“However, while the profession is no longer in crisis mode, we recognize that firms will remain under intense pressure to create new models for pricing and delivery of legal services,” DiPietro said in a news release. “The report addresses these issues as well as the industry’s response to the current market environment.”

I suppose this will lead to another in depth discussion of alternative fee arrangements.  How novel.

Some highlights:

• Realization continues to drop in spite of efforts to raise rates to offset drops in demand;
• Pressure for discounting, fee caps, multi-year rate schedules and alternative pricing increases;
• Increases in “negotiated” rates are being offset by drops in “collected rates”, leading to the lower realization;
• Firms chose to cut expenses, especially compensation costs, to offset losses (a typical reaction);
• Biglaw firms fared better than smaller firms, mostly due to dramatic purging of staff and cost controls;
• Significant improvements seen in 2009 in demand for Mergers and Acquisitions, general corporate, tax, capital markets, and real estate practices;
• Expect further cost cutting measures in 2010 (ie, not likely to be a boom year for technology vendors seeking to encourage firm investment in technology).

A look at the effects on key profit drivers:

• Productivity still in negative growth “driven to some extent by associate pushback on the unsustainable billable hour requirements in many firms”;
• Leverage is increasing to make up for declining productivity (which makes no sense as this drives up costs without adding value);
• Realization, as earlier stated, is in steady decline;
• Expenses had been a source of continual growth until 2009;
• Growth prior to 2009 was consistently driven by rate increases between 6 to 8 per cent annually;
• Expectations for future rate increases are low due to increased client resistance.

The Advisory mentions something that I have touted for years:  the need for improved efficiency to maximize profitability.  During the boom years, it enhanced an already profitable model.  Now, it will be a necessity to offset rate stagnation.

Legal Current has more on the advisory.  To read their take and download a copy of the Advisory, click here.

Below is a graphic showing attorney monthly productivity, any variance from the budget and the attorney contribution percentage.  Clicking on any of the attorney initals changes the data to show the chosen attorney’s productivity numbers.  (You must have the free Adobe Flash Player to view.  You may download it by clicking here).

Graphical dashboards such as the one below provides an easy way for managers to stay informed as to the critical performance drivers of the firm without having to pore over rows of data.  This, in turn, makes the information more actionable and thereby helps focus the firm on reaching its goals.

Feel free to click on any of the sample attorney initials below to see the data change.  If you would like more information on how you can have dashboards like the one below implemented in your firm, please feel free to email me or call 205.588.4OCC (4622).

• Standard rates are rates you would charge a client, all things being equal.  These are typically your highest rates.
• Worked rates are your actual rates you charge a client.  Worked rates are affected by client negotiation or perceived need to reduce rates to stay competitive.
• Billed rates are rates after you invoice a client.  Billed rates take into consideration both mark-downs and discounts.
• Collected rates are the final hourly fee after the invoice has been reduced to a zero balance.  Collected rates take into consideration write offs and other post-bill adjustments.

Rate can be measured from standard to billed or worked to billed to judge how well you are converting your work to invoiced fees.  These rates are measured on an accrual-basis.

Rates can also be measured from billed to collected.  These rates are measured on a cash-basis.

However, to get a full view of what happens to your standard rate as work moves through the billing cycle, firms need to measure the effective rate.  The effective rate can be measured either from standard to collected or worked to collected.

Measuring effective rate means creating targets, forecasting results, and holding your fee earners accountable for results.

The below chart shows how you can measure effective rate.  Click on the graph to download.

Tags: accrual basis, billing cycle, cash basis, cash flow rate, effective rate, graph, invoiced, law firms, mark downs, negotiation, operating expenses, profit drivers, realization, several ways, targets, zero balance
]]> http://www.ofcounselconsulting.com/2008/10/the-role-of-effective-rate-to-law-firm-profitability/feed/ 0 http://www.ofcounselconsulting.com/2008/08/simplifying-the-law-firm-business-model/ http://www.ofcounselconsulting.com/2008/08/simplifying-the-law-firm-business-model/#comments Mon, 04 Aug 2008 07:06:28 +0000 Brian J. Ritchey http://www.ofcounselconsulting.com/?p=124 The law firm business model, as defined by David Maister, is made up of the following equation:

1. Leverage
2. Rate
3. Productivity (Utilization)
4. Realization
5. Margin

If you are not tracking these profit drivers, it doesn’t matter how many reports you are thumbing through – they won’t measure the keys to per-partner profits and are thus, as far as profitability is concerned, irrelevant. The good news is that it doesn’t take much to track these drivers.  You can derive a simplified financial statement by just plugging in your numbers.  The below graph shows how tracking these key indicators can help you see exactly what drives your firm’s profits.  To download and plug in your own numbers, click on the graph.

I will be going over each of the drivers in more detail over the next several weeks.