Law firm economics can be a little opaque for associates. Partnerships typically aren’t great at explaining the business of law to non-partner firm members, and associates naturally focus their efforts on learning to be an effective lawyer. But like it or not, a law firm is ultimately a business, and if you aspire to have a long-term career in private practice, you need to understand the drivers of firm profitability and how you fit into the equation. In particular, you need to understand how to manage utilization and realization.
Utilization and Realization drive Profitability
Utilization is the proportion of your available time allocated to billable matters. Specifically, it’s the number of billable hours you work divided by the number of “available hours,” times 100. Let’s say your firm requires 2000 hours (your “available hours”), your billable hours are 1800 for the year, and you’ve got 300 in non-billables. Your total hours tracked exceeds the 2000-hour threshold, but non-billables don’t factor into utilization. Therefore, your utilization rate is 90% (1800/2000).
Realization is the percentage of recorded time that is actually paid by the client. When your partner cuts your bills or offers the client a discount or write-off, that reduces realization.
Why do these metrics matter? Simply put, firm profitability depends on them. Here’s a simplified law firm profitability equation:
Profitability = Margin x Realized Rate (the “true” rate the client is paying) x Utilization x Leverage.
As an associate, you have no control over margin or leverage. (Even as a partner, your ability to improve these metrics is constrained by market realities: for example, some practice areas are inherently lower margin than others.) Conversely, although utilization and realization aren’t entirely within your control, it’s absolutely possible for you to influence them.
Track all your time, and resist the urge to cut it
Nobody enjoys billing, but accurate time tracking is a prerequisite to strong utilization. If you’re not billing daily, you are likely failing to capture time that you would have remembered to bill if you had been more diligent about regular time entry. Chronic underbilling is a major threat to law firm profitability, so you should do your best to ensure that you aren’t part of this problem. (Of course, daily billing also guards against the risk of inadvertently overbilling, the consequences of which are even worse than underbilling!)
After you’ve accurately captured your billable time, do not cut it, even if you are uncomfortable with the pace of your work. Partners need to know how long things are really taking, and the decision to cut a bill is theirs, not yours. If you’re embarrassed about how long it takes you to complete a task, talk to someone about whether it truly is an issue and, if so, what steps you can take to improve your efficiency.
Knowing the accurate utilization rate within a department also helps partners decide when to request additional attorneys, and it’s a key input for firm management when approving requests to expand a group. If everyone is underbilling, department leadership may not realize how close their lawyers are to burning out and potentially leaving the firm.
Remember that proper time tracking extends to non-billable hours also. Your firm needs to know how much time you’re spending on administrative or other non-billable matters. They may be tracking whether their workflow is efficient, if they’re using the right software, etc. Useful analysis of those factors depends on you accurately reporting your non-billables.
Be smart about the wording of your bills
Healthy realization depends not just on how much time you spent on a task, but also on how you describe what you did. Be aware that many different parties may review your bills: partners and clients, certainly, but potentially also courts or other third parties. Take care to bill with the specificity that the client or firm requires (without including anything privileged or embarrassing, please). Appropriately specific wording will make it easier to justify the bill for your work, creating the conditions for better realization.
Ensure aligned expectations
If partners are routinely cutting your hours, that is an indicator of misaligned expectations. You should proactively communicate with partners about their expectations, so that you avoid incurring time that won’t be collected. Find out how long the partner expects a project to take, and do your best to stay in that ballpark. In the event the partner has an unrealistic view of what’s possible, have a conversation about it as early as you reasonably can. You’re managing their expectations so they can manage the client’s expectations. If you perceive a misalignment, it’s your responsibility to speak up and make an effort to resolve it.
Consider the bigger picture
So why am I sharing this, as a recruiter? Managing utilization and realization makes you more productive and efficient: you’re a more valuable associate. But this isn’t just about you. It’s also about how much work the firm has: underutilization can result from not enough work to go around. Conversely, understaffing can lead to overutilization. And your personal utilization rate reflects your quality of life. If your utilization is very high, then you’re likely overworked!
If this has got you thinking about your role in your firm, or your practice group, then let’s chat.