Firm economics can be a bit opaque for employees. Partnerships are generally not good at explaining the legal business to non-partner members of firms, and associates naturally focus their efforts on learning how to be an effective attorney. But like it or not, a law firm is ultimately a business, and if you are pursuing a long-term career in private practice, you need to understand the drivers of firm profitability and how you fit into the equation. In particular, you need to understand how to manage use and realization.
Utilization and realization increase profitability
use is the portion of your available time that is spent on billable matters. More specifically, it’s the number of billable hours you work divided by the number of “available hours” times 100. Let’s say your business needs 2000 hours (your “available hours”), your billable Hours are 1800 for the year and you have 300 non-billable hours. Your total tracked hours exceeds the 2000 hour threshold, but non-billable costs are not included in usage. Therefore, your utilization is 90% (1800/2000).
realization is the percentage of recorded time, ie actually paid by the customer. If your partner cuts your bills or offers the customer a rebate or write-off, it reduces realization.
Why are these metrics important? Put simply, firmly profitability depends on them. Here is a simplified profitability equation for law firms:
Profitability = Margin x Realized Rate (the “true” rate the client pays) x Utilization x Leverage.
As an affiliate, you have no control over margin or leverage. (Even as a partner, market realities limit your ability to improve these metrics: for example, some areas of activity have inherently lower margins than others.) Conversely, while usage and realization are not entirely in your control, it is entirely possible for you to influence them.
track Everyone Your time and resist the urge to cut it
No one likes to do math, but accurate time tracking is a prerequisite for heavy utilization. If you don’t bill daily, you’re likely not tracking the time you would have thought to bill if you’d been more diligent about tracking time on a regular basis. Chronic underbilling is a major threat to law firm profitability, so you should do your best to ensure you are not a part of this problem. (Of course, daily billing also protects against the risk of accidental overbilling, the consequences of which are even worse than underbilling!)
After accurately tracking your billable time, don’t cut it, even if you are uncomfortable with the pace of your work. Partners need to know how long things really take, and the decision to cut a bill is theirs, not yours. If you’re embarrassed about the time it takes you to complete a task, talk to someone about whether it’s really a problem and, if so, what steps you can take to improve your efficiency.
Knowing the exact utilization rate within a department also helps Partners decide when to request additional attorneys and is a key input to senior management when approving requests to expand a group. If everyone underbills, department heads may not realize how close their attorneys are to burning out and possibly leaving the firm.
Remember that proper time tracking extends to non-billable hours as well. Your business needs to know how much time you spend on administrative or other non-billable matters. They may track whether their workflow is efficient, whether they are using the right software, etc. A useful analysis of these factors depends on accurately reporting your non-billable amounts.
Pay attention to the wording of your invoices
Healthy execution depends not only on how much time you put into a task, but also on how you describe what you did. Note that many different parties can verify your invoices: partners and customers, certainly, but possibly also courts or other third parties. Be sure to bill with whatever specificity the client or company requests (no privileged or embarrassing details please). A correspondingly concrete wording makes it easier to justify the invoice for your work and creates the conditions for better implementation.
Ensure aligned expectations
When partners routinely cut their hours, it’s an indicator of misaligned expectations. You should proactively communicate with partners about their expectations so you avoid incurring uncollected time. Find out how long the partner expects for a project and do your best to stay on that scale. If the partner has an unrealistic idea of what is possible, talk about it as early as possible. They manage their expectations so they can manage the customer’s expectations. If you perceive any misalignment, it is your responsibility to address it and endeavor to correct it.
Look at the big picture
Why am I sharing this as a recruiter? Managing utilization and realization makes you more productive and efficient: you are a more valuable employee. But this isn’t just about you. It’s also about how much work the company has: underutilization can be caused by not having enough work. Conversely, understaffing can lead to overutilization. And your personal workload reflects your quality of life. If your utilization is very high, then you are probably overworked!
If you are now thinking about your role in your law firm or your practice group, then let’s talk.