into a lowball estimate or agreed-upon fee.
• “Broken” fixed fees: Many firms have fixed fees for certain projects that are outdated and don't reflect new costs.
• Faulty communications: A lack of communication between attorney and client cause the full scope of the job to be misunderstood. (And the problem is made worse when a client doesn't divulge the true and larger nature of the issue.)
• Poor delegation: The wrong attorney is assigned the project. (This may translate into a high-billing attorney performing simple but time-consuming work or an inexperienced attorney taking an inordinate amount of time to complete the project.)
• Untimely billing and lax collections: Attorneys often don't like to bill for projects in progress, which leads to jobs being invoiced later and later; when the bill is received, it's rather large, and the client has conveniently forgotten all the upfront work performed months and months ago.

There are several strategic reasons for not having a higher realization figure. Important here is that the write-offs are approved in advance ' and not used after the fact as a rationalization for not billing the full amount. Many law firms write off hours as a way to show value as a lead-in for more work. (Some would argue that there are more profitable ways to show value!) Other firms discount summer work performed by first-year associates. And many firms, if they have attorneys who suddenly find themselves with no billable projects, may be assigned work to ensure that a client remains loyal to the firm even though it's understood that it will not be billed.

Steps to Realization, or Better Realization

Hitting a realization goal is a large undertaking that should be broken down into component parts, each of which can be addressed and tracked separately. Here's how:

Make every billable person part of the effort. Share with all billable staff ' from partners to paralegals ' what the firm's profitability would be if everyone reaches their realization goals. Comparing these numbers to a 75% realization can be a powerful tool. (Also make sure they understand how their bonuses and incentives are correlated to realization.)

Set goals ' and minimal requirements ' for the number of billable hours required for attorneys. The figures will most likely be different for attorneys at different levels, and could be different for attorneys in different practices. If the figures are already established, review them yearly to make sure they are still valid. Especially with associates, discuss what's expected of them, and provide advice on avoiding “unrealized” time. And don't assume that realization efforts are solely for young attorneys. They may face issues when projects take longer than expected, but senior attorneys with higher billing rates also have issues, especially when they fail to delegate and their clients face sizable bills.

Ensure that all attorneys account for eight hours every day. This means creating codes for lunch, administrative meetings and clerical, non-billable work. Large blocks of time coded as “administrative” offer no insight, and so they are difficult to address and fix.

Practice good personnel management. Attorneys, especially younger associates, may underreport the hours they've worked on a project in order to improve their realization percentage (and working extra hours to make up for the unreported time). Ensure that attorneys report their hours correctly so that issues can be addressed. Projects that take longer than usual may indicate the need for additional training; it may also indicate a client who changes the parameters of a project. Law firm management can't address the issue if attorneys are masking them in the reporting of hours.

Review the realization numbers regularly. Although it seems obvious, it bears mentioning: Realization figures need to be reviewed weekly, or at least monthly, and acted upon. Where possible, meet with several attorneys at once to review similar problems. However, resist the urge to hammer young attorneys when the numbers are off; instead, use it as a teaching opportunity. Look for issues among young attorneys to spot problems before they do more damage to your firm's profitability.

Making sure work is being delegated properly is another tip from the “Management 101″ files. At smaller firms, for instance, many partners spend at least a small portion of each day working on projects that can easily be handled by paralegals. Review the hours of associates to make sure they are being used properly, and check to make sure administrative assistants are being shared adequately.

Communicate, communicate, communicate. Don't overlook the importance of communication. For small- to mid-size firms, weekly meetings are recommended for all attorneys where everyone shares his or her projected billable hours and workload for the week. Such meetings demonstrate to everyone in the firm that scheduling and hours are reviewed regularly and this can prevent problems from occurring. For example, these meetings provide good opportunities to spot when one lawyer needs a helping hand ' and when another is available to lend the assistance.

Bill for your work! Many attorneys are self-discounting their invoices too much. Just as doctors never decide on their own to cut fees, attorneys ' as professionals ' should bill for the time they've applied to a project. If you do discount your fees, let the client know, and prepare them for higher bills in the future. “I'm billing you this much this month, but I can't keep doing this and stay in business” should be the real or implied commentary that accompanies the invoice. Not doing so has a damaging effect: Clients come to expect that discounted fee.

Track hours for fixed-fee work. At law firms that work a large volume of fixed-fee work, there's a tendency to not track hours, under the belief that it's unnecessary if the fees are set in advance. Without tracking hours, though, it's impossible to tell whether a firm's fixed fees are profitable, or if attorneys are working efficiently on these sorts of projects to ensure overall firm profitability.

Fire your client. Blasphemy, you say? After reviewing realization figures from a number of attorneys, a managing partner may notice that many unbillable hours can be traced back to a particular client. You may have a senior attorney with billing responsibility unable to stand up to a client, but just as often you have a client who is running roughshod over your firm. Firing a client frees up attorneys to work on other matters for clients who fully pay their invoices.

Create a policy and process for writing off hours that goes beyond empowering billing attorneys to use their own discretion. Policies and processes provide a real-time method for the firm's management team to keep a close eye on the billing attorneys and the projects that are behind unbillable hours.

Collect early and often ' within reason. Have policies in place for billing and collections. Bill for projects in process as opposed to waiting until the end of a project, especially when those projects don't have a defined end point. Any CPA will tell you, the longer you wait to collect an invoice, the more difficult it is to collect. Give the billing attorney responsibility for collecting invoices 30 days past due.

Realistic Realization Figures

Many managing partners start a realization program with 1,800 billable hours as a goal for associates and work down from there, with less billable hours expected from more senior attorneys as they get involved in the management and the administration of the firm.

The question we often receive is: Is 100% realization achievable based on the 1,800 hour base? Do other firms ever achieve 100% realization? Our answers are typically “yes” to question one and “no” to question two. The 100% realization goal is achievable at a cost. The figure is based on 35 billable hours a week for 52 weeks (technically 1,820 hours), or roughly seven billable hours a day. Using the commonly held belief that it takes about 10 hours to bill for seven, many law firms have set up a system in which a 50-hour work week is required.

Here's where challenges arise in the pursuit of 100% realization. The math used above does not account for sick days or personal days, holidays that cut into work weeks, or vacation time. It also fails to account for non-billable client work such as pro bono work, attending some client meetings, court hearings, company or individual training sessions, staff meetings, or any firm marketing activities, such as speaking engagements or writing articles for publication.

Tracking numbers year over year, and even practice by practice (in multi-practice firms), managing partners should arrive at a realistic realization figure for their firm, and just as importantly, they should arrive at a figure that allows them to reach a profitability level with which they and their partners will be comfortable.

For many managing partners, the practice of law is easy compared with the challenges associated with “realization”: an 11-letter word that is the bane of all managing partners everywhere. And 100% realization? Well, that's the Holy Grail of law firm management. Given the choice of winning a Supreme Court case or solving the riddle of meeting their firm's realization goals, many managing partners might just tell the Chief Justices to take a hike.

It's important to understand that just keeping track of a firm's realization figures or, better yet, implementing a strong realization improvement program, are extremely useful efforts ' whether a firm reaches its realization goals or not. Paradoxically, when it comes to setting and striving for 100% realization, firms succeed even when they fail.

The benefits of setting realization goals and trying to hit those numbers go well beyond maximizing profitability. The entire effort speaks to proactive management. And not to sound existential here, but good managing is a journey, not a destination. Look at Law Firm AB & C, LLP. They didn't hit their numbers four years ago, and still didn't reach their goals this past year. But they've improved each year. Additionally, simply by tracking their realizations, they've identified the high billers, rewarded them properly, and have established guideposts. They've re-established or confirmed the right realization targets for their senior attorneys.

Before moving forward, a quick note about “utilization” vs. “realization”: Some firms just deal in realization figures; others use these two words interchangeably. This article deals with realization, and here's how we define the difference between the terms:

• Utilization is the amount of billable work an attorney performs, typically, in hours per year.
• Realization is the percentage of billable work perfomed which is actually billed and collected.

Realization, while a product of utilization, is the number that affects the bottom line.

Causes of Low Realization

Just as there are good and bad types of cholesterol, there are good (strategic) write-offs as well as bad (avoidable) write-offs. Write-offs that can and should be avoided fall into several different categories and can be caused by poor management, downright ornery clients, and other factors, including:

• Lack of courage: A billing attorney is afraid to stand behind the firm's work and doesn't bill the full amount for fear of upsetting the client.
• Underestimating: Some attorneys lock themselves into a lowball estimate or agreed-upon fee.
• “Broken” fixed fees: Many firms have fixed fees for certain projects that are outdated and don't reflect new costs.
• Faulty communications: A lack of communication between attorney and client cause the full scope of the job to be misunderstood. (And the problem is made worse when a client doesn't divulge the true and larger nature of the issue.)
• Poor delegation: The wrong attorney is assigned the project. (This may translate into a high-billing attorney performing simple but time-consuming work or an inexperienced attorney taking an inordinate amount of time to complete the project.)
• Untimely billing and lax collections: Attorneys often don't like to bill for projects in progress, which leads to jobs being invoiced later and later; when the bill is received, it's rather large, and the client has conveniently forgotten all the upfront work performed months and months ago.

There are several strategic reasons for not having a higher realization figure. Important here is that the write-offs are approved in advance ' and not used after the fact as a rationalization for not billing the full amount. Many law firms write off hours as a way to show value as a lead-in for more work. (Some would argue that there are more profitable ways to show value!) Other firms discount summer work performed by first-year associates. And many firms, if they have attorneys who suddenly find themselves with no billable projects, may be assigned work to ensure that a client remains loyal to the firm even though it's understood that it will not be billed.

Steps to Realization, or Better Realization

Hitting a realization goal is a large undertaking that should be broken down into component parts, each of which can be addressed and tracked separately. Here's how:

Make every billable person part of the effort. Share with all billable staff ' from partners to paralegals ' what the firm's profitability would be if everyone reaches their realization goals. Comparing these numbers to a 75% realization can be a powerful tool. (Also make sure they understand how their bonuses and incentives are correlated to realization.)

Set goals ' and minimal requirements ' for the number of billable hours required for attorneys. The figures will most likely be different for attorneys at different levels, and could be different for attorneys in different practices. If the figures are already established, review them yearly to make sure they are still valid. Especially with associates, discuss what's expected of them, and provide advice on avoiding “unrealized” time. And don't assume that realization efforts are solely for young attorneys. They may face issues when projects take longer than expected, but senior attorneys with higher billing rates also have issues, especially when they fail to delegate and their clients face sizable bills.

Ensure that all attorneys account for eight hours every day. This means creating codes for lunch, administrative meetings and clerical, non-billable work. Large blocks of time coded as “administrative” offer no insight, and so they are difficult to address and fix.

Practice good personnel management. Attorneys, especially younger associates, may underreport the hours they've worked on a project in order to improve their realization percentage (and working extra hours to make up for the unreported time). Ensure that attorneys report their hours correctly so that issues can be addressed. Projects that take longer than usual may indicate the need for additional training; it may also indicate a client who changes the parameters of a project. Law firm management can't address the issue if attorneys are masking them in the reporting of hours.

Review the realization numbers regularly. Although it seems obvious, it bears mentioning: Realization figures need to be reviewed weekly, or at least monthly, and acted upon. Where possible, meet with several attorneys at once to review similar problems. However, resist the urge to hammer young attorneys when the numbers are off; instead, use it as a teaching opportunity. Look for issues among young attorneys to spot problems before they do more damage to your firm's profitability.

Making sure work is being delegated properly is another tip from the “Management 101″ files. At smaller firms, for instance, many partners spend at least a small portion of each day working on projects that can easily be handled by paralegals. Review the hours of associates to make sure they are being used properly, and check to make sure administrative assistants are being shared adequately.

Communicate, communicate, communicate. Don't overlook the importance of communication. For small- to mid-size firms, weekly meetings are recommended for all attorneys where everyone shares his or her projected billable hours and workload for the week. Such meetings demonstrate to everyone in the firm that scheduling and hours are reviewed regularly and this can prevent problems from occurring. For example, these meetings provide good opportunities to spot when one lawyer needs a helping hand ' and when another is available to lend the assistance.

Bill for your work! Many attorneys are self-discounting their invoices too much. Just as doctors never decide on their own to cut fees, attorneys ' as professionals ' should bill for the time they've applied to a project. If you do discount your fees, let the client know, and prepare them for higher bills in the future. “I'm billing you this much this month, but I can't keep doing this and stay in business” should be the real or implied commentary that accompanies the invoice. Not doing so has a damaging effect: Clients come to expect that discounted fee.

Track hours for fixed-fee work. At law firms that work a large volume of fixed-fee work, there's a tendency to not track hours, under the belief that it's unnecessary if the fees are set in advance. Without tracking hours, though, it's impossible to tell whether a firm's fixed fees are profitable, or if attorneys are working efficiently on these sorts of projects to ensure overall firm profitability.

Fire your client. Blasphemy, you say? After reviewing realization figures from a number of attorneys, a managing partner may notice that many unbillable hours can be traced back to a particular client. You may have a senior attorney with billing responsibility unable to stand up to a client, but just as often you have a client who is running roughshod over your firm. Firing a client frees up attorneys to work on other matters for clients who fully pay their invoices.

Create a policy and process for writing off hours that goes beyond empowering billing attorneys to use their own discretion. Policies and processes provide a real-time method for the firm's management team to keep a close eye on the billing attorneys and the projects that are behind unbillable hours.

Collect early and often ' within reason. Have policies in place for billing and collections. Bill for projects in process as opposed to waiting until the end of a project, especially when those projects don't have a defined end point. Any CPA will tell you, the longer you wait to collect an invoice, the more difficult it is to collect. Give the billing attorney responsibility for collecting invoices 30 days past due.

Realistic Realization Figures

Many managing partners start a realization program with 1,800 billable hours as a goal for associates and work down from there, with less billable hours expected from more senior attorneys as they get involved in the management and the administration of the firm.

The question we often receive is: Is 100% realization achievable based on the 1,800 hour base? Do other firms ever achieve 100% realization? Our answers are typically “yes” to question one and “no” to question two. The 100% realization goal is achievable at a cost. The figure is based on 35 billable hours a week for 52 weeks (technically 1,820 hours), or roughly seven billable hours a day. Using the commonly held belief that it takes about 10 hours to bill for seven, many law firms have set up a system in which a 50-hour work week is required.

Here's where challenges arise in the pursuit of 100% realization. The math used above does not account for sick days or personal days, holidays that cut into work weeks, or vacation time. It also fails to account for non-billable client work such as pro bono work, attending some client meetings, court hearings, company or individual training sessions, staff meetings, or any firm marketing activities, such as speaking engagements or writing articles for publication.

Tracking numbers year over year, and even practice by practice (in multi-practice firms), managing partners should arrive at a realistic realization figure for their firm, and just as importantly, they should arrive at a figure that allows them to reach a profitability level with which they and their partners will be comfortable.