Best Practice Tips: Law Firm Effective Rate Improvement

Asked and Answered 

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am a partner with a 16-attorney firm in downstate Illinois and a member on our three-person management committee. My responsibility on the committee is overseeing the firm’s finances and supervising the firm administrator’s accounting and finance. In reviewing our financial reports, I have noted that our effective billing rates (realization rates) are not what they should be. We are reluctant to raise client rates. What other steps can we take to improve our effective rates?

A. The most direct way to improve rate performance is to simply increase rates at an amount at least equal to inflation and to do so often (at least once a year). Without regard to whether this can be done, there are several other important techniques such as:

• Managing the client intake process
• Tailoring rates and billing policies to specific clients and matters
• Managing rate and billing adjustments
• Billing often and keeping the client informed
• Tying partner reward structure to rate performance
• Reporting rates achieved

Managing the client intake processes is probably the most important technique for improving rate performance. Intake management means:

• Knowing what kind of clients and which areas of law support higher billing rates or rapid payments of bills
• Having policies regarding client acceptance
• Ensuring that potential clients have the willingness and the ability to pay.

Here are some ways to accomplish this:

• Effective pre-acceptance interviews
• Credit checking or prior payment history review
• Up-front discussions and arrangements
• Liberal use of retainers and advances for costs
• Early conflict-of-interest checks 
• Use engagement letters; and
• Management review of significant new clients or matters except accepted.

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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.