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! 

11 comments:

  1. 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
  2. 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
  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. 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