A new study shows that the behaviors within law firms themselves, particularly at the billing review stage, is what really puts the pressure on firm profits
Even before the onset of the global pandemic, law firms of all sizes were concerned about how to continue growing their bottom line into the future.
For most of the decade following the Great Recession (2007-’09), a steadily increasing billing rate was the key driver of improved law firm profitability, as the other levers of profitability — utilization, leverage, and expenses — all trended either neutral or negative in terms of their impact on profits.
During that same decade, realization against those increasing billing rates continued to decline steadily. Many legal industry observers might be quick to explain that this is the expected result of clients pushing back against the bills they received; but this isn’t the only possible explanation supported by data. Indeed, it appears that it is not client behavior that has driven much of the decline in realization, but rather, behaviors within law firms themselves, particularly at the billing review or “pre-bill” stage, according to data provided by Thomson Reuters Peer Monitor.
Download the full results of the research in the Law Firm Billing Efficiency and Write Downs Report.
Collected realizations have tracked in near lockstep with billing realizations. As firms have billed out a smaller percentage of their rates, they have expectedly collected a smaller percentage as well. Conversely, as billing realization has improved, collected realization has tracked closely with it. So, what drives the pattern of billing realization? In short, it is largely driven by how attorneys manage the write downs they mark against their client fees.
This self-inflicted decline in realization is worthy of scrutiny, so Thomson Reuters conducted a survey to explore how law firms attempt to manage client bills at the billing review or “pre-bill” phase. In an attempt to explore what types of tasks lead to inefficiencies for lawyers and therefore hurt productivity, we surveyed 245 respondents from law firms with 11 or more attorneys. We asked them a series of questions related to their firms’ billing practices, as well as their own practices with regard to how they handle billing their own time and the time of the attorneys for whom they bear billing responsibility.
Download the Law Firm Billing Practices White Paper, which analyzes the full scope of the impact of write downs on law firm profits.
The results of the survey provide some interesting opportunities for law firms to potentially improve profitability, even in an increasingly tight and competitive market.
Some key findings include:
- Despite much discussion over the past decade regarding alternative fee arrangements (AFAs), hourly billing remains by far the dominant model with 94% of partners identifying it as their primary billing model.
- A large percentage (46%) of partners do not apply a specific percentage when reducing a client bill, but instead “reduce by a specific dollar amount to make the client bill work.”
- When asked about specific work tasks that lead to lost time, the three most common reasons partners write down time for those attorneys they supervise are i) the junior associate learning curve; ii) an associate or staff taking longer than expected to complete a task; and iii) the time to do online legal research.
- A majority (58%) of partners believe that they themselves write down about as much time as other partners do.
- The number one reason partners fail to report their own worked time is because they were getting up to speed on a new or unfamiliar area of law. Correcting or revising an associate’s work was another common response.
As the survey clearly demonstrates, those law firms looking to improve profitability must pay close attention not only to the rates they charge their clients and the number of hours they bill, but also to the efficiency with which they bill and the amount of hours and resulting revenue they voluntarily lose to write-downs. Maximizing efficiency as a means to optimize profit margin will be vital to improving partner profits as well as to the viability of alternative billing models that clients have been requesting.