The ticking of the billable clock

Most legal businesses have embraced that charging time by the hour is no longer attractive to clients. Commercial and private clients expect fixed or capped fees, and only in a minority of situations is it possible to charge for time and make a full recovery of it.  

I know of some firms who have stopped time recording, arguing that it is simply a distraction when fixed fees apply. For myself, there are two essential reasons why we should continue to charge time.

First, the discipline helps us ?to understand how much profit we are making on each job, regardless of how fees are calculated. Secondly, many jobs grow in scope after the initial engagement letter, and time recording is a powerful tool in justifying additional costs charged.

Prior to 2008, many lawyers prided themselves on being professionals rather than business people. The last six ?years have taught us that we need to be both in order to thrive. It is essential to understand which jobs make money and which ?do not. 

The easiest method for me ?of calculating profitability is to record time on a job against a quote or budget. Provided that charge-out rates have been calculated carefully, then a time budget will highlight whether the proposed fee should yield ?the required profits.

For example, see the attached time budget. 

A real estate partner quotes £7,500 to draft a one-off lease and agreement for lease for a landlord client. The client has said that he is happy to use your firm for this work, provided that a fixed fee of £7,500 is charged. Most of the work will be undertaken by a four years PQE lawyer, with some supervisory time required by the partner. 

If the job takes 40 hours ?then this job will recover almost ?99 per cent of the time budget. Let us assume that the firm makes a profit margin of 25 per cent. 

If actual performance follows the budget, fee income shall ?be £7,500; time costs shall be ?£7,600. Profit shall be £1,800 against £1,900. A reduction from fee income of less than 1.5 per cent has caused a 5 per cent fall ?in profit.

We could review the time taken by each of the partner and the associate with a view to ensuring that the right person is doing each job. If a more junior person can perform a job without compromising the quality of ?the work then the client would receive the same service and the firm would make more money.

Now consider if the same work had come in from a bank that has a fixed fee of £6,000 and an extra £1,000 in time to report to the bank on issues affecting its security. Two things have happened; first, the risk in the ?job has increased significantly due to the appearance of the bank. Second, the profit has disappeared from the job because the bank is nailing ?down the cost of the work. 

Even though the work is on ?a fixed fee, preparing a budget ?for the job and monitoring time recording against the budget illustrates whether or not you ?are making a profit. With this information, you can understand at what volume panel work becomes viable, or whether it is better to turn down such work.

The other attraction of time recording is that discussions ?with clients over fees when a ?job varies in scope become ?easier, especially when a job ?has progressed at high pace and the agreement about the precise level of fees has been left to ?the end. 

I do not believe that the demise of billing by the hour heralds the end of time recording; rather, it increases its importance. SJ

 

Stephen Chalmers-Morris is practice manager and partner atGorvins Solicitors