How Law Firms can protect their rates and halt declining realization

Many law firms struggle to collect the full amount they bill. There’s often a gap between the rate the client agreed to pay (the “worked” or “agreed” rate), the effective rate on the invoice, and the final amount collected. This gap is known as realization.

For the last decade, realization rates held steady or even improved for many firms. But that changed in early 2022. The Am Law 100 — the largest U.S. firms — saw realization slip from 89.2% in Q1 2022 to 87.1% in Q1 2023. Usually, realization dips slightly at the start of the year (when clients react to new rate increases) but rebounds by year-end. In 2022, the rebound never came.

Am Law Second Hundred and midsize firms have fared better but show the same worrying trend. The Second Hundred dropped from 92.6% in early 2021 to 91.2%, while midsize firms declined more modestly from 91.7% to 91.5%.

Many firms blame these drops on client pushback or economic uncertainty — factors they believe are out of their control. But a closer look at the data reveals a different story: realization is something law firms can influence, and fix.

Why Realization Declines

There are two main reasons realization suffers:

1. The gap between the agreed rate and the billed rate

This is where partners decide not to bill part of the work, even though the client agreed to the rate.

2. The gap between the billed rate and the collected rate

This reflects amounts the client simply refuses to pay.

Ideally, the agreed and billed rates should be identical. So why do lawyers bill less than agreed?

Consider a common scenario: a partner reviews a large matter before billing. They see a high number — higher than expected — and remember their associate was still learning and may have been inefficient. Anticipating client scrutiny (even before any actual pushback), the partner cuts the bill.

It doesn’t stop there. Some work may never even be logged into the billing system — perhaps the partner judged it unproductive or didn’t want to justify the time. This practice — proactively discounting out of fear — is how rate degradation takes root.

Worse, instead of using data or past experience to defend the bill, partners try to guess what will “feel right” to the client. It’s often less about real client objections than the lawyer’s own fear.

Many attorneys never learn pricing strategy in law school. They hear stories of clients objecting to high rates (even if their own clients haven’t complained) and assume trimming the bill is good client service. Ironically, clients don’t even know these silent discounts exist.

The data shows client refusals to pay are a much smaller factor in lost realization than these self-imposed discounts. In fact, even with rising rates, collection rates closely track billed rates — clients generally pay what firms actually invoice.

How Law Firms Can Fight Rate Degradation

Law firms can take two main steps to improve realization:

1. Protect Rate Integrity

Stop the self-inflicted wounds. Clients have already agreed to the rate. Is cutting it from 95% to 93% really going to save the relationship? Probably not. But those 2% losses, across every lawyer and matter, add up to real money.
Partners need to resist the urge to “help” the client by reducing bills unnecessarily. Instead, they should trust the value of their work.

2. Communicate Value

Clients aren’t rejecting rates purely because they’re too high — they reject them when they don’t see the value. General counsel often say: yes, some firms are expensive. But when a firm delivers true expertise, speed, and quality, the higher rate is justified.

For example, in M&A or private equity, clients will pay double the rate for firms that finish the job in one-third the time. That efficiency and expertise are worth the premium.

Ask yourself: do your clients see that value in your firm? The best way to protect your rates is not by negotiating fees but by demonstrating — and communicating — the value you deliver.

Sourced from Thomson Reuters