Costs, billing & profitability

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1 Guide to Costs, billing & profitability Practice support

2 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 & Profitability 28 9 Cashflow and Working Capital Summary 36 Appendix 1 Appendix 2 Appendix 3 Ethics and Creativity in Billing Practices: Costs in a disciplinary context: Charging excessive costs in connection with the practice of law 39 Costs management checklist 46 Further Reading 47 Costs, billing & profitability a best practice guide page II

3 Forward This guide was produced by the Legal and Policy department at QLS to assist legal practitioners in relation to the client care and practice management aspects of costs and billing. It is intended to give general guidance only it is not intended to be comprehensive or constitute legal advice. The Society accepts no responsibility for the accuracy of any of the information or opinions contained in this guide, or for any loss flowing 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 Watson QLS Legal Practice Consultant Tel: 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 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, Costs, billing & profitability a best practice guide page III

4 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 client dissatisfaction 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 office 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 confidence to the client. Tell your client that the first 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. Confirm your instructions in writing, as your costs agreement may not be sent as quickly as your first 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 financial 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 A happy client is a client who will come back and a client who will give you referrals and isn t that alone sufficient reason to have a best practice approach? Ian Berry President March 2009 Costs, billing & profitability a best practice guide page 1

5 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, , 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 bigger layer of informal client dissatisfaction about costs evident in complaints directly to firms, client satisfaction surveys and general public concern. There are different causes of dissatisfaction: Alleged overcharging Bill significantly 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 firm can effectively implement a best practice approach to costs. Information about the main causes of costs dissatisfaction across the profession is of only qualified value to individual practices: the most valuable information is that which is specific 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 in relation to costs, and thus reaping the benefits in terms of reputation, referrals, profitability and working capital management, they must listen to their clients needs and comments, and change their work practices accordingly. Costs, billing & profitability a best practice guide page 2

6 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 solicitors proactively raise the issue of costs. Apart from anything else, it demonstrates that the solicitor recognises the importance of costs for the client. Good communication involves listening as much as telling, and as with client service generally, understanding your clients needs and preferences applies equally to the pricing of services. Wherever possible, try to discuss their preferences on billing arrangements and the structuring of fees, so you are then able to come up with an offer or a solution that is attractive to them. Communication also includes being upfront and transparent with your clients about what you will and won t charge for. Clients appreciate it when practices provide some information 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 a lack of client control could lead to disappointment include: where a law practice does (and charges for) some basic work that could have been done (cheaper) by the client, undertakes work which is unnecessary, provides expensive detailed advice documents where cheaper brief updates are all that is required; or where work which could have been done by cheaper junior staff is instead done by more expensive senior staff Flexibility Wherever possible, be prepared to offer a number of alternative arrangements in relation to fees & billing, so that the client is able to identify which best suits them. See chapter 7 on creative fees and billing options. Extras Clients hate to see hidden or unexpected extras, overheads or disbursements appearing on a bill. State clearly at the outset what expenses and disbursements will be included in the final bill, the likely extent of these, and try to limit these as much as possible. If you are going to charge the client for travel, photocopying and refreshments, these amounts should be reasonable and made clear at the outset. Certainty One of the main concerns that clients have in working with lawyers is uncertainty over the cost, 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 fixed fees or fee caps. 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 feeearners involved. Some firms even offer the chance for clients to inspect their time recording and/or billing systems. For genuine transparency, practices should also ensure that their narratives or task categorisation provide sufficient information to assess value. Value It is rarely a good idea to compete purely on price, it is much better to compete on value. This can often be done by demonstrating superior expertise/experience/efficiency, and explaining that although an hourly rate might be higher than a competitors, the additional experience/expertise/efficiency will lead to either a more desirable, valueadded 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 of their quoted prices: Complimentary access to online knowledge management resources; Client extranet A copy of relevant research or other high-value publication; Training; A desk/office for the client with the legal team within the law firms office; and The secondment of a solicitor to the client for the time of the case. Costs, billing & profitability a best practice guide page 3

7 Risk sharing Recent years have seen the rapid growth of no-win no-fee offers from legal firms, primarily in the sphere of claimant personal injury. Many other clients, however, including commercial clients, would appreciate their legal advisers offering to risk a proportion of their standard fee/price in the form of a success bonus. Please note s325 of the Legal Profession Act 2007, re contingency fees. Efficiency Where time costs money, clients are especially keen to see practices working efficiently, and implementing arrangements to ensure that tasks are completed as quickly as possible and without expensive time wastage. Regular cost updates Once fees have been quoted, it is vital to keep the client informed about the progress of costs against the estimates, and to issue interim bills and interim estimates whenever possible, including a detailed explanation of the additional costs. It is much better to do this than to wait until the end of the matter and shock the client with a bill of well more than 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 firms. Many firms 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 to increase long-term client retention. Gearing & seniority Clients have traditionally appreciated the experience and reassurance that the involvement 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 and reassurance. To avoid dissatisfaction, aim to discuss the likely mix of higher and lower rates with your clients. Initial client interview Client anxiety about costs often starts even before a first 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 confirmation that either The first 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 first 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 good start, managing expectations, identifying risks, defining the retainer etc. In terms of costs, the first interview should also, wherever possible, include the following: An open discussion about the clients expectations in relation to costs Where possible, a qualified 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 sufficient information to provide a confident estimate of the likely overall cost of the matter. Costs, billing & profitability a best practice guide page 4

8 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 sufficient skills or knowledge to negotiate confidently 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 first 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 dissatisfied 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 reflect 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 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 firm s service and performance in relation to costs a source of competitive advantage. This can be achieved by: Managing the clients costs expectations; Confirm 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 than focussing 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 advised and 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 satisfied with the stated costs arrangements. This will help the early identification of any concerns or misunderstandings in relation to costs and thus provide the chance for any problems to be addressed. Costs, billing & profitability a best practice guide page 5

9 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 file Train your staff on the importance of updates and create a culture of pro-activity in relation to cost & estimate updates Use you diary or reminder system to enter key dates for cost & estimate updates at relevant stages 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 file, so you can consider whether an estimate update is required Program or design your accounts or time-recording systems to alert you when your recorded work-in-progress meets 70% of the initial or latest estimate, so you can consider whether a revised estimate is required Develop checklists for different matter types that include requirements to compare workin-progress to an initial estimate at appropriate stages of the matter, so you can consider whether a revised estimate is required The final 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 final (provisional) costs tally, explain any recent or unexpected costs and seek feedback. Cost updates & value If you send a cost update, revised estimate or final bill which provides only dollar figures 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 benefits 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 simple task 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 final bill comes in at $32,500. The additional cost is justified 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 satisfied client, but this is the situation that many solicitors clients find themselves in. Compare this to the situation below. Costs, billing & profitability a best practice guide page 6

10 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 final 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 specifically 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 defined as The importance or worth of something for someone. To speak about the value of legal services to clients, you have to first 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 difficult for two reasons: Clients often find it difficult 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 difficulties 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 identified above, you also have to ensure that this perceived value meets or exceeds the monetary value of your bill. Costs, billing & profitability a best practice guide page 7

11 The issues that most affect perceptions of value for money are as follows: Managing the matter to your client s satisfaction Managing financial arrangements and billing Perceptions of your technical ability Perceptions of practice efficiency The commerciality of your advice (if appropriate). Of these, the first 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 financial arrangements and billing. Communicating value To reap the benefits that enhanced client service can bring, practices not only have to invest in 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. What you think you should charge Perceived value gap Service & Communication Your current fee What your client considers to be the value received As mentioned above, the majority of clients do not understand either the complexities or economics of legal work, so it is understandably difficult 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 benefits them. Costs, billing & profitability a best practice guide page 8

12 Efficiency As mentioned earlier, any real or imagined inefficiency on the part of the law practice can destroy value, lead to significant client dissatisfaction, and suspicions of overcharging. Typical occurrences that lead to inefficiencies 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 extra time 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 inefficiencies Document crashes, difficulties in accessing information leading to additional time costs Support staff efficiency Secretarial errors (wipes tape / loses document) leading to additional time costs Double handling Transition between fee-earners illness / holiday Poor file management Lost files, misfiled documents Poor risk management arrangements Small or large errors that lead to additional time costs Such inefficiencies raise ethical, client service and profitability issues. The charging of time for learning on the job, or to correct avoidable errors would probably be considered unethical. Other inefficiencies might not be considered unethical, but they would effect client satisfaction, and ultimately practice profitability. Whilst some efficiency gains in areas such as IT and knowledge management require significant financial investment, much inefficiency can be eliminated by simply amending existing processes and arrangements, and training staff appropriately. Addressing such unnecessary inefficiencies carries only limited one-off time costs, and can result in significant improvements re clients perceptions of value. For some practices, the reluctance to invest in quick win efficiency gains comes from the belief that efficiency gains will reduce the number of hours recorded and thus reduce profitability. This is a limiting short-term approach which can have dramatic negative consequences for any practice in the long term. Without consistent and regular efficiency gains, practices not only risk rising client dissatisfaction, they will also cease to be competitive in an increasingly competitive and informed market. Costs, billing & profitability a best practice guide page 9

13 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 profitable 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 fixed fee is charged, residential conveyancing for example, but it is essential to monitor the profitability 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 record time 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 firms, 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 financial management and a thorough understanding of their cost base. For the majority of firms 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 (especially when they charge on a fixed 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 profitability. Increasingly, commercial clients ask for copies of time-recording schedules along with bills, whilst many firms 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 Costs, billing & profitability a best practice guide page 10

14 Time recording & productivity Productivity can mean different things to a law firm than to many other industries. A classical definition for productivity might be the amount of output per unit of input, with input commonly measured in man-hours. For a firm doing low-value commoditised work, and charging fixed 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 who completes 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 office time as chargeable (e.g. percentage of working/ office 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 first approach at the expense of the latter. Through a mixture of training, guidance, analysis, support and supervision, it is possible to make significant 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, hours get lost not because work isn t being done, but because of uncertainty over how to record it or whether it should be chargeable. At the same time, clear policies and guidance are necessary to avoid ethical indiscretions. Reliable recording & informative data Practices need data to help them understand where the time goes. This requires both consistently good time recording practice, and support from an IT system that genuinely supports the time recording process, rather than becoming a time burden itself. Analysis With good data, practices can successfully analyse where the time goes, and consider whether work or time recording practices need to be improved. With data on time in office, 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 work priorities. Practices should make time recording a performance management issue in itself, separate from productivity and quality of work. Costs, billing & profitability a best practice guide page 11

15 Policies, training & guidance Efficient, 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 first 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 profitability 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 fixed fees or do not understand why nonchargeable 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 efficiently; Monitoring time recording and questioning any time entries that seem excessive; and Effective delegation & workload management to limit any temptation to pad timesheets and enable fee-earners to meet any billable hour targets or expectations. Whatever questionable benefits padding might have for the individual (in terms of reaching billable hour targets), time padding rarely benefits 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 reflected 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. Costs, billing & profitability a best practice guide page 12

16 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 inflated time sheets, and the risk of recording inefficiencies 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 to the 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 justification for consistently rounding up is that some time is inevitably lost on activities that are not, in isolation, recorded as chargeable. The practice of rounding up is seen as a legitimate 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, for instance, for a practitioner to record 20 units (2 hrs) for sending out 20 standard letters, a task that can be completed in 15 mins, or to record 10 units for checking 10 s in 5 minutes. Practices should regularly review their time recording guidance and policies in respect of the use of units and the practice of rounding. If a practice finds that it is gaining significantly more on the swings than it is losing on the roundabouts, arrangements might have to be revised. Research It is normally seen as legitimate to charge for exceptional research provided that the research is both necessary and specific to the single client matter at hand, and is clearly disclosed to the client. Background research or research which is not necessary for any specific matter should be recorded as non-chargeable. A grey area in relation to the time recording of research activities occurs where there is uncertainty whether a practitioner should already be knowledgeable in the areas they are researching. A junior practitioner should not be expected to have the knowledge or expertise of a senior practitioner and might therefore legitimately expect to check or clarify some facts accordingly either through research or discussion with colleagues. As a junior practitioner will charge less than the senior practitioner, this should not raise any ethical concerns. 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-earner who ultimately does the work, it is clearly unethical to charge the client for learning on the job. Practices should review their client engagement and delegation practices, and systematically 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, but not working, provided such waiting is either a result of the client s requests, or is a necessary consequence of your work for the client. Practices should, however, ensure that the client is aware that waiting time can be chargeable. Where waiting time is used productively on other work, time should only be recorded as chargeable for the work actually done. Under no circumstances should the same time be recorded twice (for waiting and for other work). In the modern age of laptops, wireless broadband and mobile phones, the recording of waiting time as chargeable is becoming increasingly unpopular amongst clients who expect 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 clients expectations 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 waiting time, with the key principle being that such time should either be recorded as travel, where legitimate, or under other files, but never both. As with waiting time, solicitors should consider their clients expectations, and wherever possible discuss the cost implications of travel with the clients. Working outside the office It has always been common to treat time spent on work outside of the office (at home, during travel, at meetings etc.) the same way as it would be treated were the work is completed within the office. Accountability for work outside the office has been increased significantly through the increased use of lap-tops, wireless broadband and remote access technologies. Costs, billing & profitability a best practice guide page 13

17 Supervision Professional supervision time relating to client work on a particular file is commonly recorded against the relevant matter files by both supervisor and supervisee. Supervision time which is not matter or client specific should be recorded as non-chargeable. Discussions between feeearners The treatment of discussions between fee-earners should depend to a large extent on the nature of the discussion. If the discussion focuses on the specifics of a client matter, and subsequently results in progress, it would be legitimate for both fee-earners to record the time as chargeable. If, however, the discussion is not specific to any particular matter, is background, or does not contribute to progress on any matter, it would normally be recorded as nonchargeable. File administration Professional file administration, including file audits and other activities that mitigate file risk or otherwise benefit the client is commonly recorded as chargeable, provided the activity is specific to a particular file. Pure administration (filing, photocopying etc) and management activities that are not specific to individual files would normally be recorded as non-chargeable. Entertainment Entertainment would normally be recorded as non-chargeable. Even where client matters are discussed in a professional capacity during an entertainment event, fee-earners should consider their clients expectations before recording any time as chargeable. Charging for time during an entertainment function risks negating any goodwill generated by the entertainment. 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 specific 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 files 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 find out. Costs, billing & profitability a best practice guide page 14

18 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 time recording 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 sufficiently informative for clients and supervisors, but concise enough so that the drafting of such narratives does not become a time stealer. Practices might consider providing guidance or training to fee-earners to assist in this. The key is to record all time as if the client was the next person to look at the entries. Wherever possible, 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 efficient & 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 client pays 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 inefficient 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. Costs, billing & profitability a best practice guide page 15

19 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 latter may have been fully occupied all day. Targets for time vary across firms, 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 of billable 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 & efficiency 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 inefficiency 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 difficult to do, especially in high-volume work where a fee-earners has a large number of files. Software can of course help, and it pays to get the choice of software right perhaps by involving staff in the decisionmaking 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 find 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. Costs, billing & profitability a best practice guide page 16

20 4. Costing time Neither law practices nor individual fee-earners calculate hourly rates on a regular basis: mostly they are fixed 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 difficult to make well-informed decisions about fees and profitability. 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 figure of course provides only a provisional cost figure. To arrive at an hourly fee this has to be increased to allow for both the profit margin and the practice s recovery rate. The achievable profit margin is of course dependant on your ambitions and competitive situation, but as a rule of thumb, practices should be aiming for a profit 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 reflected in the calculation for the hourly fee. The calculation for the hourly rate might therefore look something like this: Employment costs + overhead allocation $120,000 + $50,000 Number of hours work 1200 hrs x Profit margin x recovery margin = Hourly rate x 1.3 x1.2 = $230 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 profitability, the more costs that can be allocated to individuals or a department, rather than the firm 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 firm 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 benefit. A discussion on whether the family law department should pay a slightly smaller share of PI insurance than the property Costs, billing & profitability a best practice guide page 17

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