Today we are talking about cash. We're talking about the profits that partners take home and what affects that metric? Because the truth is that most of the attorneys that come to you are asking how to make more money. Sometimes they phrase it, “how do I charge a higher hourly rate? How do I get more clients?”, vast majority motivated by money. How much cash do they take home.
Three Major Metrics
What are the three major metrics that are affecting how much cash they can take home every day? Great question, and it's a question that I get all the time. "How do I make more money?" The answer that I give is often another question. "What are your utilization, realization, and collection rates?" In other words, how many hours are you working versus how many hours are you billing? and that would be your utilization rate and then your realization rate. So how many hours are you working on a specific client, versus how many hours are you billing them? And then your collection rate, how, what's the, what's the invoice number versus what you get paid?
Utilization Rate for Law Firms
Got it. So for a utilization rate, that's if a partner works of a 50 hour week and spends 40 of those hours shaking new client's hands changing the water on the bubbler, making lunch, things that aren't actually billable hour activities. If he spends 40 hours doing that and only 10 hours on billable work, that's a 20% utilization rate. Is that normal for a law firm?
Perfect clarification there, that's exactly what utilization rate is all about. And, while this may be shocking, that 20% rate is actually pretty, fairly standard.
It's just about that on a national average for attorneys. Where I like to see it in, where I move and try and move all of our clients toward is flipping that on its head, so it should be 80/20. You should spend about 80% of your time, on your actual practice of law, servicing clients, billing clients, increasing those great billable hours that get you paid, and spending 20%, in, in other areas.
And frankly, that that 20% shouldn't be spent on changing the water bubbler, the way it is. It should be spent on getting out there, working on your referral networks, going to kind of go old school, go shake people's hands, take them for lunch, take them for coffee. And do the rainmaking business, business development.
So we have the utilization rates. Say they build 10 hours out of a 50 hour week, which, although its average for law firms, law firms are generally underleveraged as far as how much money they can make. They can make a lot more money with a higher utilization rate. Let's talk about realization.
Realization Rate for Law Firms
So if they work 10 billable hours, you're saying if they only bill for eight of those, whether they're giving "freebies", or they just messed up the time tracking, that realization rate would be 80% of those 10 hours worked. So talk to me a little bit about what the average is there, and how you can improve that realization rate.
Yeah, so 80%, I mean, by contrast to the utilization rate of 20%, 80% sounds great. But, the reality is you want to be, you want to be closer to 90%, if not even a little at a tick above that. And that's where you're really at firm stability and growth. You want to be 90%, 92% would be preferable.
And really the issue, the issue there is that all of these things compound on each other, right? So if you have, a realization rate, that's 80%, but then. Put that on top of the fact that your utilization rate is 20% now you're only getting 80% of it's, I mean, this just snowballs, right?
So the, more clarity there is behind these numbers of every firm and every individual within that firm the, the greater, the easier it is to see the pathway of correction. And that's where Practice Alchemy comes in. And that's where I come in, and there are a lot of different technologies and whatnot.
We can get into that certainly on a different episode, but there are a bunch of things, systems and processes that can be put into place to, right the ship, so to speak.
Absolutely. Practice Alchemy can help with that, but really our listeners should be able to find these numbers by themselves. Whether or not they're able to improve those numbers, our listeners should be able to find their utilization rate, their realization rate, their collections rate because of those are the three metrics driving how much money they can take home. If our listeners don't understand that or can't find those metrics by themselves, what's some of the impact of, of not knowing those three metrics?
The Impact of Not Knowing Utilization, Realization, and Collections Rate
I mean. Case in point. If you don't know those metrics, then you don't know what can be improved. Then, again, this is kind of why I start with these "tell me your metrics". If you don't know those metrics, you don't know it can be improved. If you do know those metrics, you have clear pathways to greater financial gain.
You also have a clearer insight into how your business is financially speaking. Are you, are you stable? Are you standing at the edge of a cliff? Are you about to skyrocket? Do you need to hire more folks if you're assigning more clients? And knowing all these numbers really helps with that predictability. Of where the firm is going, where your, where your time needs to be spent, where your resources can be spent. And ultimately, hopefully you have more resources and dollars to spend and having some more clarity behind all of the, all of that data.
Is Increasing Hourly Rate Important?
A lot of the questions you get around money, especially early in, in conversations with law firms is "How do I charge higher hourly rate". Because too many attorneys, that's, that's what they think about. They think “if I charge a higher hourly rate, I can make more money... I can take more money home”. The scary reality is, as we've seen before, is even if an attorney is charging $1,000 hourly rate, if they're only working a few billable hours a week, and they're only realizing, they're only billing the client for a number of those hours, and then they're collecting even less.
In reality a $1,000 an hour attorney can potentially make a lot less than, for example, a hundred dollar an hour attorney that has high utilization rate, high realization rate. And that's something that we often see, clients aren't able to, to comprehend at first because they don't know those metrics. What are some ways that you can measure your utilization rate to compare it to, to the industry average?
Um. Great question. First, I have to just touch on, if you can find $100 an hour attorney, then where do you live? Because that would be ... unheard of in Boston, I mean, even` on legal zoom, I don't think you can get that right. But the point stands, so how do you find those utilization rates?
How do you find that utilization rate and as, as an attorney that wants to make a higher hourly rate, how do you understand that the increase in your utilization rate can actually make a lot more money than increasing your hourly rate?
Okay. Great question. The answer I will give the simplified version obviously that we, this is a lot more in depth, but this simplified version of that is it's tracking your time.
It's, it's something that is almost as old as this industry is, but if you track your time and you use, you don't kind of sit down at 6:00 PM and wonder what you've done since 8:00 AM, and you actually use a tool that sits, on your desktop, that regularly makes, makes you check in. Some of them will even set a reminder and say, "are you still working on fill in the blank?"
If you use the time tracker, that will, I mean, again, it will really just hold a mirror up in front of you and hold you accountable. And, where am I spending my time? Am I spending my time talking to my paralegal about what they're doing for the weekend, or, am I servicing clients and billing these hours? And honestly, just having insight into that alone, even if you do it, just to start off, try it for a day, just, just try it. Hold yourself accountable. I think you might surprise yourself with that information.
Awesome. Well, I challenge our listeners to find your realization rate, find your utilization rate, and find your collections rate. Those are the three metrics that you can change that without increasing your hourly rate, you can drastically increase the amount of profits you take home from your firm.
If you have trouble finding those numbers, reach out to us, tweet at us, comment on this podcast, and we'll be able to help you find those numbers yourself.
Thanks Ross for joining us. Next , we're going to talk about the technology behind tracking some of those metrics and keeping track of where your money is in the firm.