Best Practice: The 3 types of realization rates
Asked and Answered
By John W. Olmstead, MBA, Ph.D, CMC
Q. Our firm is reviewing its partner compensation system and one of my partners suggested that we incorporate realization rates. This term was new to me. Is realization the percent that we collect? Your comments would be appreciated by all of us.
A. Not exactly, there are three general types of fee realization.
Overall Realization - which is the relationship between the standard value of time (standard billing rate) and the actual fees collected. This is calculated by taking the value of unbilled time at the beginning of the year plus fee accounts receivable at the beginning of the year plus value of billable time worked during the year minus the value of unbilled time at the end of the year minus fee accounts receivable at the end of the year - equals potential fees to be collected. Realization (Actual fees collected/potential fees to be collected.)
Billing Realization - which are actual fees billed/potential fees to be billed. This is calculated by taking the value of unbilled fees at the beginning of the year plus fees recorded during the year minus unbilled fees at the end of the year - equals potential fees to be billed. Billing realization is then calculated by dividing the actual fees billed by the potential fees to be billed.
Collection Realization - which are actual fees collected/potential fees to be collected. This is calculated by taking the value of AR fees at the beginning of the year plus fees billing during the year minus AR fees at the end of the year. Collection realization is then calculated by dividing the actual fees collected by the potential fees to be collected.
All three calculations are important and tell different stories. They can be calculated at a firm level, client level, timekeeper level. Realization reports are available in the better law firm time and billing software programs.
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John W. Olmstead, MBA, Ph.D, CMC, (www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics and author of The Lawyers Guide to Succession Planning published by the ABA. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.