Realization rate definition
/What is the Realization Rate?
The realization rate is the proportion of billable hours at standard billing rates to the amount that is actually billed to clients. A low realization rate directly and negatively impacts the profitability of a firm, since its revenues are reduced. Realization rates can be reported by individual, partner, office, or practice group.
Types of Realization Rates
There are several types of realization rates on which a law firm might focus. Here are the options:
Billing realization rate. This is the ratio of what was actually billed to a client versus what would have been billed at the firm’s standard billing rate. For example, if you customarily bill clients at a $200 hourly rate, but have negotiated with a large client to only bill it $150 per hour, then your billing realization rate is 75%.
Collection realization rate. This is the ratio of how much money a firm collects, versus what it billed out. For example, if you billed $100,000 but only collected $80,000, then your collection realization rate is 80%.
Overall realization rate. This is the ratio of the total cash received to the amount of cash that would have been received if you had billed all clients at the standard billing rate and collected 100% of this amount. It is a combination of the preceding two measures. For example, if you actually collected $62,000 when you could have collected $100,000 if you had billed at the standard rate and collected all of it, then the overall realization rate would be 62%.
Example of the Realization Rate
An attorney's standard rate is $300/hour, and she works 140 billable hours in a month. Thus, her monthly billing at her standard rate is $42,000. However, the partner only bills $40,000, which is a realization rate of 95.2% (calculated as $40,000 billed divided by $42,000 at standard rates).
Factors Impacting the Realization Rate
A low realization rate can occur because junior employees tend to be less efficient, so fewer of their hours are billed. Another cause of a low rate is that clients impose pressure to keep total billings low. A third reason is a misunderstanding regarding the scope of the work to be performed.