Employees should always bring value to your law firm, whether their time is directly billable or not. Sometimes it is easy to identify your heavy hitters, but the relationship between employee value and cost is not always directly tied back to their time printed on an invoice. For example, your office manager may never track billable time, yet they may be the glue that holds a lot of your daily operations together.
Yet tracking expected billable time is one of the most effective means of understanding employee performance This is because billable time is often related directly to task versus billing analysis.
While LawKPIs, we cannot tell you the true value of any one employee, but we can provide you with the critical data to evaluate who has been on task, and even which services you provide outperform others. The key is breaking down billable time into utilization vs. realization.
Utilization vs. Realization of Billable Time
In general, there are two ways to calculate billable time and thus the value that your employee provides to your law firm: utilization and realization.
The same formula can be used to calculate the realization for all employees of a company. It can then be used to calculate the total realization rate of the company. It is important to note that the total billable hours are different from the total available hours. For better results, a company may include its billable and non-billable hours.
Why Track Realization?.
The realization rate is a percentage term that refers to the billed hours earned against the total billable work hours, called as Billing realization.
In practice, the realization rate is the ratio of the revenue received against the revenue earned by a company, called as Collection realization.
Therefore, the realization rate is also important efficiency and revenue metric. It indicates the percentage of realized revenue against the total earned income.
A law firm must understand the real causes behind a lower realization rate. For instance, if a firm fully charges its client, it may become costly and the client may refuse to pay. Here, we can say that client may bargain while paying the whole amount of fees and a law firm may end up giving some discounts.
Ultimately, the realization rate will also indicate improving the internal efficiency of the company. The law firm can improve its realization by increasing manpower output, reducing idle time, reducing overheads, and adjusting its pricing strategy.
Why Use Realization Rate?
Realization rate is an advanced approach to calculate the efficiency and productivity of a firm as compared to other metrics.
Every law firm would like to know how its employees are performing. Professional service organizations specifically need to calculate the realization rates so that they know their efficiency levels.
The realization rate also helps a firm to account for its non-billable working hours. Once it calculates all the available hours, it would then account for the actual billed hours.
This approach would create a cushion for non-billed hours. Using this approach, a firm would then adjust its profit margins and improve internal efficiency.
Assigning the right employees for the right job increases efficiency and the realization rate effectively.
Utilization Rate Vs Realization Rate – Key Differences
The utilization rate is an efficiency and productivity metric. It shows how well a company utilized the available resources in terms of labour time.
The utilization rate also helps a company identify non-billable activities. It can differentiate between the billable and non-billable hours effectively.
On the other hand, the realization rate shows how well a firm gets paid against the potential revenue earned.
Since many factors affect the pricing strategy of a company, therefore, it is impossible for a law firm to always charge an ideal rate and achieve 100% realization.
The realization rate also helps identify non-billable hours. Employees go through training, meetings, breaks, rework, and other similar activities that eat up billable hours.
In short, the utilization rate helps in improving internal efficiency and productivity. Whereas, the realization rate helps in improving revenue and profitability.
Since utilization and realization are derived using the same metrics, it is important to achieve a balance between the two.
For instance, when an organization’s utilization is too low, it indicates lower profitability and will result in lower realization as well.
Contrarily, a too high utilization would end up in a stressed workforce and compromised work quality. That again would result in a lower realization rate.
Therefore, a law entity must strike balance between the utilization and realization rates.
The bottom line of any business is its profitability. Proper management of the utilization and realization rates of an organization can lead to a profitable venture.
As mentioned above, both metrics must strike a balance to achieve optimum balance and profitability. If the gap between both metrics is too large, it means an entity’s efficiency is compromised.
A lower utilization means low efficiency and a further lower realization of profits. It indicates that the proportion of non-billable activities is too high.
It can also mean that the company didn’t assign skillful labor to the project tasks. Other reasons could be inaccurate project estimates, a lack of resources, inappropriate task delegation, errors in time-keeping, and so on.
A law firm cannot control its client’s paying ability. However, it can increase its internal efficiency and improve planning to achieve better results.
It should aim to achieve a 100% realization rate. It can be achieved by setting competitive prices, submitting high-quality work, and efficient resource management.
Contrarily, a consistent high utilization rate may indicate negative repercussions for an entity. Either it means the workforce is consistently burdened or the task management of the entity is poor.
In short, a law firm’s profitability is directly linked with both the utilization and realization rates. The aim should be to strike a balance between both metrics. See how LawKPIs’ a robust reporting solution fully integrated with Clio helps you get an accurate Realization Rate Report KPI.
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