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!
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