Important realisations about Realisation Rates...

Important realisations about Realisation Rates...

The legal practice is a professional business.

There are additional challenges faced by the legal practice over and above those faced by non-professional businesses.

Every lawyer in private practice knows that, and I don’t need to list them here for the purposes of this article.

As to the remainder of the business challenges, they’re fairly simple to describe:

·??????Invest money in setting up, and?

·??????In operating month to month invest in marketing, communications, staff resources, insurances including professional indemnity cover, occupancy costs, software acquisition and maintenance, practising certificates, library resources, training including Continuing Professional Development, Accounting, Utilities etc...

·??????Convert the enquiries that come in and get the work done and paid for...

·??????Pay taxes and capital components of loan repayments...

·??????Survive...

·??????Hopefully pay owners some return on their invested capital...

·??????Leave significant funds in the firm to build up reserves against unprofitable periods....

·??????Repeat!

Unfortunately, in my Robservation far too many lawyers involved in small-medium practices have made ineffectiveness and waste something of an art form!

Every week I analyse data tracking WIP Realisation Rates, highlighting waste in its various forms, and with its smorgasbord of causes.

In those firms that track investment of time into clients’ files most do it by recording the time spent at hourly rates of the people involved. This creates an amount of “Raw” work in progress.

When a file is invoiced the comparison of the Raw WIP removed from the file to the actual professional fees invoiced provides the Realisation Rate.

I will leave the important issues of:

·??????Collection of invoices?

·??????Inadequate volumes of client file work available for the firm’s resources

aside for the purposes of this discussion.

If a firm is interested in understanding where its most stubborn and damaging causes of waste are it will be concerned to know where resources applied are simply not delivering sought-after outcomes.

A problem identified is a problem that can be attacked, with some hope of success.

Here’s a painful example of how what appears to be relatively minor waste can cruel profitability entirely, putting the firm’s very continuation in business at risk.

Let’s take a lawyer with a range of charge rates that, after looking at percentages of work at each rate budgeted for, leaves a blended rate of $385 plus taxes.

Accurate recording, and simple maths after invoicing, will often reveal that the rate actually invoiced is as low as just $308, as a result of the WIP Realisation Rate being 80% rather than 100% (or better).

By far the majority of firms would be delighted to have a genuine profit of 20% after Principals’ salaries.

In this example the profit has gone from 20% of $385 ($77) to zero, in the blink of an eye.

Here are just some of the common things that I see impacting on Realisation Rates:

·??????Inadequate skills applied to scoping of the client’s matter...more work will be needed than the fee requested takes account of...

·??????Lack of confidence and skill in putting forward scoping and pricing options for the client...

·??????The amount of work done and how it was allocated and supervised...including potential issues of work doubled up or unnecessary rework demands created...

·??????How well the work was recorded...if not fully recorded the problem may be even bigger than it appears...

·??????The actual fee charged...and whether opportunities to reasonably charge for some unavoidable scope changes were missed...

Again, for these purposes we can assume that the blended rate of $385 was appropriate in the first place (more on this below). The problem did not lie in the budgeting process, but in the execution of the work acquisition, completion, and invoicing processes.

At the core of many management problems in law firms is a perceived lack of time.

The simple expedient of doing half the work, at twice the original target profit margin, will free up considerable time of lawyers involved in managing themselves and others.

Savings can be made in so many areas if half the files need to be processed to achieve a very desirable result.

So, to round out the discussion, using most of the numbers in our earlier example, confident scoping, pricing and good systems and supervision ensure a 100% Realisation Rate on a blended rate of $415.

Rather than $308 recovered for no profit margin, and rather than achieving even 100% Realisation on $385 ($77)...recovered margin is now $107...nearly 40% higher than originally considered excellent by so many lawyers.

Realisation Rate is neither a mystery nor largely a waste of time. It can contain most of the answers and solutions the average practice needs to become and remain financially healthy.

2020-2022...

Without wanting to use too many metaphors, we are seeing the light at the end of the pandemic tunnel here at Knowsley Management.

After relocating to Queensland’s Gold Coast in late February 2020, we certainly expected a period of readjustment, but of course Covid-19 had not been on our radar.

With our major markets of Australian states and New Zealand all doing very much their own thing for the last two years, business travel has not been part of our plans.

As with everyone else, Zoom and Teams have filled the gap, of necessity, and most planning retreats and in-house training have proceeded, along with KMSManagementSupport? arrangements.

Other typical support services continue:

Mentoring, exit interviewing, performance management, strategic planning, pricing advice, career development input, marketing guidance, WorkPlan design, leadership training, and of course, daily input into readability of firm-generated content for websites, newsletters, and external publications.

Over one-sixth of 2022 already behind us all!

Here’s to a superbly rewarding remainder of the year...

Keep safe and well, you and yours!