Change Is Coming: The Realized Hour v. The Billable Hour

The “billing” process doesn’t end until the bill is paid and the money is in the bank. That basic principle may seem obvious to people who think about efficiency and profitability every day, but for most law firms it is anything but obvious. For them, the billing process seems to end once the invoice is drafted and sent to the client. It would make sense then that as an industry we’ve always focused on and scrutinized everything that happens prior to invoice creation, like time tracking and entry, prebills, audits and attorney efficiency. 

Frankly, as an industry we’re obsessed with billable work. We’re always looking for ways to squeeze more of it into a day, capturing every minute we spend doing it, and documenting it for clients in a form that is the least likely to cause concern or result in payment delays. But that is just half of the billing process. The other half is what happens after that invoice goes out. At the end of the day, law firm profitability isn’t about hours billed; it’s about hours paid. 

If firms are only looking at the first half of the process they are only getting an accurate picture of that half, ie how much the firm billed. But let’s face it, hours billed doesn’t pay the bills. Hours paid is what matters. That’s what keeps the lights on and allows the firm to hire more people, find more clients, and continue to grow. Focusing on how to optimize only the activities that take place prior to invoice creation is like only reading half a book or watching the first half of a movie: you don’t have the full story unless you follow it through to the end.

Lately, more people in our industry have begun paying attention to the second half of a law firm’s internal ‘billing’ process. Just in the last two weeks we’ve seen Stephen Embry and Dera Nevin publish articles on the relevance of better data analysis to legal billing and overall law firm health. They suggest there may be a lot to gain from focusing more closely on data and processes related to actual revenue rather than continuing our traditional obsession with the billable hour. 

At the end of the day, it all comes down to law firm realization rates. First, we need to be able to measure our efficiency at recouping payment for every hour billed. Next, we need to be able to identify patterns in realization efficiency or inefficiency so we can make better decisions in the pre-invoice lifecycle of a firm’s internal processes. As Dera Nevin pointed out in her recent article, “[T]he industry-wide inability to capture, understand and analyse revenues and the specific and tied costs of generating that revenue are the far greater obstacle to the acceleration of fixed and alterative pricing arrangements, not the billable hour. While these billing point-solutions have their place, they are unlikely to yield systemic changes.” In other words, firms concerned with maximizing profitability should be focusing on how to increase the amount of time we’re actually paid for rather than focusing on how to capture more time. 

To illustrate, let’s dig deeper with an example we can likely all relate to: At Law Firm X we work on a billable hour system. We know that Associate Andy always crushes his annual billable hour requirement of 2,200 hours. His work gets good results, he is funny and outgoing, and he is getting moved up the partnership track regularly. He is a rising star at the firm. Meanwhile, Associate Anita is also a strong attorney but often undershoots her annual hourly goal. She is more introverted than Andy, but her work is solid and she is well-liked. When it comes time for annual reviews, however, she just doesn’t stack up. Law Firm X requires that billable minimums be met in order for associates to be moved up the partnership track. Anita hasn’t been moved up at the same rate as Andy, and she’s getting frustrated with the lack of recognition.

Sound familiar? Now let’s look at this scenario through a different lens. 

Andy is well-liked and his work is good. He bills 2,200 hours a year regularly and is a favorite with firm leadership. But as it turns out, Andy’s realization rate is only $.73 on the billed dollar. Clients often push back about the time he’s spent on tasks, and on average his clients pay in 114 days. The firm often needs to offer a 10% or 20% discount after the 90-day mark in order to collect on his invoices. Meanwhile, Anita billed only 1,900 hours this year, 16% less than Andy. Firm leaders are getting annoyed that she isn’t “pulling her weight” like Andy. But as it turns out, Anita’s clients pay $.98 on the dollar and they pay fast – in just one week, on average. The firm rarely needs to give her clients a discount or adjust their bills in order to collect full payment. 

Anita’s realization rate of 98% obviously beats Andy’s 73%. Although she bills 16% less than Andy, Anita realizes 25% more on the dollar. An hour of Anita’s time is worth more to the firm than an hour of Andy’s time. When it comes time to hire, Law Firm X should be looking for candidates who will perform more like Anita than Andy. When looking at marketing budgets, the firm may want to spend more dollars targeting clients similar to Anita’s that are likely to pay more on the dollar, and faster. 

With an analytics “lens,” firms can dig deep into realization rates, and this can have big implications for other decisions Law Firm X needs to make in their quest for increased efficiency and profitability. It’s time to drop our singular obsession with the billable hour and turn our focus to the realized hour instead. As Stephen Embry suggests, “This would drive a much more business-oriented examination into profitability as opposed to the simplistic hours and revenue analysis many firms use.” 

We created Headnote so that firms could bring more transparency and uniformity to their post-invoicing process. Our technology helps firms manage and oversee billing and accounts receivable processes, including embedded payments, automated collection functionality, client satisfaction tracking via NPS, and data and analytics around client payment efficiency and realization rates. By focusing on this overlooked but important part of a firm’s billing process we can help them operate more efficiently, make better decisions, and offer more value and transparency to their clients. Learn more at headnote.com or schedule a personalized demo

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