Law firm KPIs: realization, utilization, WIP and lockup

In short. Four numbers show whether a firm turns lawyers’ time into cash: utilization (how much of the available time is billable), realization (how much of that billable value is billed and collected), WIP (work done but not yet billed) and lockup (how long the firm waits for its money, from work done to cash in). Hours alone show none of this. The four together show where the cash is lost.

Utilization

Utilization = billable hours recorded ÷ hours a fee earner is expected to bill

Decide the denominator before you measure. Firms use one of three: an annual billable target per fee earner, the hours left after holidays and leave, or one fixed standard for everyone, such as 1,500 hours. Each gives a different figure for the same person, so pick one and keep it.

Read it per fee earner and per level, not only for the firm. A firm average of 80% can hide associates at 95% and partners at 55%. A low figure has causes you can find: intake that lets unbillable work in, supervision and admin that nobody planned for, or matters priced so that the work cannot all be recorded as billable.

Utilization counts time recorded. It says nothing about whether the client pays for it. That is realization.

Realization

Three ratios, often confused:

• Billing realization: value billed ÷ value of time recorded at standard rates.
• Collection realization: cash collected ÷ value billed.
• Overall realization: cash collected ÷ value of time recorded.

Write-offs and write-downs before billing show up in the first: the partner who trims the bill because the matter ran over, the fixed fee that did not cover the hours, the time nobody sent. Unpaid or disputed invoices show up in the second.

Two things distort it. Value time at your standard rates, not at the rate agreed with each client: at the agreed rate, every discount disappears from the figure before anyone sees it. And measure collection realization on invoices old enough to have been paid; invoices sent in December and paid in January make one year look worse and the next one better.

A firm can have high utilization and low realization at the same time. That usually means the hours are being worked, but the scope and price agreed at intake do not hold.

WIP and WIP days

WIP is time and expenses recorded but not yet billed, valued at standard rates. On its own it is a sum of money. To compare it across months, turn it into days of fee income:

WIP days = WIP ÷ annual fees billed × 365

Look at the age of WIP as well as its size. The older it gets, the harder it is to bill in full, because the client no longer remembers the work. Review it by age, matter by matter.

Debtor days

Debtor days = invoices sent but unpaid ÷ annual fees billed × 365

The average hides the detail: a few large invoices from one client can carry most of it. Read the list of what is overdue, not only the figure.

Lockup

Lockup = WIP days + debtor days

Lockup is the time between doing the work and having the money: first the work waits to be billed, then the invoice waits to be paid. Each day of lockup is a day of fee income the firm has earned but not banked, so lockup measures how much cash the firm is lending to its clients. Partners feel it as the gap between a good year on paper and a tight bank account.

A worked example

A firm of 20 fee earners, each expected to bill 1,500 hours a year. The figures are illustrative.

Step	Calculation	Result
Hours expected	20 × 1,500	30,000 hours
Billable hours recorded		24,000 hours
Utilization	24,000 ÷ 30,000	80%
Value of time recorded	24,000 hours × €200 standard rate	€4,800,000
Fees billed		€4,080,000
Billing realization	4,080,000 ÷ 4,800,000	85%
Cash collected		€3,840,000
Collection realization	3,840,000 ÷ 4,080,000	94%
Overall realization	3,840,000 ÷ 4,800,000	80%
Daily fee income	4,080,000 ÷ 365	about €11,200
WIP days	€670,000 of WIP ÷ €11,200	60 days
Debtor days	€447,000 unpaid ÷ €11,200	40 days
Lockup	60 + 40	100 days

What it says: of every €100 of time recorded at standard rates, €15 never reaches an invoice and another €5 is not collected in the year. At any moment about €1.1 million, 100 days of fee income, sits in WIP and unpaid invoices. Taking 20 days off lockup would release about €224,000 of cash once, without one more hour of work.

How the four connect

Read them in order, as the path from a lawyer’s hour to cash in the bank:

1. Utilization: how many of the available hours become billable hours.
2. Billing realization: how much of the value of those hours reaches an invoice.
3. Collection realization: how much of each invoice is paid.
4. Lockup: how long the whole path takes.

A firm that tracks only hours sees the first step. Money can be lost in each of the other three, and hours will not show it.

What moves them

What you change	What it moves
Scope and price agreed at intake	Billing realization, write-offs
Matter plans and budgets that catch overruns early	Billing realization
Billing on a fixed rhythm instead of at the end of the matter	WIP days, lockup
Partners reviewing WIP by age every month	WIP days, write-offs
Agreed payment terms, and a named person who follows up overdue invoices	Debtor days, collection realization
Intake rules that keep unbillable work out, and time planned for supervision	Utilization

Time & billing and Finance & KPIs are two of the areas the AgiLawyer Radar scores.

Agree your definitions first

Definitions vary between firms, which is why figures from two firms rarely compare. Before you measure, decide and write down:

• the denominator for utilization;
• whether time is valued at standard rates or agreed rates (standard, as above, keeps discounts visible);
• whether expenses count in WIP and in fees billed;
• the period: a calendar year, a rolling twelve months, or each month.

Keep them fixed for a year before you compare one year with the next.