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! 

Time to Evaluate Billing Rates?

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:	Time to Evaluate Billing Rates?  What to Consider

        Although this may have no application to your particular practice, Big Law raised their hourly rates in 2012 despite all the chatter about clients having the upper-hand in fee negotiations.  According to 55 Legal Industrial Complex firms surveyed by The National Law Journal, the median partner hourly rate increased by 4.5% to $517 and the median associate rate jumped 3.5% to $323. 

        If your firm has been thinking about tweaking billing rates – whether across-the-board, for specific individuals, applicable to a specific practice area or just for new clients or new matters opened from some date forward – here are a few things you might want to consider: 

1.   Can some of the partner rates be increased to narrow the gap between them and the partner with the highest hourly rate?

2.   Can individual associate rates be increased to reflect increased seniority, experience and efficiencies?

3.   Is the gap between the lowest partner rate and highest associate rate appropriate for what each individual brings to the table?

4.   Are paralegal rates generating sufficient “profit” for the firm (e.g., there is an old adage that paralegal productivity should be 1/3 comp and benefits; 1/3 to cover overhead; and 1/3 contributed to partner profits)?

5.   Will “the market” permit increases for lesser-productive timekeepers to narrow the pay-versus-performance gaps?

 

Increasing rates is always a sensitive matter, but remember:  You can always negotiate downward and a 10% discount from $260 an hour is preferable to a 10% haircut from $250.

Standard Mileage Rate Increases $0.01 in 2013

Parsley Sage Rosemary & Ginsburg llp

“always a reasonable result for a reasonable fee, always”

MEMORANDUM

To:	All Partners, Associates and Staff
From:	Mike Marget
Date:	December 4, 2012
Re:	Standard Mileage Rate Increases $0.01 in 2013

The IRS standard mileage rate for use of a vehicle in a business will increase by a penny per mile for miles driven in 2013.  (IRS Notice 2012-72)  For business use of an automobile, the 2013 rate will be 56.5 cents per mile.[i]  Driving for medical or moving purposes similarly increases to 24 cents per mile.  Both rates are one cent higher than for 2012.

These rates are based on annual studies of the costs of operating an automobile.  The business mileage rate factors in the increased fixed and variable costs of operating an automobile, while the medical/moving rate is based solely on increased variable costs.

Since most law firms reimburse partners and employees for business use of personal automobiles based on the IRS standard rate and, where permitted, pass those amounts through as costs to clients, it is important for firm managers to plan for this upcoming change. 

Beginning January 1, 2013, it will be important to distinguish between whether the miles driven occurred in calendar year 2012 or 2013.  The one cent increase applies only to travel occurring after December 31, 2012, regardless of whether the reimbursement or client billing occurs in 2013.

I’m fairly certain those outfits who audit legal bills for insurance companies will modify their software to look for this penny-per-mile difference by travel date.  My advice is to get it right when you process the reimbursements. 

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[i] Notwithstanding IRS standard mileage rates, taxpayers always have the option of calculating the actual cost of using their vehicle for tax purposes.  However, extremely accurate records are required to substantiate such deductions.  Seek advice from your professional tax preparer before traveling this route.

Legal Industrial Complex Still Struggling with Rising Costs

Parsley Sage Rosemary & Ginsburg llp

“always a reasonable result for a reasonable fee, always”

MEMORANDUM

To:	Management Committee
From:	Mike Marget
Date:	September 25, 2012
Re:	Legal Industrial Complex Still Struggling with Rising Costs

Two big financial institutions, who bank many of the largest US law firms, recently released surveys concerning the financial condition of the Legal Industrial Complex.[i]  While these surveys attract less attention than pronouncements from the Federal Reserve, The American Lawyer magazine makes a big deal out of them, as do most big firm managing partners.

The elite law firm lending units at Wells Fargo and Citi Private Bank surveyed 115 and 176 law firms, respectively.[ii]   Since some firms participate in both surveys, it is not surprising that both banks reached the same conclusion about big firm financial results for the fist six months of 2012:

·         Revenues up
·         Expenses up more than revenues
·         Profits down.

The magazine’s takeaway:  After 4+ years of lawyer headcount reduction, staff layoffs and overhead cost reductions, managers at the Legal Industrial Complex firms are running out of ideas for aligning slow revenue increases with faster escalating expenses.

What’s a law firm manager to do?  Plenty actually, but it will require some out-of-the-box thinking and nimble execution.  I’m indebted to Hal M. Stewart (who I’ve never met), the COO at the mega-firm Chadbourne & Parke LLC, for suggesting a list of technology-centric initiatives in an articlepublished last December.  I’ve tweaked Stewart’s list a bit to emphasize operating efficiency and lawyer productivity improvement opportunities.  Most of these initiatives will improve the bottom line for small and midsize firms, too.

		applicable to smaller firms, too?
1.	Back office functions:  outsource or relocate them to lower-cost locations.  (Selective big firms are doing this and the trend is sure to continue.)	√ Absolutely, especially outsourcing
2.	Digitize all incoming mail/Document Management Systems:  improvements in scanning technology and integration with document management systems bring efficiencies to mail distribution and storage-and-retrieval of correspondence; enhanced use of client-matter databases to keep track of all relevant documents, emails, voicemails, PDFs and filings.	√ Absolutely,  document management is a big deal
3.	Reduce office rent – “hoteling” and other efforts to reduce office space	Probably Not
4.	Workflow automation to streamline client billing process: faster processing of client charges; electronic distribution of pre-bills; email invoice delivery (no mailing of paper invoices); faster processing equals faster collection cycle	√ Absolutely, available through outsourcing
5.	Actionable financial data:  faster, more informative financial reports; client budgeting, especially for fixed fee and contingency matters to gauge profitability	√ Absolutely
6.	Unified messaging for email/voicemail and lower telecommunications costs:  VOIP (voice-over-Internet protocol) telephone systems; ability to forward voicemail messages and save them (long-term) for retrieval via case-matter database	√ Can be accomplished inexpensively
7.	Social media to recruit associates:  Facebook as a recruiting communications tool.	Probably makes sense
8.	Precedent retrieval/Document assembly: utilize document management systems to store prior work product for prompt retrieval to avoid duplicating prior research or drafting; and utilize form documents integrated with specific case management databases to draft recurring forms (e.g., pleadings; interrogatories; motions).	√ Absolutely, available through  managed  IT services

Let’s be real.  There is still a lot of work to be done to realize the potential of law firm workplace technology – both in big firms and small/midsize firms. 

Value billing, alternative fee arrangements, contingency fee windfalls and busts aside – at the end of the day there are only 24 hours for lawyers to do what they do – represent current clients, prospect for future clients, and all the other things.  Lawyers (and administrators) need more time for all three. 

Full Disclosure Note:  4L Law Firm Services manages – for small and midsize law firms – all those things given the √ Absolutely references.

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[i] “Legal Industrial Complex” is a term applied to the 200 largest US firms identified each year by name in The American Lawyer magazine as having the highest gross revenue.  The published numbers there are mostly about bragging rights – to impress corporate clients and potential lateral candidates (i.e., the richest clients use the richest lawyers).  Although the magazine claims to do extensive due diligence on the numbers, the “real numbers” sometimes get massaged multiple times by managing partners, management committees and image consultants before being given up for publication.  The Wells Fargo and Citi Private Bank surveys, as well as a private one conducted by PricewaterhouseCoopers, provide comprehensive, reliable financial data, useful for peer group comparison purposes because the data for each participating firm is kept confidential. 

[ii] What, you might ask, do these 2 banks get for all the time, expense and trouble of compiling these surveys 4-times a year?  They get a “sit down” with the managing partner of each participating law firm; an excellent time to solidify relationships with their law firm customers and to market themselves to firms who bank elsewhere.