qls guide to cost billing and profitability

8/16/2019 QLS Guide to Cost Billing and Profitability

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Costs, billing & protability

Practice support

Guide to


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Costs, billing & protability – a best practice guide – page IIQueensland Law Society

Table of Contents

1 Presidents Introduction .........................................................................................1

2 Costs, client care & communication ..................................................................2

3 Time Recording ...................................................................................................10

4 Costing time .........................................................................................................17

5 Estimating time ....................................................................................................19

6 Costs, culture & ethics ........................................................................................22

7 Creative fees & billing options ..........................................................................25

8 Costs & Protability ..............................................................................................28

9 Cashow and Working Capital .........................................................................32

10 Summary ..............................................................................................................36

Appendix 1 Ethics and Creativity in Billing Practices: Costs in a disciplinary context:Charging excessive costs in connection with the practice of law ...............39

Appendix 2 Costs management checklist............................................................................46

Appendix 3 Further Reading ...................................................................................................47


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Costs, billing & protability – a best practice guide – page IIIQueensland Law Society

Forward

This guide was produced by the Legal and Policy department at QLS to assist legal practitionersin relation to the client care and practice management aspects of costs and billing. It isintended to give general guidance only – it is not intended to be comprehensive or constitutelegal advice. The Society accepts no responsibility for the accuracy of any of the information oropinions contained in this guide, or for any loss owing from its use.

In relation to the costs provisions in the Legal Profession Act 2007 (Qld), please refer to the QLS‘Costs Guide’ available on the QLS website.

Enquiries/comments to:

Giles WatsonQLS Legal Practice Consultant Tel: 07 3842 5853

[email protected]

Acknowledgements:

Many thanks to the following for their assistance in the production of this guide:

Bob Brittan, Legal Services Commission

Anna Burnett, Blake Dawson

Amanda Donnelly, formerly of

Queensland Law Society

David Edwards, Legal Services Commission

Tim Jones, Vincents Accountants

Scott Mclean, Legal Services Commission

The QLS Litigation & Rules Section

Jonathan Shaw, Blake Dawson

Stafford Shepherd, Queensland Law Society


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Costs, billing & protability – a best practice guide – page 1Queensland Law Society

1. Presidents Introduction

This is the most important and most useful document you have read since

your admission – and I certainly don’t mean that lightly.

Poor costs management is the quickest way for a solicitor to destroy

a client relationship and is one of the most common causes of clientdissatisfaction and complaint to the Legal Services Commission.

Rarely do solicitors deliberately and unethically overcharge but poor

costs management, - it is, more to the point, an understating of our costs

position - inadequate client communication and a generally haphazard ofce administration

can give that impression to clients or, at the very least, give a client reason to doubt your

integrity, ability and professionalism.

It is fundamentally critical that solicitors aim not just for mere compliance as clients have

higher standards – our clients expect that their solicitor will listen to them attentively and

sympathetically and consider the matter with the same seriousness that they do.

It is very strongly recommended that solicitors proactively raise the matter of fees and charges

with prospective clients from the initial contact. It does much to allay concerns and gives

condence to the client. Tell your client that the rst 15 minutes is without charge and take this

valuable opportunity to explain your rate, your billing practice, the terms of your client/cost

agreement and, if you receive the go ahead - and only then - proceed to take instructions.

Conrm your instructions in writing, as your costs agreement may not be sent as quickly as

your rst letter. If this is the best advice I can give, then the next best advice is render your bills

regularly and involve small amounts. Why? Firstly, your client will not be stunned by the quantum

of the bill, and secondly, if it is not paid you may need to discuss your client’s nancial position

and, if necessary, extricate from the instruction – if your costs agreement allows you to do so!

If the matter progresses beyond the predicted original outcome, solicitors should again raise

the question of costs and charges and explain, that for reasons already outlined, these will be

higher than originally indicated. Keeping the client informed is a fundamental of best practice.

Most computer systems have reminders when bills reach a certain amount. Use this technology

or have your bookkeeper remind you on a regular basis.

This important and comprehensive guide should be read in conjunction with the Queensland

Law Society’s “Costs Guide” which focuses on compliance with the Legal Profession Act 2007.

A happy client is a client who will come back and a client who will give you referrals and isn’t

that alone sufcient reason to have a best practice approach?

Ian Berry

President

March 2009


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2. Costs, client care & communication

Costs are the most common cause of complaints or dissatisfaction by the consumers of legal

services. According to the statistics in the Legal Services Commission Annual Report, 2007-8, over

24% of enquiries, and 31% of consumer disputes are primarily concerned with costs issues.

Under the level of formal dissatisfaction (in terms of complaints or enquiries) is a much biggerlayer of informal client dissatisfaction about costs evident in complaints directly to rms, client

satisfaction surveys and general public concern.

There are different causes of dissatisfaction:

• Alleged overcharging

• Bill signicantly exceeds estimate

• No estimate given

• Poor costs communication / poor costs updating

• Unreasonable charging of disbursements

• Work, and therefore bill, exceeded scope of retainer • Unethical charges (e.g. charging for entertainment)

• Unnecessarily aggressive billing & debt recovery practices

• Numerous mixtures of the above

The key underlying causes of such dissatisfaction are unethical behaviour (in the sense of

dishonesty or a lack of integrity in relation to costs), inadequate management systems in relation

to costs, and inadequate solicitor-client communication in relation to costs.

This guide argues the latter two drivers (systems and communications) account for the vast

majority of failings in relation to costs, and further, that most of these failings are avoidable if a

law rm can effectively implement a ‘best practice’

approach to costs.

Information about the main causes of costs dissatisfaction across the profession is of only

qualied value to individual practices: the most valuable information is that which is specic

to an individual practice and their clients. Information on clients’ needs and subsequent level

of satisfaction with how you handle costs can be sought in a number of ways: at opening and

closing interviews, through client satisfaction feedback forms sent out at the end of the matter,

through annual satisfaction surveys, through analysis of internal complaints, or through general

staff feedback. Billing statistics such as speed of payment and the recovery rate (% of billed WIP

that is actually paid) are also a good indication of the strength of a practices costs and billing

arrangements.

The point to emphasise is that if practices are committed to improving client satisfaction inrelation to costs, and thus reaping the benets in terms of reputation, referrals, protability

and working capital management, they must listen to their clients needs and comments, and

change their work practices accordingly.


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What clients want

As discussed above, the best information on what clients want will come from your own

practice, but past research indicates that clients focus on a mix of many of the following

elements:

Communication Contrary to the belief of many lawyers, clients actually welcome it when solicitorsproactively raise the issue of costs. Apart from anything else, it demonstrates that thesolicitor recognises the importance of costs for the client.

Good communication involves listening as much as telling, and as with client servicegenerally, understanding your clients’ needs and preferences applies equally tothe pricing of services. Wherever possible, try to discuss their preferences on billingarrangements and the structuring of fees, so you are then able to come up with an offeror a solution that is attractive to them.

Communication also includes being upfront and transparent with your clients aboutwhat you will and won’t charge for. Clients appreciate it when practices provide someinformation on their time recording policies, for example.

Control Clients don’t want to just be aware of costs, they want as much as is possible to be in

control of them. Giving clients control over costs primarily means discussing, or advising of,the cost implications of different actions before the costs are incurred. Examples where alack of client control could lead to disappointment include:

• where a law practice does (and charges for) some basic work that could have beendone (cheaper) by the client,

• undertakes work which is unnecessary,

• provides expensive detailed advice documents where cheaper brief updates are allthat is required; or

• where work which could have been done by cheaper junior staff is instead done bymore expensive senior staff

Flexibility Wherever possible, be prepared to offer a number of alternative arrangements in relationto fees & billing, so that the client is able to identify which best suits them. See chapter 7on creative fees and billing options.

Extras Clients hate to see hidden or unexpected extras, overheads or disbursements appearingon a bill. State clearly at the outset what expenses and disbursements will be includedin the nal bill, the likely extent of these, and try to limit these as much as possible. If youare going to charge the client for travel, photocopying and refreshments, these amountsshould be reasonable and made clear at the outset.

Certainty One of the main concerns that clients have in working with lawyers is uncertainty over thecost, so fee arrangements that limit or eliminate this uncertainty are often very popular.This will usually mean moving away from the traditional hourly fee towards xed fees or feecaps.

Transparency Another major concern of clients is to know exactly what they are getting for their money.For this reason, it will often help not only to explain in detail the work you will undertake,but also to offer a full printout of work done and hours spent on the matter by all fee-earners involved. Some rms even offer the chance for clients to inspect their time

recording and/or billing systems. For genuine transparency, practices should also ensurethat their narratives or task categorisation provide sufcient information to assess value.

Value It is rarely a good idea to compete purely on price, it is much better to compete onvalue. This can often be done by demonstrating superior expertise/experience/efciency,and explaining that although an hourly rate might be higher than a competitors’, theadditional experience/expertise/efciency will lead to either a more desirable, value-added outcome, alternatively, less time spent on the matter and lower total fees.

Lawyers can also offer added value by offering one or more of the following as part oftheir quoted prices:

• Complimentary access to online knowledge management resources;

• Client extranet

• A copy of relevant research or other high-value publication;

• Training;• A desk/ofce for the client with the legal team within the law rms ofce; and

• The secondment of a solicitor to the client for the time of the case.


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Risk sharing Recent years have seen the rapid growth of no-win no-fee offers from legal rms,primarily in the sphere of claimant personal injury. Many other clients, however, includingcommercial clients, would appreciate their legal advisers offering to risk a proportion oftheir standard fee/price in the form of a success bonus. Please note s325 of the LegalProfession Act 2007, re contingency fees.

Efciency Where time costs money, clients are especially keen to see practices working efciently,

and implementing arrangements to ensure that tasks are completed as quickly as possibleand without expensive time wastage.

Regular cost updates Once fees have been quoted, it is vital to keep the client informed about the progressof costs against the estimates, and to issue interim bills and interim estimates wheneverpossible, including a detailed explanation of the additional costs. It is much better to dothis than to wait until the end of the matter and shock the client with a bill of well morethan the initial estimate.

Volume or loyalty rewards The past 10 years have seen retailers offering loyalty schemes to frequent shoppers(clubcards, Flybuys etc) and the same principle can be applied to law rms. Manyrms already offer discounts to key clients or to gain particular instructions. Firms could,however, be more creative in the way they offer these across the board as a way toincrease long-term client retention.

Gearing & seniority Clients have traditionally appreciated the experience and reassurance that theinvolvement of partners or senior practitioners can bring to a matter. But seniority costs,and clients will often be reluctant to pay ‘extra’ (as they see it) for such experience andreassurance. To avoid dissatisfaction, aim to discuss the likely mix of higher and lower rateswith your clients.

Initial client interview

Client anxiety about costs often starts even before a rst interview. One of the major concerns

that clients have when retaining a lawyer is uncertainty over what is free and what they might

be charged for. To facilitate effective communication, it might help to give conrmation that

either

• The rst interview is free

• That the cost of the interview is $x

• That the cost of the interview is at a reduced cost of $x per hour; or

• That the rst y minutes are free, and thereafter they will be charged pro rata at the rate of $z

per hour.

This information should help to reduce some client anxiety in relation to costs. If you are able to

give other information such as usual fee & billing arrangements, standard hourly rates or typical

costs in advance of the meeting, this should also help to facilitate a relaxed interview.

The initial client interview is vital for a number of reasons: getting the relationship off to a goodstart, managing expectations, identifying risks, dening the retainer etc.

In terms of costs, the rst interview should also, wherever possible, include the following:

• An open discussion about the clients expectations in relation to costs

• Where possible, a qualied ‘ballpark’ indication of likely overall costs

• An explanation of the issues or variables which could lead to increases in costs

• A discussion on the client’s preferences in terms of fee structuring, billing and cost updates.

• A discussion on the details of the instruction that is detailed enough to give the solicitor

sufcient information to provide a condent estimate of the likely overall cost of the matter.


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Many solicitors are cautious about discussing costs. This might be because they:

• are embarrassed about the seemingly high level of their fees;

• are concerned about the clients reaction; or

• because they lack the sufcient skills or knowledge to negotiate condently re costs.

Research suggests, however, that clients value an open and frank discussion about costs

and are frequently frustrated that they have to raise the issue of costs themselves. An open

discussion about costs in the rst interview can go a long way to avoiding costs dissatisfaction

further down the track. Key to this is the management of expectations. If clients understand the

variables that can affect cost, they are less likely to be shocked or dissatised when costs rise.

Another key element of managing expectations is ensuring that the initial estimate of the overall

likely cost of the matter is as accurate as it can be. The legal profession does not have a good

reputation on the accuracy of its estimates, and this might reect a skills gap due to the lack of

training or guidance. Estimating time is discussed further in chapter 6, but the starting point for

accurate estimates is the data-gathering process in an initial interview: how can a fee-earner

expect to produce an accurate estimate of overall cost if they do not fully identify the factors

that can affect cost in an initial interview?

Formal costs disclosure

The subject of formal (written) costs disclosure is inevitably dominated by the cost disclosure

requirements in the LPA 2007. Practitioners should, however, treat these legislative obligations as

a starting point for their formal cost communications, not as the only, or even the most important

considerations.

In addition to meeting regulatory costs requirements, practitioners should be aiming to limit

the possibility of any costs disputes or costs dissatisfaction, and where possible make the rm’s

service and performance in relation to costs a source of competitive advantage. This can be

achieved by:

• Managing the clients costs expectations;

• Conrm whether you are providing an estimate or a quote, and what this means;

• Ensuring any initial estimate is as accurate as possible;

• Discussing and explaining the potential for changes to any initial estimate;

• Explaining the value to the client of the services linked to the cost estimates, rather thanfocussing purely on the costs themselves;

• Acknowledging and addressing any concerns the client might have raised in relation to costs;

• Communicating a commitment to manage costs on the clients behalf, keeping them advisedand in control of costs at all times, and

• Communicating a willingness to continue discussing costs, and the clients’ requirements in

relation to costs.

Once the letter is sent, another tactic to limit the risk of costs dissatisfaction is to call the client up

to check:

• if they received the letter;

• if they have read it;

• if they understood it, or if they have any queries; and

• if they are happy and satised with the stated costs arrangements.

• This will help the early identication of any concerns or misunderstandings in relation to costsand thus provide the chance for any problems to be addressed.


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Cost & estimate updates

One of the most common forms of costs dissatisfaction occurs when the client receives a bill

that vastly, and unexpectedly, exceeds either an initial estimate, or the latest estimate received.

Keeping the client informed of any changes to total estimated costs is not only a requirement

under s 315 of the LPA 2007, it is also vital in ensuring both client satisfaction and full, timely

recovery of fees.

Cost and estimate updates, however, do not happen automatically, and rarely seem the

most urgent matter in the fee-earners in-tray. Because of this, practices need to implement

arrangements to ensure that clients are updated as required. Possible arrangements include:

• Record cost & estimate update requirements prominently on each le

• Train your staff on the importance of updates and create a culture of pro-activity in relation tocost & estimate updates

• Use you diary or reminder system to enter ‘key dates’ for cost & estimate updates at relevantstages for each matter.

• Train support staff and/or fee-earners to do regular, systematic checks of recorded WIP

against the initial or latest estimate for each le, so you can consider whether an estimateupdate is required

• Program or design your accounts or time-recording systems to alert you when your recordedwork-in-progress meets 70% of the initial or latest estimate, so you can consider whether arevised estimate is required

• Develop checklists for different matter types that include requirements to compare work-in-progress to an initial estimate at appropriate stages of the matter, so you can considerwhether a revised estimate is required

The nal costs or estimate update should happen, if required, immediately before a bill is sent.

To ensure that a client never receives a bill that will either shock them or lead to dissatisfaction,

it is good practice to telephone them before the bill is issued, provide the nal (provisional) costs

tally, explain any recent or unexpected costs and seek feedback.

Cost updates & value

If you send a cost update, revised estimate or nal bill which provides only dollar gures rather

than emphasising the work related to these costs, it is not surprising if the client focuses on the

cost of the work rather than its value. Telling the client what you are doing, and how it benets

them, not only helps to justify the fees, it also aids client understanding and appreciation, thus

limiting the risk of client dissatisfaction.

The challenge of communicating value can be illustrated by comparing solicitors to builders

and imagining yourself as the client of a builder.

You would like the builder to build an extension to your house, and you see this as a fairly simpletask which should not cost more than $15,000. The builder however quotes $25,000 but doesn’t

indicate that the work is any more complicated than you had assumed. You reluctantly accept

the estimate and retain the builder but are disappointed when the builder keeps revising

his estimate and at the end of the job (1 month later) the nal bill comes in at $32,500. The

additional cost is justied only by ‘harder than I thought’ and ‘complications’ in conversation

and by ‘additional time and materials’ in the bill.

In the above situation, you are unlikely to be a satised client, but this is the situation that many

solicitors’ clients nd themselves in. Compare this to the situation below.


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You would like the builder to build an extension to your house, and you see this as a fairly simple

task which should not cost more than $15,000. The builder inspects your property and explains

that, whilst normally this would cost c$15,000, the current drainage arrangements mean that it

would be risky to go ahead without additional work on your guttering, drainage and plumbing.

Although this will increase the cost to $25,000, he explains the risks involved of not doing the

extra work, and you end up being impressed not only by the builders skill in recognising the initial

problem, but in how he has explained the issues to you.

After 5 days, the builder contacts you and says he has some more news. He apologises for

not noticing the issue immediately, but says he has discovered a serious termite problem in

the existing wall, and that this will mean more work and money. He explains the problem in

more detail and increases his estimate to $32,500 – making sure you are happy with this before

proceeding with the extra work. His nal bill comes in as estimated, and includes a detailed

breakdown of where his time and your money were spent.

The two examples include the same initial estimates and costs, and both include prompt cost

updates. The difference lies in explaining the work, and specically in explaining the value

attached to the extra work – in this case the value of addressing the drainage and termite risks.

Although much legal work is complicated, solicitors are often too quick to assume that the client

would not understand or would not be interested in more details of the work they are doing on

the clients’ behalf. By working on their communication skills, complicated legal work can be

explained in a way that not only makes sense to clients, but which helps them to recognise the

value of the work, thus limiting the risk of costs dissatisfaction.

Value for money

Value can be dened as

“The importance or worth of something for someone.”

To speak about the value of legal services to clients, you have to rst understand the views of

clients. Clients want to feel that the fee they pay is reasonable for the value they have gained

for your services. Clients will regard your bill as fair and representing good value for money only if

you have provided a service that matches – or exceeds - their expectations.

Matching these expectations is difcult for two reasons:

• Clients often nd it difcult to understand either the complexity of legal work, or the numerous

practice overheads associated with it.

– Providing information to explain that the fee charged is not your take home pay will help to

limit sensitivity over costs.

• Legal costs are high: the hourly rate for many lawyers will be the same as many private clients

earn in a day.

– As the costs are high, expectations will also be high before clients feel they have received

value for money.

Perceptions of value for money are subjective and will vary between clients, but the difculties

of matching client expectation of value will often lead to a large proportion of clients

perceiving a gap between the cost and the value of legal work.

To ensure your clients consider your service good value for money, you not only have to build

and demonstrate your value by focussing on the areas identied above, you also have to

ensure that this perceived value meets or exceeds the monetary value of your bill.


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The issues that most affect perceptions of value for money are as follows:

• Managing the matter to your client’s satisfaction

• Managing nancial arrangements and billing

• Perceptions of your technical ability

• Perceptions of practice efciency• The commerciality of your advice (if appropriate).

Of these, the rst two are the most important, as whilst clients appreciate and value technical

ability, only a minority (sophisticated clients) will be in a position to judge or assess it. Similarly, the

commerciality of your advice will only be relevant for some clients or in some situations.

In most situations, therefore, clients’ perceptions of value for money will primarily be driven by

how practices manage both the matter and the associated nancial arrangements and billing.

Communicating value

To reap the benets that enhanced client service can bring, practices not only have to investin the areas mentioned above, they have to ensure that this value is perceived by clients. This is

not meant to suggest that you need to do a hard-sell and simply tell them how wonderful you

are, but simply that solicitors should attempt to bridge the gap between what you think your

services should be worth, and what the client thinks they are worth.

As mentioned above, the majority of clients do not understand either the complexities or

economics of legal work, so it is understandably difcult for them to recognise the value in

your service. Solicitors can address this by improving and increasing client communication.

Clients appreciate and value communication from their solicitors, so the act of communication

helps to build value in itself. It also, however, helps to justify your fees by giving the client more

information about your activity and how it benets them.

What you think you

should charge

Your current fee

What your client considers

to be the value received

Perceived

value gap

Service & Com-

munication


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Efciency

As mentioned earlier, any real or imagined inefciency on the part of the law practice can

destroy ‘value’, lead to signicant client dissatisfaction, and suspicions of overcharging. Typical

occurrences that lead to inefciencies and which can then subsequently lead to a cost

increases or the perception of overcharging include:

Poor delegation • Delegated to wrong person

- too slow / too expensive

- learning on the job

• Poor explanation leading to slow, poor or unfocused work, leading to the risk of extratime costs

Poor supervision • Leading to mistakes and additional time costs

Poor knowledge

management systems

• Additional time costs due to lack of appropriate precedents

• ‘Re-inventing the wheel’ costs.

IT failures or inefciencies • Document crashes, difculties in accessing information leading to additional time costs

Support staff efciency • Secretarial errors (wipes tape / loses document) leading to additional time costs

Double handling • Transition between fee-earners

• illness / holiday

Poor le management • Lost les, misled documents

Poor risk management

arrangements

• Small or large errors that lead to additional time costs

Such inefciencies raise ethical, client service and protability issues. The charging of time for

learning on the job, or to correct avoidable errors would probably be considered unethical.

Other inefciencies might not be considered unethical, but they would effect client satisfaction,

and ultimately

practice protability.

Whilst some efciency gains in areas such as IT and knowledge management require signicant

nancial investment, much inefciency can be eliminated by simply amending existing

processes and arrangements, and training staff appropriately. Addressing such unnecessary

inefciencies carries only limited one-off time costs, and can result in signicant improvements re

clients’ perceptions

of value.

For some practices, the reluctance to invest in ‘quick win’ efciency gains comes from the belief

that efciency gains will reduce the number of hours recorded and thus reduce protability.

This is a limiting short-term approach which can have dramatic negative consequences for any

practice in the long term. Without consistent and regular efciency gains, practices not only risk

rising client dissatisfaction, they will also cease to be competitive in an increasingly competitive

and informed market.


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3. Time Recording

Value and purpose

There are three main reasons why all fee earners should record their time:

• Billing• Management & supervision information

• Information about the value of work done and WIP.

Time recording forms the basis of management accounting because it forms a record of your

professional work. Your management accounts will be of far less value, if not meaningless,

without accurate time recording. How do you know whether any work has been protable if

you do not know how much it has cost you to produce it? Some practitioners do not see the

need to record time on matters for which a xed fee is charged, residential conveyancing for

example, but it is essential to monitor the protability of work and whether the margins you are

achieving can be improved without detriment to the level of service.

Fee-earners must understand the importance of time recording and be encouraged to recordtime fully. They must also recognise the need for accuracy and be discouraged from padding

time. Irrecoverable time should be written off as soon as a bill in respect of the work has been

delivered.

In some rms, standard costing for work of a highly routine nature that is undertaken by junior

fee-earners is used in place of time recording. Such practices should have sophisticated

nancial management and a thorough understanding of their cost base. For the majority of

rms and work types, time recording remains the only reliable means of understanding the cost

of producing work.

Traditionally most fee earners have regarded the main, or indeed, only purpose of time

recording as an aid in preparing bills. Many view it both as a complete waste of time (especiallywhen they charge on a xed fee basis), and as a demoralising and stressful part of life in a legal

practice.

If fee-earners do not record their time, however, the practice will not be able to accurately

measure the cost of producing work, which makes it almost impossible to measure and manage

protability.

Increasingly, commercial clients ask for copies of time-recording schedules along with bills, whilst

many rms provide such printouts automatically as a means of being more transparent and to

differentiate themselves from their competitors.

The discipline of recording your time also makes you use it more effectively: It makes you think

about what you are doing.

Firms on full time recording are able to produce a range of management information such as:

• Chargeable hours for each fee-earner on a daily, weekly or monthly basis;

• Information on average hourly fees – by dividing the chargeable hours recorded into that

person’s fees;

• Non-chargeable hours for each fee earner

• An analysis of non-chargeable time

• Total value of work done each week or month

• Total value of WIP for the practice and for each fee earner, team, department


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Time recording & productivity

Productivity can mean different things to a law rm than to many other industries. A classical

denition for productivity might be ‘the amount of output per unit of input’, with ‘input’

commonly measured in man-hours. For a rm doing low-value commoditised work, and

charging xed fees, this approach makes sense, with the worker who completes more stages

or matters within the working week being seen as more productive than the colleague whocompletes fewer stages/matters.

For practices who charge by the hour, however, man-hours commonly become the measure

of output rather than the measure of input, and individual productivity is measured by the

recorded number of billable hours.

The challenge of increasing chargeable hours can be approached in 2 ways:

• Working longer hours, or requiring your staff to work longer hours (e.g. annual billable hour

target increased from 1200 to 1400 hrs)

• Recording a higher proportion of your ofce time as chargeable (e.g. percentage of working/

ofce time that is billable to increase from 70% to 80%)

In responding to the challenge of increasing productivity, too many practices rely too heavily on

the rst approach at the expense of the latter. Through a mixture of training, guidance, analysis,

support and supervision, it is possible to make signicant improvements in time recording so that

the quantity of billable time can be increased without either longer working hours or any ethical

compromises.

Policies & guidance Staff need to understand the what, why, how and when of time recording. Often, hoursget lost not because work isn’t being done, but because of uncertainty over how to recordit or whether it should be chargeable. At the same time, clear policies and guidance arenecessary to avoid ethical indiscretions.

Reliable recording &informative data

Practices need data to help them understand where the time goes. This requires bothconsistently good time recording practice, and support from an IT system that genuinelysupports the time recording process, rather than becoming a time burden itself.

Analysis With good data, practices can successfully analyse where the time goes, and considerwhether work or time recording practices need to be improved. With data on time in ofce,chargeable time and non-chargeable time, practices can then start asking questions such as:• Why is time unaccounted for?• Should any non-chargeable time be chargeable (or vice versa)?• Should different non-chargeable activities be discouraged?

Performance

management &support

Assist staff in improving their time recording through guidance and the discussion of workpriorities. Practices should make time recording a performance management issue in itself,separate from productivity and quality of work.


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Policies, training & guidance

Efcient, ethical and accurate time recording is a skill in its own right – a skill that has to be

developed and nurtured by guidance and support. The main reason for poor time recording is

uncertainty over how to record time, how much time to record for a given activity, or whether

the time should be chargeable. Practices should aim to remove any uncertainty by developing

clear policies and guidance on key time recording issues.

The rst policy that all practices should embrace is as follows:

“All fee-earners should accurately and promptly record all of both their chargeable

and their non-chargeable time”

This policy is vital to ensure that a practice has all the accurate information it needs to cost

matters, assess protability and manage performance.

Such a policy is now common practise, but it will often be necessary to deal with individual

objections, particularly from people who charge xed fees or do not understand why non-

chargeable time needs to be recorded. The reasons for time recording therefore need to be

explained to all staff.

The second element of this policy is to ensure that time is recorded accurately: limiting or

eliminating any adjustments either upwards or downwards.

Adjusting time upwards is clearly unethical, and practices should implement a number of

arrangements to limit the risk of ‘padding’:

• Making padding or unethical time recording a disciplinary offence;

• Reducing or eliminating any real or perceived pressure to exaggerate time;

• Supporting staff in their efforts to time record efciently;

• Monitoring time recording and questioning any time entries that seem excessive; and

• Effective delegation & workload management to limit any temptation to pad timesheets andenable fee-earners to meet any billable hour targets or expectations.

Whatever questionable benets padding might have for the individual (in terms of reaching

billable hour targets), time padding rarely benets the practice in the long run. Increases above

any initial cost estimate are unpopular and are therefore subject to internal discounting, lower

recovery rates, slower payment and lower client retention rates.

Turning this issue on its head, however, practices should also be wary of facilitating a culture

in which fee-earners record time according to how long a task ‘should’ have taken them

rather than how long it actually took them. It is not uncommon for young fee-earners, perhaps

insecure in their abilities, to compare their speed of completing tasks against the speed of

more experienced colleagues, and consequently edit their recorded time entries downwards.

Similarly, a practice should introduce strict policies on who has the authority to write-off time, by

how much and under what circumstances.

Fee-earners have different levels of skill and experience and this is usually reected in the hourly

rates they are charged out at. Junior fee-earners should not be expected to complete a task as

quickly as more senior colleagues and should have no cause to record anything other than the

actual amount of time they took to complete any given task.

One way to ensure time is recorded accurately is to require time to be recorded promptly.

Many software solutions allow time to be recorded ‘in real time’, thus limiting the temptation for

adjustments, but practices should also aim to supplement this through its own requirements for

prompt completion of time entries.


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As can be seen from the above discussion, time recording policies need to be both ethical

and commercial, addressing both the risk of padding or inated time sheets, and the risk of

recording inefciencies or unnecessary adjustments. They also need to be sensitive to client

expectations: some time recording practices might be both ethical and commercial, but would

still lead to client dissatisfaction.

Below is a discussion of some key time recording issues.

Units & rounding Most practices record time in 6 minute units with the common practice of rounded up tothe nearest unit.• Units of less than 6 minutes are seen as being unmanageable

• Units of more than 6 minutes are seen as being unethical

The justication for consistently ‘rounding up’ is that some time is inevitably lost on activitiesthat are not, in isolation, recorded as chargeable. The practice of rounding up is seen as alegitimate way to re-capture some lost time in a ‘swings and roundabouts’ sense.The danger of rounding up, however, is that it is open to abuses. It is clearly unethical, forinstance, for a practitioner to record 20 units (2 hrs) for sending out 20 standard letters, atask that can be completed in 15 mins, or to record 10 units for checking 10 e-mails in 5minutes.Practices should regularly review their time recording guidance and policies in respect ofthe use of units and the practice of rounding. If a practice nds that it is gaining signicantlymore on the swings than it is losing on the roundabouts, arrangements might have to berevised.

Research It is normally seen as legitimate to charge for exceptional research provided that theresearch is both necessary and specic to the single client matter at hand, and is clearlydisclosed to the client. Background research or research which is not necessary for anyspecic matter should be recorded as non-chargeable.A grey area in relation to the time recording of research activities occurs where there isuncertainty whether a practitioner should already be knowledgeable in the areas theyare researching. A junior practitioner should not be expected to have the knowledge orexpertise of a senior practitioner and might therefore legitimately expect to check or clarifysome facts accordingly – either through research or discussion with colleagues. As a juniorpractitioner will charge less than the senior practitioner, this should not raise any ethicalconcerns.If however a practitioner knowingly accepts instructions which extend beyond a level

of competence expected by the client, either for themselves or for another fee-earnerwho ultimately does the work, it is clearly unethical to charge the client for ‘learning onthe job’. Practices should review their client engagement and delegation practices, andsystematically review timesheets to ensure that abuses do not occur.

Waiting It is normally seen as legitimate to record as chargeable time spent waiting for a client, butnot working, provided such waiting is either a result of the client’s requests, or is a necessaryconsequence of your work for the client. Practices should, however, ensure that the client isaware that waiting time can be chargeable.Where waiting time is used productively on other work, time should only be recorded aschargeable for the work actually done. Under no circumstances should the same time berecorded twice (for waiting and for other work).In the modern age of laptops, wireless broadband and mobile phones, the recordingof waiting time as chargeable is becoming increasingly unpopular amongst clients whoexpect solicitors to be able to use their waiting time productively. Whatever the regulatory/ethical view of recording waiting time, solicitors should therefore also consider their clientsexpectations in respect of recording waiting time, and discuss these issues wherever

possible

Travelling The recording of travelling time as chargeable covers much the same ground as waitingtime, with the key principle being that such time should either be recorded as travel,where legitimate, or under other les, but never both. As with waiting time, solicitors shouldconsider their clients expectations, and wherever possible discuss the cost implications oftravel with the clients.

Working outside the

ofce

It has always been common to treat time spent on work outside of the ofce (at home,during travel, at meetings etc.) the same way as it would be treated were the work iscompleted within the ofce. Accountability for work outside the ofce has been increasedsignicantly through the increased use of lap-tops, wireless broadband and remote accesstechnologies.


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Supervision Professional supervision time relating to client work on a particular le is commonlyrecorded against the relevant matter les by both supervisor and supervisee. Supervisiontime which is not matter or client specic should be recorded as non-chargeable.

Discussions between fee-earners

The treatment of discussions between fee-earners should depend to a large extent on thenature of the discussion. If the discussion focuses on the specics of a client matter, andsubsequently results in progress, it would be legitimate for both fee-earners to record the

time as chargeable.If, however, the discussion is not specic to any particular matter, is background, ordoes not contribute to progress on any matter, it would normally be recorded as non-chargeable.

File administration Professional le administration, including le audits and other activities that mitigate le riskor otherwise benet the client is commonly recorded as chargeable, provided the activityis specic to a particular le.Pure administration (ling, photocopying etc) and management activities that are notspecic to individual les would normally be recorded as non-chargeable.

Entertainment Entertainment would normally be recorded as non-chargeable. Even where client mattersare discussed in a professional capacity during an entertainment event, fee-earners shouldconsider their clients’ expectations before recording any time as chargeable. Chargingfor time during an entertainment function risks negating any goodwill generated by theentertainment.

Much of the above can be narrowed down into 4 basic principles:

• Time should only normally be recorded as chargeable where the time spent is specic

to a single client or matter. General or background activities should not be recorded as

chargeable.

• Never duplicate time recording, or record the same time on 2 or more different client les

• Consider client expectations and disclose or discuss the costing implications of different

actions

whenever possible.

• Professional activities are usually chargeable. Administrative duties are usually not.

Once you have developed your time recording policies, consider making a version of this

available to clients: clients would prefer to know in advance what will and won’t be charged

for, rather than waiting for the bill to nd out.


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Informative & transparent time entries

Practices should aim to ensure that time is recorded so as to provide as much information as

is necessary for either a supervisor or a client to understand the activity and assess its value or

validity.

Time is normally recorded through a mixture of existing standard codes/entries in a timerecording IT application, and personally drafted narratives.

• Practices should aim to review its standard codes/entries on a regular basis, ensuring all

common tasks are included and the descriptions informative. This not only ensures entries are

clear and understandable; it also makes the process of recording time easier and quicker for

the fee-earner.

• For non-standard time entries, fee-earners need to provide narratives that are sufcientlyinformative for clients and supervisors, but concise enough so that the drafting of suchnarratives does not become a time stealer. Practices might consider providing guidance ortraining to fee-earners to assist in this.

The key is to record all t ime as if the client was the next person to look at the entries. Whereverpossible, block or large time entries should be avoided as they provide minimal information, are

often vague, and might lead clients to question the amount of time or the value of the activity.

In developing both their standard codes/entries and their own guidance and policies on time

recording, practices should also refer to Court Scale of Costs (available in the Uniform Civil

Procedure Rules 1999). Practices might consider tailoring standard entries to those in the scale,

and recording separately those activities that are not recognised in the scale.

Supervision, performance management & analysis

Whatever guidance and support is provided to fee-earners in relation to time recording,

practices should implement arrangements to ensure that all bills are ethical and comply with

practice policy. This would normally require bills to be checked and approved by a supervisor

or partner before being sent to a client. This is an opportunity for the partner to discuss any

concerns with the fee-earner, make amendments as necessary, and also to identify any areas

where a fee-earning team might need additional training or guidance. The simple knowledge

that all bills will be checked will also add discipline to the practice of time recording.

The supervision of time recording in legal practices is too often focussed on a single indicator:

• the number of billable hours recorded each day/week/month/year by any given fee-earner

To ensure efcient & effective time recording, however, law practices should also focus on a

number of other key performance indicators (KPI’s):

• The % of the day that has been accounted for (the goal should be 100%)

• The % of this time which is chargeable – goals will vary according to fee-earner

• The recovery rate: the % of the chargeable time which is billed to clients and which the clientpays for (80-90% is typical)

Supervision meetings should aim to discuss these indicators, and offer direction and support

accordingly. One of the main discussion points should be non-chargeable time, as this is a great

way of identifying poor working practices and inefcient use of time – time that could have

been billed. Develop a series of codes for non-chargeable time and analyse this as closely as

the chargeable time: should it have been chargeable? should it have been done at all?

In addition to the time itself, supervisors should also check the narratives or descriptions of work

done when simple task categorisation is inadequate to describe the nature of the work. This

is important not just for internal supervision purposes but also for client communication, and

particularly in demonstrating the value of the work to the client.


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Time recordings are the basis for bills, and clients are often supplied with a fully itemised bill of all

time recordings, which have a short description of the tasks, along with the respective costs. If

the narratives or task descriptions are short and vague, clients will inevitably focus on the cost,

and perhaps question the value of the service. If, however, the narratives are more detailed

and give the client a better understanding of the work done, the client is more likely to focus on

the value of this work, rather than merely the cost. In this way, more detailed narratives or task

descriptions can help to improve the recovery rate.

Finally, supervisors should not just be looking for poor performers (those with low billable hour

tallys) but also for those consistently working excessive hours, which is not healthy or sustainable

in the long term, and can lead to resentments, stress or depression.

Billable hour targets

When it comes to setting targets for chargeable hours, try to set reasonable targets that take

the nature of the work and the other activities of the fee-earner into account.

It is sometimes easier to record a full eight hours doing commercial work for a single client than

in respect of numerous matters for private clients, even though the fee-earner doing the lattermay have been fully occupied all day. Targets for time vary across rms, but many consider that

to achieve 5.5 or 6 chargeable hours a day is reasonable.

As fee-earners gain experience, become more valuable to a practice and perhaps move

towards partnership, it is good practice to reconsider fee-earner performance management. As

issues such as supervision, business development and other issues take up more time, it might be

necessary to adjust billable hour targets downwards in recognition of a broader contribution to

the success of a practice (with total hours probably still increasing).

These considerations mean it is rarely a simple matter to set a practice-wide billable hour target

and expect everyone to accept this as reasonable. Practices should develop a range of KPI’s

and measure and reward performance on a wider range of issues than just the quantity ofbillable hours. This will not only make variances in billable hour targets easier to manage, it will

help to develop a broader range of skills.

The effect of billable hour targets is discussed further in chapter 6.

Time recording & efciency

Perhaps the biggest risk that a practice should be aware of is not necessarily the clear-cut

instance of manipulating time-sheets, but rather the individual instances of wilful inefciency

that can become institutionalised. Taking a relaxed 2 hours to do a task that could with no risk to

quality be done in 90 minutes not only raise ethical concerns, it can also have a serious impact

on the competitiveness of any practice in the medium and long term.

Time-recording and morale

Many fee-earners dislike time recording, and it can in practice be difcult to do, especially

in high-volume work where a fee-earners has a large number of les. Software can of course

help, and it pays to get the choice of software right – perhaps by involving staff in the decision-

making or arranging demonstrations of different solutions.

• Time recording and billable hour targets should be just one way to manage performance

& productivity, not the sole. Practices need to nd other ways of measuring performance

beyond billable hour tallys

• Discuss & agree billable hour targets with staff – don’t enforce them

• Build in allowances for client care, marketing, personal development, support etc• Management to take a supportive approach to time-recording, rather than merely looking for

poor-performers.

This topic is discussed further in chapter 6.


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4. Costing time

Neither law practices nor individual fee-earners calculate hourly rates on a regular basis: mostly

they are xed not by calculation but by a mixture of incremental increases on past rates and

competitive comparisons. Unless you understand your costs of production, however, it is difcult

to make well-informed decisions about fees

and protability.

A basic calculation of time cost is easy: all costs involved in the production of the service (salary,

related employment costs and overheads) should be apportioned and then divided by the

number of hours that each fee-earner will be expected to record as chargeable time.

A simple equation therefore looks something like this:

Employment costs + overhead allocation

Number of hours worked= Provisional Hourly cost

This gure of course provides only a provisional cost gure. To arrive at an hourly fee this has

to be increased to allow for both the prot margin and the practice’s recovery rate. The

achievable prot margin is of course dependant on your ambitions and competitive situation,

but as a rule of thumb, practices should be aiming for a prot margin in the region of at least 25

to 30%. Practices should also build in a calculation to allow for time written-off and discounted

bills. Firms rarely recover all their time (80-90% is a typical percentage – see FMRC Legal data))

and this should be reected in the calculation for the hourly fee.

The calculation for the hourly rate might therefore look something like this:

x Prot margin x recovery margin = Hourly ratex 1.3 x1.2 = $230

Employment costs + overhead allocation$120,000 + $50,000

Number of hours work1200 hrs

Overheads

The calculations above show how factors such as overheads and recovery rates can affect

costs of production, and this is a good argument for analysing these costs within different

practice areas, and adjusting charge-out rates accordingly.

In terms of accurately costing time, and subsequently analysing protability, the more costs that

can be allocated to individuals or a department, rather than the rm as a whole, the better:

• Individual employment costs: salary, Payroll taxes, super contributions

• Department overheads: Secretarial, marketing, training and library costs to a department,

and

• Firm as a whole: accommodation and insurance to a rm as a whole

The process of where and how overheads can be allocated might lead to much discussion.

Different departments might use secretaries, paralegals, knowledge management resources

to clear greater or lesser extents, and costs can be allocated accordingly. There is a danger,

however, in overcomplicating the calculations for little benet. A discussion on whether the

family law department should pay a slightly smaller share of PI insurance than the property


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department is unlikely to greatly benet the costing process. You should therefore be cautious

about trying to allocate expenditure across departments unless that allocation can be based

on a genuine measurement.

Take, for example, a practice with ten fee-earners: 3 in the family department and 7 in the

property department. The practice decides that of a total overhead bill of $500,000, $150,000

can be allocated to the property department, $50,000 to the family department and $300,000should be distributed on a

per capita basis.

To each property fee earner should therefore be allocated a share of the general overheads

($300,000 / 10) plus a share of the property departments overheads ($15,000 / 7) to give a total

per capita overhead of $51,428. For a fee-earner in the family department, the equivalent

overhead is slightly less, $46,666, recognising that departments lower usage of secretarial and

paralegal staff.

Example overhead calculation

Practice – General Property Department Family Department

Overheads 300,000 150,000 50,000

Fee-earners 10 7 3

Per capita overhead allocation 30,000 21,428 16,666

Redistributed per capita overheadallocation

51,428 46,666

The process outlined above might seem complicated, but only has to be undertaken once

or twice a year, and the benets of understanding your costs of production cannot be

underestimated in terms of both costing work and making decisions about protability and

practice direction.


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5 . Estimating time

Many practitioners consider themselves good ‘estimators’ of the time taken to carry out work,

and therefore how to price it, whilst others believe that accurate estimating is impossible for their

areas of practice. Very few solicitors, however, can claim that they have a proven system for

accurate costing and estimating, and many practices fail to go beyond an initial gut feeling, a

reference to the last piece of similar work, or a back-of-the-envelope time-cost calculation.

Estimating myths

Let’s look at a couple of ‘myth conceptions’ about the provision of accurate

estimates to clients:

Myth 1: The accuracy of the estimate does not have a strong inuence on the protability of the

work - because whatever the estimate, the bill and fees recovered will depend on the actual

hours recorded, not the estimate.

Myth 2: Accurate estimates are not possible: the work is potentially complicated and there are

too many variables that could affect the nal size of the bill.

Covering the rst point rst, it is wrong to assume that the accuracy of the estimate has

little bearing on the protability of the work. With rms on average recovering only c85% of

recorded time, the link between recorded time or work-in-progress and fees is not as strong as

is sometimes assumed, especially where the submitted bill exceeds the estimate. Research from

both law rms and their clients has shown that accurate estimates can affect protability in a

number of ways:

Firstly, surveys have shown that the closer the nal bill is to the estimate, the higher the recovery

rate – the percentage of recorded time (or work in progress (WIP)) that is nally paid by the

client to the rm. If a bill comes in exactly as estimated, clients pay it because there are no cost

concerns and nothing to debate or complain about. For the same reason, there is no partnerediting of the bill before it is sent.

If, however, the bill comes in above the estimate, this is when partners either write off some WIP,

or the client is disappointed and becomes more inclined to scrutinize or dispute the nal bill,

leading to write-offs or discounts. There seems to be an understanding, observed (to varying

degrees in different markets) by both rms and their clients, that any fees above an estimate are

negotiable. It therefore follows that if work is done without any estimate of overall costs, then an

even bigger proportion of the nal bill is negotiable, or at risk of being written off.

More accurate estimates can therefore lead to higher recovery of recorded time and a

signicant increase in protability, and this effect is common amongst the few rms who have

formalized accurate estimating by changing from an hourly fee system to xed fees in recentyears. Let’s look at an example that shows a 66% rise in prots:

Esti-mate

WIP Notes Recoveredfees

Prot @ fees less 75% of WIP

$8,500 $10,000 Partner notices fees are more than theestimate and reduces bill to $9,500 toplease client. Client is still upset. If hepays the extra $1000 he has to justify itto his boss and it affects his budget forother work. He scrutinizes the bill andsees $500 has already been written off.This makes him believe there is scope fora bigger reduction. He asks for another

discount

$9,000 $1,500

$10,000 $10,000 Client is happy with the bil l and paysquickly.

$10,000 $2,500


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In a similar way, if the nal bill comes in close to the estimate, fee-earners will be quicker to

bill and clients will be quicker to settle – for the same ‘nothing to discuss, nothing to dispute’

reasons. If the estimation and billing system can be managed to ensure that bills are consistently

settled quickly in this way, this can dramatically improve the cash-ow of the rm, releasing cash

for investment, reduction of bank overdraft or partner drawings.

If your practice gets really good at estimating accurately, you might then consider movingtowards a xed-fee approach to some extent. If you are willing to x or cap fees for either an

entire instruction or specic elements within an instruction, thus accepting some of the risk on

the cost and protability of the matter, clients are sometimes willing to pay a ‘risk premium’

which will further increase your protability.

In relation to the second ‘myth’, some lawyers might be surprised at the number of instructions

it is ‘reasonably practicable’ to make accurate estimates for, once they realize the extent

to which such accuracy can affect client satisfaction, the payment of bills and protability.

Although some legal work is genuinely unique and groundbreaking, the vast majority (either

in its entirety or once broken down into its constituent parts) has been done before by any

particular rm. This means that the rm should be able to draw on historical time and costs data

to identify what past jobs, or their constituent parts, have previously cost.

Using historical data to provide accurate estimates is an obvious but often under-used

approach within law rms: it requires a combination of legal knowledge and accounts analysis

skills that neither lawyers nor accounts staffs have fully acquired. Two solutions to this might be to

either train the fee-earners up on estimation skills to a greater extent, or to change the accounts

focus (or move staff) from billing

to estimating.

The breaking up of legal work into constituent parts is also vital for accurate estimating. This

not only helps a law rm come up with accurate gures, and provides a client with more

information; it can also increase consistency and perceived fairness and accuracy of a bill even

where the overall costs can not be accurately predicted. For example, a law rm might not beable to reasonably predict how many documents of a certain type it will be required to review

as part of a case, but can predict each review will cost, for instance, either 3 hours or c$750. If a

rm can quote, stick to, and refer to these estimates, then the nal bill will still be consistent with

the estimate, irrespective of the number of

documents reviewed.

This shows the value of managing expectations re costs, even where accurate estimates are

not possible. As long as the nal bill is consistent with initial discussions and indications, a client

should nd little room to dispute a bill. This is why it is in a practices interest to provide as much

information as possible re costs, explaining all the variables that can impact on costs and

minimising the risk of failing to manage client cost expectations.

An estimating process

The key to greater sophistication in time-cost estimation is the use of historical costs data.

Solicitors can be very proud of their experience, and it can be very reassuring to hear that a

solicitor has done “many of these before”. When it comes to cost estimates, however, solicitors

often fail to learn from their experience, fail to predict the unexpected, or fail to plan for

contingencies. Clients have a right to be frustrated by solicitors who claim extensive experience

in any particular area, but who are then unable to produce precise and accurate costs

estimates. So why are solicitors so poor at estimating? Part of the problem is that solicitors simply

fail to gather the required data for estimating purposes because of poor initial interviewing skills.

Another suggested reason is that solicitors do not realise the full importance of the estimating

process, underestimating the impact on client satisfaction or protability. The main reason,

however, is the lack of a cohesive approach and system for estimating.


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The table below suggests some of the key steps in developing a system for accurate estimates

based on historical data.

Segmentation ofstages/tasks

• Develop a range of matter templates that breaks each matter down into costable stages

• Segment each stage into tasks and related sub tasks

Time recordingguidance and training

• Record all time – including non-chargeable time and time written off. If fee-earners aren’trecording all of their time on a matter – regardless of how much is written off – your historicdata and cost projections are awed.

• Develop training and guidance for all staff on time recording

• Whatever IT system you use, make sure it can measure the time taken to complete theidentied stages & tasks.

Develop database of

historical task/stage

times & costs.

• Develop a database of historical time/cost data, calculate the average time to completeeach task and sub task.

• Develop data for how will this vary:

• in different circumstances

• with different fee-earners

Use client interview to

gather data for costsestimates

• Use the initial client interview to gather all the information you require to do an accurate

costs estimate, including:

• The relevant tasks/stages

• The factors that could affect time spent on each task/stage, or on the matter overall

• Use a prompt, checklist or matter template that mentions all possible tasks/stages and allpotential variables which could increase complexity, time and cost

Compare interview to

historical data

• Refer to your historical time/cost database to produce time estimates for the stages ortasks identied for the new matter

Consider variables &

risk factors

• Refer to the database again, for information on how any identied variables or ‘risk factors’should affect the time/cost estimate.

• Risk factors or variables might include:

- Inexperience/Incompetence of the other side

- Foreign jurisdictions - Multiple clients, nanciers, agents etc

- Delay: often if a matter isn’t completed by a certain time, the costs can expect toincrease signicantly

- Client capacity.

- Client’s communication / service / project management demands

- Commercial / political / economic events

Check & review • Before nalising the estimate, briey discuss it with a supervisor or colleague. A second pairof eyes might identify another variable that you hadn’t considered.

The above process is not dissimilar to the process that each solicitor, informally or unconsciously,goes through in his/her mind before doing estimates. The formalisation of the process, however,

prompts greater consideration and incorporates more data and variables, which should ensure

greater accuracy. Although the process outlined above seems complicated, it needn’t be

provided a practice is disciplined in recording data, and can streamline the process through

the use of support staff and appropriate IT.

Measurement and discussion

Another, perhaps simpler, way to improve the accuracy of costs estimates is simply to measure

the accuracy rates of different fee earners’ costs estimates. Following the principle of “what

gets measured gets managed”, comparing the initial estimate to the nal recorded WIP, and

then discussing accuracy in team or supervision meetings, can radically focus minds and

prompt teams to pay more attention to the estimating process. Discussing the estimating

process internally might also lead to other ideas for accuracy and best practice.


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6. Costs, culture & ethics

For between 20 and 40 years, hourly fees and billable hour measures have been the basic

economic units of law rm protability. Assumed to be accepted by clients because they were

(and still are) seen to provide the potential for detailed information and transparency on any

legal fees charged, they also provide law rms with a simple, low-risk model to condently

calculate, manage and lock-in protability.

The majority of rms are keen to stick to the ‘hourly fee’ system of billing, even though many

of the disadvantages are well documented. It should of course be noted that many of the

criticisms of the hourly fee, time-costing or the billable hour system are actually targeting 3

different phenomenon which do not necessarily have to be

linked together

• Time recording – the internal process of recording time against matters

• Time costing – the basis by which you calculate your fees & bill.

• Individual, or team, billable hour targets – the internal targets for fee-earners to record or bill acertain number of chargeable hours each day/week/month/year.

It is possible to have time recording without the pressure of demanding individual billable hour

targets. It is also possible (and a good idea) to have time recording, and time recording targets

without this being the basis for charging clients. Finally, it is actually quite common for practices

to seemingly charge clients according to an hourly fee, but for this to be only loosely based on

the tally of recorded hours, with the partner deciding to increase or decrease the tally of hours

according to either an estimate of what the client is willing to pay, or the amount of hours any

given fee-earner ‘might have been expected’ to complete the work in, according to their

experience and expertise. This raises both ethical and protability issues which are also discussed

in the chapter on time recording.

These examples should illustrate, however, that it can be dangerous to use the terms ‘billable

hours’, ‘time costing’ and ‘time recording’ as interchangeable or one in the same. Althoughthey are often found together, many of the cultural or ethical concerns mentioned above can

be avoided by separating the phenomenon from each other and considering each on their

own merits.

In terms of understanding the drivers and motivations for some concerns, it is also important

to separate the practice from the individual. Time costing might prompt more concerns at a

practice level, whilst billable hour targets lead to more questionable individual behaviors.

Time recording

Time recording used simply as an information tool, and separate from billable hour targets, its

use in performance management, or its role in time costing, has relatively few adverse culturalor ethical effects. It is, however, still unpopular and can lead to low morale. Very few people

leaving private practice miss it.

Most cultural or ethical criticisms of time recording, however, arise when it is linked to time

costing or billable hour targets.


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Time costing & Billable hour targets

The main criticisms of time costing and billable hour targets are as follows:

• Time costing does not provide the client with predictability on cost, leading to client anxiety, a

lack of accountability, inefciency, and the potential for disputes

• Time costing and billable hour targets can encourage institutionalised inefciency in workingpractices. Practices or fee-earners who do the work quicker record fewer hours, generating

fewer fees, so some fee-earners will allow the work to expand to ll the time.-

• Time costing and billable hour targets can tempt practices and fee-earners to ‘pad’ or inate

timesheets and bills

• Time-costing and billable hour targets can lead to the undertaking of unnecessary additional

work (such as overzealous due diligence)

• Time costing and billable hour targets can lead, at both practice and individual levels, to a

reduction in important non-chargeable activities such as client service, communication, the

development of precedents or personal professional development

• Individual billable hour targets discourage team co-operation and support (billable hour

targets for a team can, with good management, encourage co-operation and support).• Demanding team billable hour targets, when made the responsibility of a partner, can

heighten the risk of bullying or unreasonable demands on individual team members

• Time costing and billable hour targets can create a long hours culture. Together with practice

cultures which demand or expect you to be available when the work demands it, this can

adversely affect individuals’ work-life balance and limit their ability to effectively manage their

commitments to home life or social engagements.

• Billable hour targets place an emphasis on quantity rather than quality, which can lead toboth lower quality work, and low morale when performance management appears to beexclusively based on billable hour statistics.

Together with other negative aspects of law practice culture, the cumulative effect of the

ethical and cultural strains described above can lead to an increased risk of claims andcomplaints, low morale and motivation, high staff turnover and stress

and depression.

Suggestions for avoiding some of the negative consequences, of billable hour targets include

the following:

• Effective supervision, delegation and workload management to ensure fee-earners have the

work they require to meet their billable hour targets, thus reducing the temptation to ‘pad’ or

work inefciently.

• Ensure all billable hour targets are reasonable, achievable and are agreed with fee-earners

rather than merely ‘imposed’.

• Develop different career pathways and salary levels, so that individuals who are not

comfortable with high billable hour targets can still contribute productively to the practice.

• Develop balanced performance management arrangements, of which billable hour targets

form only one part. Quality of work, business development, supervision, customer care & client

development are all important to the development of fee-earners, and emphasising these

as part of performance management will minimise the risk of the negative aspects of billable

hour targets.

• Develop policies and provide training for your fee-earners on time recording.

• Make the padding and ination of timesheets a disciplinary offence

• Supervise the practice of time recording to both eliminate unethical practices, and offer

support to fee-earners.

• Develop work-life balance arrangements to enable people to meet billable hour targets whilststill maintaining their home and social commitments.


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Time for a change to a xed fee or alternative system?

Some relatively recent developments, however, suggest that a number of rms might benet

from re-thinking their reliance on time-costing.

• Recruitment, retention & Generation Y morale

• General client demand & increased sophistication.• Movement of private practice associates to in-house positions

The rst driver is a renewed focus on associate recruitment and retention. Increasingly high

associate drop-out rates are having a dramatic effect on law rm planning and protability,

with rms calculating turnover costs at up to 2.5 or more times the cost of a salary (allowing for

loss of revenue, loss of some clients, and the time of developing a replacement etc.). In seeking

to improve levels of job satisfaction, rms are reviewing the ‘treadmill’ culture of high billable

hour targets, and increasingly accepting that Generation Y associates with lifestyle ambitions

are unlikely to stay in high pressure positions with slow professional development, minimal

opportunities for creativity, and limited control over their own contribution to the prots of a rm.

Firms are also acknowledging that the treadmill culture negatively affects protability by limiting

associate development, thus slowing the rate of increase of associate charge-out rates.

Increasingly disciplined legal procurement processes are also leading to a re-think amongst

many clients of the benets of the hourly fee compared to a xed fee, capped fee or other

arrangements. Much will depend on any clients’ experience of law rms’ ability to keep to

estimates, but with cost control increasingly important, many clients are increasingly favoring

the security that a xed fee will bring, even being willing to pay a premium in exchange for the

law rm accepting some risk.

Clients are also getting increasingly sophisticated in their management of their relationships

with law rms due to, among other reasons, the increasing number of former private practice

solicitors moving to in-house positions. Many of these will not only be critical of the inefciency

and low productivity of the billable hour culture, but also condent of their ability to extractadded value from a rm once a xed fee has

been agreed.

So, could your rm benet from re-thinking its approach to the hourly fee? It will depend on your

practice culture and the sophistication of your clients and the work you do for them. You might

have to get used to working in different ways, learn new skills or invest more in IT, knowledge

management, pricing and cost management, risk management and/or negotiation skills. For

some practices, a move to alternative billing systems will mean higher morale amongst your fee-

earners (leading to more effective recruitment and higher retention), clearer differentiation from

your competitors, and a better understanding of your clients’ views in relation to value and fees.


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7. Creative fees & billing options

Hourly rate billing has many advantages for rms: it is relatively easy and efcient; helps with

cash ow; allows a rm to know the value of its work in progress (WIP); is objective and, above

all, minimises nancial risk to the rm. But it does nothing to alleviate the risk to clients, nor does

it always represent value to them. Many clients are now seeking alternative methods of billing in

which the rm bears more of the risk.

This poses not just a threat, but also a practical problem because, even if a rm’s accountant,

practic

qls guide to cost billing and profitability

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