40 ASIAN LEGAL BUSINESS – AUGUST 2023 WWW.LEGALBUSINESSONLINE.COM THE BACK PAGE HOW LAW FIRMS CAN STOP RATE DEGRADATION BY BRENT TURNER To ensure profitability, law firms need to come to grips with the way the rates they charge clients for legal work can get degraded, resulting in lost revenue over time. Like so many other businesses, law firms aren’t always able to collect the entire amount they bill their clients. Indeed, there is almost always a difference between the rate clients agree to pay (what we often call the worked or agreed rate), the effective rate clients are billed, and the actual rate clients pay. However, realisation is something that law firms have the ability to control — and, when it comes to declining realisation, to fix. The causes of declining realisation There are two components of rate realisation. The first is the gap between the agreed and billed rates: what law firm partners decide not to bill. The second is the gap between the billed and collected rates: what their clients refuse to pay. Ideally, the agreed and billed rates should be one and the same. The agreed rate is exactly what it sounds like: the rate the client has agreed to pay. So why would any attorney charge the client anything less? Let’s look at an example in which a partner brings in a large legal matter. Four months later, they are looking at the bill and, frankly, it looks big — perhaps too big. When the partner thinks about it, they realise their associate was still coming up to speed on this type of work, which often took too much time. Anticipating client scrutiny, the partner shaves a bit off the bill. It’s also likely that the partner did some work on the matter that never got logged into the timekeeping system — such as when the partner might have felt the time was not as productive as they would have wanted, so they opted not to report it to time and billing. That’s how rate degradation starts. Then, rather than applying data analytics based on past matters to the bill — or any sort of analysis, for that matter — the partner decides that the amount on the invoice needs to be something that “makes the bill work for the client.” They don’t want to risk angering the client over the amount, so they proactively revise it. It’s not even that the client has pushed back; it’s that the partner is afraid that the client might. Essentially, it’s fear-based pricing. When we look closely at the data, however, we see something interesting: realisation is something that law firms have the ability to control — and, when it comes to declining realisation, to fix. The data shows this is a far bigger problem for realisation than actual client pushback on invoices. Despite much chatter in the market about client pushback, what the data actually tells us is that law firms keep raising rates and clients keep paying. The collection rate tracks remarkably closely to the rate the client is billed. Protecting rate integrity Law firms can take two actions to stem this slide in realisation. The first is to protect their own rate integrity. Firms need to limit the self-inflicted damage that is hurting their profitability. Partners should remember: the client has already agreed to pay the rate. So, will charging a client 95 percent of the agreed rate — rather than cutting it to 93 percent — put the client relationship at risk? That’s questionable, to say the least. But that difference in billed rate, multiplied across every timekeeper at the firm, will make a difference. The other strategy is to reconsider how lawyers convey their value back to their clients. I’ve spoken with general counsels about the extent to which rate increases are driving a migration of work. Inevitably, the conversation is the same. Yes, general counsels say, law firms are expensive. But when a law firm brings true value to the table, they’re worth it. In mergers and acquisitions and private equity work in particular, the general counsels will call out specific firms. Yes, their rates might be double someone else’s, but they get the job done one-third of the time, and their expertise is so valuable that the rate doesn’t matter. If you’re leading a law firm or managing client relationships, do your clients say the same about your value? At the end of the day, the best way to preserve your firm’s rates and improve rate realisation is not to talk with clients about fees — it’s to talk to them about the value you provide. Brent Turner is director of advisory services and principal consultant for Thomson Reuters. A version of this piece was originally published by the Thomson Reuters Institute. Reprinted with permission. Asian Legal Business is seeking thought-provoking opinion pieces from readers on subjects ranging from Asia’s legal industry to law firm management, technology and others. Email ranajit.dam@tr.com for submission guidelines. “Realisation is something that law firms have the ability to control — and, when it comes to declining realisation, to fix.”
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