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Critical Firm Metrics (Part 4)

By Chris Emerson posted 08-14-2014 00:07

  
Which metrics should a firm really pay attention to in order run efficiently and profitably?  We asked Stuart Dodds, Director, Global Pricing & Legal Project Mgmt at Baker & McKenzie for his thoughts on this. 

Stuart:  Be careful to interpret realization metrics properly.

It is useful to examine realization at its component level.  Although the usual definition of realization is the percentage of the firm's standard billing rate  actually collected, there are a number of other approaches which can be as, and often be more, useful.  An article by James Cotterman (published in 2012, Issues in Realization, Altman Weil,) expanded upon this in a bit more detail. 

In the article, James argues that it is important to understand more fully the various components of realization, and how these impact realization.  There are seven potential components, outlined below:

  • where a timekeeper discounts their time at point of timesheet entry (either intentionally or otherwise) impacting potential revenue capture;
  • write downs of unbilled time (most common, and in part due to a nervousness of the partner that the client will not perceive the value of work conducted);
  • client adjustments which result in write offs to receivables, through more active client monitoring of billing;
  • pricing variance. Although firms typically measure realization against the respective timekeeper's standard (rack) rate, this can also be done against their agreed client rate (if, for example, discounts are given).  The variance can be a useful measure to determine  effective the discounting approach has been.  Whereas standard rate realization reflects not only the impact of any pricing decisions, but also the impact of matter management, staffing, and service efficiency, actual rate realization removes the pricing element, allowing more granular analysis.
  • efficiency variance, looks at the non-pricing issues which impact realization, such as staffing decisions and overall process efficiency.  Another part of this component is the 'speed of collections', with slower collections and/or longer billing cycles leading to less money being collected, lower realization and also higher working capital requirements;
  • turnover of unbilled time.  In other words,  what have we worked but not yet billed.  For most firms this is typically between 1.5 - 2.5 months.  Depending upon the type of fee arrangements adopted by your firm, up to 0.5 months be driven by 'contingent' fee matters; and finally, 
  • turnover of accounts receivable (AR).  In other words,  how many months of revenue are sitting in fees receivable.  This is also typically between 1.5 - 2.5 months (for most), which in turn impacts a firm's working capital requirements.

Therefore, if we were to just look at realization through the more traditional lens, we would not be able to identify, and therefore appropriately address, some of the underlying 'root causes' of potentially poor performance.  As the article concludes "(t)he appropriate remedy will vary based on the cause  . . (and)  . . (t) he only way to get to the cause is to get into the details." (5).  To make this metric meaningful, that is exactly what we need to do.

(Taken from ‘Smarter Pricing, Smarter Profit’, pps 19 – 20, published by the ABA, Stuart J T Dodds)
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