Wednesday, January 9, 2013

Lower Realization -- Sometimes an Acceptable Tradeoff

Parsley Sage Rosemary & Ginsburg LLP
“Always a reasonable result for a reasonable fee, always”
MEMORANDUM

To:
Managing Partners; Practice Group Leaders
From:
Mike Marget
Date:
January 9, 2013
Re:
Lower Realization – Sometimes an Acceptable Tradeoff 

Since the onset of the recession, clients have gained the advantage in fee negotiations.  Yet Legal Industrial Complex firms still managed to increase their hourly rates in 2012.  According to a survey published last month by The National Law Journal, median partner rates jumped 4.5% to $517 an hour and median associate rates increased 3.5% to $323.  The survey covered 55 firms ranging in size from 128 to 3,000+ lawyers.

While these rates may not resonate with your particular practice, it is a prudent business exercise to review pricing issues from time-to-time.  

Over the years I’ve had “discussions” with partners and practice group leaders who prided themselves on high realization.  They seldom needed to write-down time, collecting 98%-99% as compared to their standard hourly rates.  High realization percentages are wonderful when you are absolutely certain those rates are at the ceiling as to what the market will bear.  But such certainty, you should be bold and sacrifice a few realization percentage points in a quest for higher aggregate fees.  Let me demonstrate how this is important.

Assume you work 1,800 billable hours a year; have a $250 standard hourly rate; and enjoy 98% realization.  You will collect $441,000 on your work. [1,800 x $250 x 98% = $441,000]  Digging into the details of your practice reveals 900 of those hours are worked and collected at your standard $250 hourly rate, while the balance is for more rate-sensitive clients who are charged $240.  (This is illustrated in Example 1.) 

Then further assume, you decide to test drive a 4% rate increase on your standard rate, pushing it to $260 an hour. 

What is the worst that could happen?  Your rate-sensitive clients balk at the increase, so those hours remain at $240.  Theoretically, you could lose the other 900 hours if the new $260 rate is too high.  But in the real world, you are a lawyer and everything is negotiable.  If necessary, you’ll discount the new $260 standard rate with the pitch, “My standard rate is $260, but for you … $250.”  As illustrated in Example 2, you will still generate $441,000 in revenue even though your realization has dropped to 94.2%.  In essence, you enjoy the same revenue stream despite a lower realization statistic. 

On the other hand, if you manage just 1 additional hour at a rate higher than $250, you are ahead.

What is the best case scenario?  Assume you get the 4% increase on all your time currently billed at $250 an hour.  This is illustrated in Example 3.  The additional $10 an hour jumps your total revenue up to $450,000.  However, due to the $20 an hour negative spread between your new standard rate of $260 and the $240-an-hour cap on half your time, your realization drops to 96.2%.  Again, you achieve higher revenue despite the lower realization rate.

There is also an alternative almost-best case scenario.  Assume you cannot replace all 900 hours at the new higher standard rate?  Instead of 900 billable hours at $260 an hour, you produce only 865.  No worries, I’d still call this a win.  See Example 4.  With these numbers you are still generating the same $441,000 of revenue, but need to work only 1,765 billable hours in the process.  Sure, your realization drops to 96.1%, but the lower number of billable hours provides you 35 additional hours without any revenue decline.  That’s 35 free hours to devote to business development efforts which will eventually generate new work and create incremental revenue.

 
Example 1
Example 2
Example 3
 Example 4
Standard hourly rate
$250
$260
$260
$260
$240/hr clients
 
 
 
 
Billable hours
900
900
900
900
Effective hourly rate
$240
$240
$240
$240
Fee revenue generated
$ 216,000
$ 216,000
$ 216,000
$ 216,000
Other clients
 
 
 
 
Billable hours
900
900
900
865
Effective hourly rate
$250
$250
$260
$260
Fee revenue generated
$ 225,000
$ 225,000
$ 234,000
$ 225,000
Result
 
 
 
 
Billable hours
1800
1800
1800
1765
Effective hourly rate
$245
$245
$250
$ 250
Fee revenue generated
$ 441,000
$ 441,000
$ 450,000
$ 441,000
Realization rate
98.0%
94.2%
96.2%
96.1%

Now, I’m not about to paraphrase Dick Cheney and say “realization rates don’t matter.”  Rather, the point is realization rates, like deficits, need to be evaluated in a larger economic context.  Higher rates may mean higher write-offs and lower billable hours – but what is important is the bottom line. 

Maybe a higher standard rate for new clients simply becomes a starting point for fee discussion in 2013.  After all, a 10% discount from $260 an hour is preferable to discounting from $250.  Like the aphorism says, “If you don’t ask, you don’t get.”  Sometimes you do get! 

18 comments:

  1. Replies
    1. IEEE Final Year Project centers make amazing deep learning final year projects ideas for final year students Final Year Projects for CSE to training and develop their deep learning experience and talents.

      IEEE Final Year projects Project Centers in India are consistently sought after. Final Year Students Projects take a shot at them to improve their aptitudes, while specialists like the enjoyment in interfering with innovation.

      corporate training in chennai corporate training in chennai

      corporate training companies in india corporate training companies in india

      corporate training companies in chennai corporate training companies in chennai

      I have read your blog its very attractive and impressive. I like it your blog. Digital Marketing Company in Chennai Project Centers in Chennai

      Delete
  2. wow very nice article glad to see your article ....

    do not forget to visit our website as well: Sejarah Togel D: D

    thanks for the info very nice and creative

    successful greeting always: Togel Online D: D

    nice article.....

    ReplyDelete
  3. Welcome to our hight quality Mumbai Escort Agency. When you are looking best female escorts in Mumbai then this is right services for you. it may be hard to find and good escort services in entire city which provides cute and energetic escorts in Mumbai that look just good as appeared in pictures or better than their pictures. Sometimes portfolio hides the much deterioration about them. So pictures and physical appearence, both are different things. mumbai is a well-known city around the world.

    Model escorts in mumbai

    Callgirls in mumbai

    Housewifes in mumbai

    Mumbai escorts

    College girls in mumbai

    ReplyDelete
  4. Welcome to our hight quality Mumbai Escort Agency. When you are looking best female escorts in Mumbai then this is right services for you. it may be hard to find and good escort services in entire city which provides cute and energetic escorts in Mumbai that look just good as appeared in pictures or better than their pictures. Sometimes portfolio hides the much deterioration about them. So pictures and physical appearence, both are different things. mumbai is a well-known city around the world.

    Model escorts in mumbai

    Callgirls in mumbai

    Housewifes in mumbai

    Mumbai escorts

    College girls in mumbai

    ReplyDelete
  5. Our Escorts in Gurgaon services conferred are not to be too expensive it will be always afforded to your pocket. Choosing any of the time of the day you will specifically create a selection from our Gurgaon photos gallery. Just in any case you need a spectacular escort’s service in Gurgaon for any special day, you will hire a special girl anytime. Please go to the escort gallery of our website for sexiest call girls in Gurgaon. Every professional man has different choices someone like fat women whereas some like slender girls with big curves. Some are prone to mature ladies whereas some like company of young women. No matter be your personal want, you’ll be at liberty to contact Gurgaon Escorts and call girls at no matter time you would like we are open 24X7 to assist you and to fulfill your desires, your feelings, and your willingness. You’ll delicately discuss details with the employees that are each useful and passionate.

    Model escorts in gurgaon

    Callgirls in gurgaon

    Housewifes in gurgaon

    Gurgaon escorts

    College girls in gurgaon

    ReplyDelete
  6. (Cheap Yeezys For Sale) particular litigation could run 50% longer, Together with income taxing present when nova scotia. A regular great made of constructed from wool go well with goes relating to $450 in Hong Kong.

    No person that has half a head into their leads will certainly refuse because during eight five to ten a lifetime the two of us experienced some amazingly noxious and (Coach Outlet Store Online) moreover sinister many years, (Michael Kors Outlet Store) For the become old having to deal with number possibility (Jordan Shoes For Sale Online) but to think customers connected with management disappointments is before long only probably still (Ray Ban Outlet Store) in. We were a fairly enjoyable long term above, Loaded (New Yeezys 2020) with domestic and (Cheap Jordan Shoes Websites) private tests, Since bonk the following, I have on want to hang about until december. I starting out rejoice in (Yeezy Boost 350 Cheap) at this instant.

    ReplyDelete
  7. We have a List of Girls who are in financial problems. They need your help. They are ready to sleep with you in some small amounts. Call us for their contact no and help them. To book an escort just drop a call to the given number and ask them what kind of service you want!. You will also WhatsApp us for the availability of ourEscorts Service in Amausi, LucknowIf you’re in the end determined and ready to enjoy the amusing of being at duration the corporate of one of our beautiful girls. Check our other Services...
    Escorts Service in Aram Bagh Agra
    Escorts Service in Arjunganj, Lucknow
    Escorts Service in Badarpur
    Escorts Service in Badarpur
    Escorts Service in Badarpur
    Escorts Service in Badarpur
    Escorts Service in Badarpur

    ReplyDelete
  8. Asked in Business Finance, Coach Outlet Coach Outlet Store The Difference Between, Legal New Jordan Shoes 2020 Definitions What is the difference between margin and margin?Profit margins are important if your suppliers keep raising Yeezy Discount the price of the product you need to sell or product you need for manufacturing. Margins are the differnt changes in the cost to profit percentages. If you buy a case of cookies for 5 dollars and sell them each for 10 dollars profit Ray Ban Glasses percentage is a 200 % or 50 Ray Ban Outlet % mark up.

    The ISES training principles provide Coach Handbags Clearance an excellent starting point for professionals and horse owners. Currently, there does not seem to be an accepted protocol for evaluating horse training programs against the ISES Yeezy Boost 350 principles. We suggest an approach to this, using Parelli Natural Horsemanship as our subject for evaluation.

    ReplyDelete
  9. It is possible to spend a magical time with the Rajouri Garden Escorts girls as our team is aware of some exotic places from where the view is stunning and breathtaking and you can get your privacy without getting disturbed Call Girl Service in Rajouri Garden.

    Rajouri Garden Escorts Service
    Rajouri Garden Escorts Service
    Rajouri Garden Escorts Service
    Rajouri Garden Escorts Service
    Rajouri Garden Escorts Service
    Rajouri Garden Escorts Service

    ReplyDelete
  10. you can get all types high class call girls Delhi and most demanding girls of city. meet our expert and erotic girls and spent whole night with them. enjoy the magic moment of your life. visit my website:-
    Delhi escorts ##
    Mahipalpur escorts service ##
    Connaught place escorts service ##
    Saket escorts service ##
    Vasant kunj escorts service ##
    Aerocity escorts service ##
    Dwarka escorts service ##
    Rohini escorts service ##
    Laxmi nagar escorts service ##

    ReplyDelete