ARE WE MAKING TIME COUNT, OR COUNTING TIME?
The billable hour has never been under more pressure and for modern firms to thrive, lawyers need to recognise the difference between fees and cost, argues Glyn Morris
It is likely you have always been under pressure to submit prompt, accurate time recording information. On top of which, you are being bombarded by article after article about fixed fees and alternative fee arrangements, and living in anticipation of the next software install intended to aid the operation of your firm’s latest pricing strategy. Yet many lawyers remain unable to pinpoint how or when they might confidently use different methods for pricing services or accurately assess the profitability of their work.
Of course, there are many sophisticated providers of legal services out there who are totally on top of this area but the vast majority still struggle with it, because:
— Too few firms explain to their staff well enough how the topic of time recording intersects with their client billing arrangements and profitability. Or they are only given part of the story, perhaps from one dimension, either from a firm macro perspective or client level, for example.
— Often the lawyer is left out of the ‘so why are we doing this again?’ debate or has not been fully engaged in the process at an intellectual level.
— No one has asked the vast majority of lawyers, in their entire career, how they actually feel about time recording. The French mathematician-philosopher Blaise Pascal said it best in his book, Pensées (literally, Thoughts): “Custom is the whole of equity for the sole reason that it is accepted. That is the mystical basis of its authority. Whoever tries to trace this authority back to its origins, destroys it.” So, we are going to go back to the origins, not to destroy anything but to deconstruct time recording before putting it all back together with pricing and profitability on top. A BRIEF HISTORY OF TIME To know why lawyers time record you need to go back in time.
To quote from The (modern) father of the billable hour and timesheet, by Ron Baker April 16, 2009. “Reginald Heber Smith, a Harvard graduate and attorney hired to head Boston Legal Aid in 1914 was using timesheets as early as the 1920s … [even] timesheets in six-minute increments. He brought the concepts of “Scientific Management” to this organization, based upon the work of Frederick Winslow Taylor, who was famous for his time-and-motion studies starting in the late 1800s, working to help factories become more productive.”
In the 1940s fees became more standardised with published minimum rates. However, by 1958 an American Bar Association special committee started to consider alternative charging mechanisms. Then a 1975 Supreme Court ruling in Goldfarb v Virginia State Bar gave added vigour to use of the billable hour. Firms started recording accurately, billing aggressively and by leveraging up with associates, recording ever more hours, found that they were able to increase profits.
This is where the profitability model comes in and the opportunity being seized upon by firms to make money by:
— Making lawyers work ever more hours.
— Charging more per hour. But what happens when you are selling hours, not value? Almost inevitably it led to inefficiencies in legal service delivery and an increase in client complaints about being overcharged. Few firms were ever looking to do things better and regulation kept others from entering the market. Once you have exhausted your lawyer hours (a potentially unintended consequence being high levels of burn out and stress in the profession) there is maximum pressure on rates, resulting in blended rates, the hiking up of rates for specialisms and a proliferation of lawyer grades. Clients demanded lower fees period and used electronic billing systems and technology to look for work duplication and to apply billing rules. Ultimately the Legal Services Act 2007 further addressed the lack of competition and efficiency.
Then in 2008/2009 law firm failures resulted as some were unable to cope with the lower fee incomes, while supporting excessive numbers of people working out of expensive properties under this old law firm model. TIME TO CHARGE APPROPRIATELY A once universally accepted method of pricing for legal services, that was also the simultaneous driver for law firm profitability, was found to be inflexible and not meeting modern law practice requirements. As a result, it now needs to be de-coupled and the two components – fees and cost – managed in completely separate ways. To explain this concept, I would like to draw on a personal experience. I was about to engage another professional services firm to perform the relatively simple task of producing some documentation to help my firm achieve savings. They offered me an alternative fee arrangement which was based on a percentage of the lifetime savings achieved by the professional for the task being performed. The key word here is task, no additional knowledge was being applied, beyond the professional’s minimum required expertise, there was no negotiating element and no risk sharing. So, let’s get this straight, I have approached a third party knowing that my business has the chance to achieve a future stream of savings if we file the appropriate documentation, and they want to jump on board and a percentage of the lifetime savings achieved! I think all those savings should be ours.
A legal professional should be able to differentiate whether they are selling a performed task involving legal process knowledge or genuinely creating value. So, what should the professional have done? My answer was simple. I was willing to pay a fixed fee for step one of the process, they knew how long the documentation would take to produce and the possibility of deviance from that expectation was very low. I wanted them to advise the savings that are typically achieved from the standard approach. The first £x’s achieved above that would be 100 per cent ours, however if by virtue of their applied knowledge and expertise there was further value generated, we would share that 50:50. That way the professional is incentivised to achieve results above and beyond the basic outcome. The supplier of services tried to salvage this by offering to reduce the percentage, but had really missed the point. The professional must know whether they are selling value they have created or selling a performed task involving a legal skill.
For me, the lesson here is clear; every lawyer must know and understand when to charge for:
— Tasks: best suited to a fixed fee approach
— Time taken: when there is a process requiring legal skill or knowledge but the time taken to perform the work is based on factors outside the lawyer’s control
— Value: only when additional value is specifically attributable as being created by the lawyer’s knowledge or firm reputation. The truth is that legal services broadly fall under these three headings but more often than not the vast majority of legal services are a mixture of all three. Interestingly, the proliferation of the alternative fee arrangements are only likely to be derivatives of these (see Fig 1).
As described in my example of acquiring an external professional services input there was a task element, something I could purchase from anywhere; and a value element, something more that I felt could be achieved by the professional’s applied knowledge or personal ability both wrapped up in the same transaction. In other words, the reason I switched supplier was that I was buying work type six and the professional was charging for work type three. Management author Dr Michael Hammer once said: “A professional is someone who is responsible for achieving a result rather than performing a task.” This is when it becomes appropriate to discuss with the client any value that is generated by the results achieved. By reviewing the following table, a lawyer will be able to know where their own service, work or task should be positioned and where time recording sits in relative context.
awyers work on multiple matters and tasks for multiple clients every day and the bombardment is constant. It is time consuming and challenging to reconstruct what they have worked on at the end of a long day, particularly when there may be time pressure to leave the office. So they delay the task until they have time to focus upon it and think things over carefully. But the following day the whirlwind starts all over and the previous day’s time is lost or significantly devalued. Technology has helped here but what technology has struggled with is that lawyers can too easily attempt to manipulate the outcomes of only recording matter time. Many legal service products are devised over a period of time, so capturing the total cost to produce a service – the R&D development if you like – is often a sunk cost that is lost to the non-chargeable codes or not captured at all. Since the advancement of mobility and the move away from palatial offices pre 2008/2009, lawyer salaries are by far the highest cost component of any law firm. Salaries can account for upward of 60 per cent of the cost of legal services, yet law firms only ‘accurately’ capture about one third of the entire firm activity. Poor non–matter time recording plagues most law firms and no firm to my knowledge accounts for support staff hours. So how can any firm manage costs, understand profitability or make production more efficient without accurate time capture for the entire business.
EMBRACING TIME RECORDING
Perhaps surprisingly all the literature I have reviewed over the years that deals with time recoding, emphasised only the management tool aspects or the client perspective, with very little looking at it from the lawyer point of view. But are they not the most important stakeholder group? It would certainly seem to be the case for some firms that have taken to some surprising tactics to promote best practice time recording behaviour, blocking computer access, fines and even vibrating electronic bracelets. The people we ask to record the hours they engage in producing legal services have a lot going on in their minds, what one lawyer described as the ‘emotional side’ of time recording.
The following are real world thoughts from actual lawyer feedback.
— I don’t want to have to write off time because my supervisor is happier when I bill everything that’s on the clock.
— I’ve got a really good relationship with this client and I don’t want to damage that by asking for more fees than they want to pay.
— I know that partners and other colleagues in the firm have really good relationships with this client. I don’t want to risk damaging those relationships by asking for more fees than they want to pay.
— I feel sensitive about lawyers’ reputations for being expensive and don’t want to be tarred with that brush.
— It seems issues such as wanting to be liked, affects individuals’ recording decisions multiple times per day.
DECIDING WHETHER TO RECORD
t seems to be the case that lawyers discount themselves before any firm discount is applied. This is based upon various factors including their own internal narrative as a result of the type of work being engaged in, their legal training, what they believe the purpose of time recording is and how management or a supervisor might use the information.
Some of those issues are articulated below:
— I’ve already billed the client and I’m not going to issue another bill. Should I record the time I spent on the file after the bill was issued? If I record the time, won’t that just increase my WIP even though it will never be billed?
— Is it OK to record time that I haven’t spent yet, but expect to incur to make sure it goes on the bill?
— The work is outside the scope I agreed with the client and I haven’t agreed to charge any extra for it.
— If I have to write off time, my fee recovery statistics will look worse. Won’t it look better if I don’t record the time?
— It’s early in the relationship with our client. Neither of us knows if there is any mileage in this work and I don’t want to record the time or have any costs conversations until I know that it’s going ahead. It’s also difficult to discuss costs at this stage as neither of us knows what will be required.
— A significant proportion of professionals also have doubts about self-worth, after all that sense of self scrutiny is often why they are professionals. Character types, whether they are introvert or extrovert, or their legal discipline training also matter.
— I feel like I’ve taken far too much time to complete this work.
— My charge-out rate seems extremely high and I’m not sure I’m worth that much.
— My client is [only a small company] [not particularly wealthy] and [[s]he] [they] won’t be able to afford my fees.
— My perception of time. Time increases or decreases depending upon how conscious you are of it. When I feel stress, time goes slowly, but when I’m in the moment what seems like moments can literally be hours.
When lawyers are struggling with something, do they discount the time recorded, feeling it took too long? And conversely, do they under record because they enjoyed a task and got great results? All these issues truly matter. In summary, for a law firm to be able to understand profitability and price well, they need: — Lawyers equipped to accurately evaluate when to charge for a task, when to charge for their time and when to charge for value.
— To be capable of creating efficient legal tasks and reduce the cost of service delivery as well as recovering appropriate remuneration for work performed – both of which depend on full and accurate time-capture.
— To be able to appreciate the entire cost of developing value-based expertise which also benefits from good time recording practices.
The Ancient Greeks had two different words for time; Chronos – which encapsulated the seconds, minutes, hours and days, also, Kairos which translates as “when the time is right”. We might well adapt and apply this concept to those law firms wishing to prosper in the future so that truly successful firms will be those that don’t simply count time but have a razor-sharp focus on how to make time count