It has taken real skill, in recent years, for top law firms to avoid 10 percent annual earnings growth. But today, as economic conditions deteriorate, as clients rein in spending and as competition intensifies, an improving bottom line is no longer a foregone conclusion. This year, many CFOs are asking what legal work is actually the most profitable for their firms, and how much business development they can realistically count on.
These are not easy questions. Recently software and consulting firm Redwood Analytics (acquired by Lexis Nexis in January) examined client “realization” rates, or the percentage of normal fee rates actually received, for 16 of its law firm customers. Surprisingly, the highest realization rate was in the second-highest billing group for each firm. The next highest was in the top billing group, and then realization continued to decline through the clients with the lowest level of billings. This is helpful information. If a firm can improve realization, it can raise its bottom line and profits in the process. But most will find that getting the information requires significant overhauls not just in IT systems, but in their underlying approaches to accounting and financial analysis.
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