By Andrew Maloney, Editorial | April 16, 2024 at 10:11 AM
Am Law 100 firms last year saw their lowest realization rates in five years: 80.93%, down from 82.2% in 2022 and 83.11% in 2021.
During the pandemic era, it may have been easy to assume high realization rates were going to be a part of the “new normal.” Firm leaders saw the benefits firsthand in 2020 and 2021, when transactional demand soared and lawyers working remotely were more diligent in their billing practices and better able to reap the benefits. Plus, firms for years have been adding business professionals to help them make the most of their pricing strategies.
But in 2023, Am Law 100 firms saw their lowest realization rates in five years, according to The American Lawyer survey data. The average rate was 80.93%, down from 82.2% in 2022 and 83.11% in 2021, when industry observers expressed hope that firms would remain vigilant about collections for their own sake. The median rate followed a similar course, decreasing from 83% in 2021, to 81.2% and most recently, 79.65%.
Despite the lower realization, the industry appears to have had a better financial year in 2023 compared with 2022, with the Am Law 100 growing revenue as a whole by 6.8%. So how much do realization rates actually matter?
While several firm leaders have acknowledged depressed realization, they’ve also said they’re just fine keeping it down, especially if it means they can keep pushing billing rates up. And several have also suggested they’re deemphasizing or moving away from realization, anyway. Although it has always been an imperfect metric, one of Big Law’s big realizations in the post-pandemic era may be that it has outgrown realization.
”We’re really not tied to the realization rate. We’re instead focused on what we are getting from that client year over year, increase-wise,” said Tom Cole, chair of Troutman Pepper, where realization dropped 5.45% last year. “As long as we’re improving the collected rate and it’s consistent with the market and our budget, we’re okay with some hit to realization rates.”
Among the 40 Am Law 100 firms that responded to American Lawyer’s survey about realization, three-quarters reported a drop in their realization rate in 2023. Some of the largest reported drops among Am Law 100 firms include Crowell & Moring’s 6.6% drop to 66.5%; Fish & Richardson’s 6.5% decrease to 80.2%; and Troutman’s decrease, to 69%.
Fish & Richardson president and CEO John Adkisson said his firm is budgeting for higher demand and realization in 2024. Crowell & Moring did not comment on its realization rate.
The drop in realization rates in the industry came the same year that Wells Fargo’s Legal Specialty Group reported “some of the highest growth in billing rates we’ve seen,” with standard rates rising an average of 8.6% for the Am Law 100, and 8.3% industry-wide.
There are some caveats to American Lawyer’s realization data. Of course, not every firm reports their rate, and the mix of firms responding may change during each survey period. Yet hearing from 40% of the highest-grossing U.S.-founded firms provides a general trajectory of realization rate changes in any given year.
The decline in realization throughout the legal industry has also been documented elsewhere. There’s evidence a lot of the decrease may be due to so-called “self-inflicted” damage rather than client push back on rate structure, with firms discounting bills before they are sent to clients. Of note, The American Lawyer survey specifically asks firms for their rates as they pertain to “the percentage of collected revenue out of the value of standard rates (before any discounts, write-downs or write-offs).”
The legal industry often relies on client discounts in the revenue mix. Citi’s Global Wealth at Work Law Firm Group asked large firms in 2022 to report the percentage of revenue coming from pre-negotiated discounts. The result was 44%. The bank also asked for their projections for 2024. About half of firms expected to remain at the same level, while 39% expected to see an increase.
Gretta Rusanow, managing director and head of law firm advisory services at the Citi unit, noted that discounts are just one factor in realization rates. Others include write-offs before or after sending bills to clients, contingency wins that are not repeated the following year, or handling client work in other countries. Realization rates may also be lower in litigation matters and where firms are doing more work for large institutional clients, she added.
‘Profitability, Not Realization’
Not everyone thinks about realization the same way. But a common theme in conversations with firm leaders and industry experts this year suggests the drop in realization is not a big concern.
Bill Stoeri, managing partner of No. 100-ranked Dorsey & Whitney, notes that while he believes his firm generally does better with realization than others — its rate only fell slightly in 2023, from 90% to 89.5% — he’d “rather have 70% realization on $1,000 an hour than 100% on $600 an hour.
“When we didn’t look as hard at profitability, we had partners adverse to raising their rates because it would impact realization. Last year, we really introduced and pushed a new profitability metric, and for this year, in particular 2024, the goal is to get people thinking profitability, not realization,” Stoeri adds.
Morrison & Foerster has seen its realization rate decline from 78% to 75% in the past two years. “If you don’t push rates, you’re not going to get them,” COO Pat Cavaney said in an interview with American Lawyer in March. “If you push rates, you’ll give back a little in the form of an added discount, but you still come out ahead.”
Fenwick & West chair Richard Dickson said he thinks realization is “a very old-school metric” that doesn’t adequately capture how much variability is involved in the modern legal services industry. The firm didn’t report its realization rate, though Dickson said in an interview that he didn’t think it changed materially between 2022 and 2023. What he does think is that realization is not that useful, and he said his firm began moving away from it “many years ago.”
“I don’t believe realization is a particularly good measure of anything,” Dickson said. “Particularly if you are good at matching your pricing to the value you’re providing in different markets and for different legal services.”
That idea may be cropping up more among firm leaders, especially in a high billing rate environment. Lisa Smith, a consultant and principal at Fairfax Associates, said law firms are perhaps moving more toward a “discount mentality,” with firms focusing more on effective rates. “That’s been true for a long time,” she said.
“Realization is an interesting metric, but by itself, it doesn’t tell you that much, because what actually matters is the effective rate you’re collecting. And part of this is being driven by clients who are continuing to look for discounts, and it really just matters what you’re discounting from,” Smith said. “So, I think some firms have realized having high realization, but a relatively lower effective rate, is not as good a strategy as having a higher standard rate, and discounting more heavily if you need to, because clients are asking for that, but your net effective rate is going to be higher.”
“At the end of the day, it’s about dollars in the door,” noted Patrick Fuller, chief strategist, legal, at ALM. “And while I’m not a fan of discounting, a larger discount on a market-leading or higher rate is better than 100% standard realization on a depressed rate.”
Similarly, Michelle Fivel, a recruiter and co-founder of Hatch Henderson Fivel, said while realization has “always” been in the mix, “I think it really is all about profitability for the firms we’re talking to.”
Of course, it’s not like profits and realization are at odds with each other. One analysis late last year found that the decline in realization between 2022 and 2023 was due mostly to fee erosion and self-inflicted billing behaviors, rather than client negotiations or push back on increasing rates. Such things as “silent” write-downs – partner discounts based on their own personal expectations rather than agreed-upon bills – limited deployment of pricing teams, and tricky e-billing systems may have caused firms to leave “millions and millions” on the table.
Comparing one firm’s realization to another may not be all that useful, said Smith, of Fairfax. But it can be a helpful signal within firms. And that’s what other firm leaders say they treat it as – a signal, rather than a driver of strategy.
Allison Murdock, managing partner at Stinson, a Second Hundred firm whose realization rate dropped from 89.3% to 87.5% in 2023, said they “for sure” focus on realization, along with other “hygiene metrics.”
“So, we do emphasize that we want to make sure we’ve got strong realization, on both billing and collection. It’s not a driver of the, shall we say, performance,” she said, noting that other firms might use it as a measure for making compensation decisions. “That’s not a driver of ours. We look more at profitability of matters. But it is something we pay close attention to.”
Pat Whalen, chair and managing partner of Spencer Fane, said his firm has remained focused on realization, mainly because his firm’s billing rates “tend to be at the lower end of our cohort, and because we really prize our efficiency and our client service.
“So we think that realization rate can be a signal, so we never want to minimize it,” he said. The firm’s realization also dropped from 79% to 76%, and Whalen said that’s the kind of change that could either be noise, or a signal of some other issue.
However, whether it’s realization, profits per partner, or some other metric, it can’t be a be-all, end-all. “You naturally want to make sure you’re not just growing the top line, but you’re growing profits as well. So, we’re very focused on that,” he said. “However, we’re not setting strategy based upon any one metric. We’re not going to obsess about one particular metric, whether it’s profitability per partner or any other metric.”
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