Hours: BILLABLE UNDER-REPORTED AND KILLING YOUR FIRM S BOTTOM LINE

Transcription

1 BY BRUCE MACEWEN AND JANET STANTON OF ADAM SMITH, ESQ. Hours: BILLABLE UNDER-REPORTED AND KILLING YOUR FIRM S BOTTOM LINE A recent study shows that lawyers frequently under report their billable hours, leaving potentially millions of dollars behind. Updating timekeeping methods can help to alleviate the situation and collect lost revenue. 34 LEGAL MANAGEMENT SEPTEMBER/OCTOBER 2010

2 Legal administrators must concern themselves with the health of their law firms on many levels, but especially from a financial standpoint. A profitable firm is a happy firm. On the other hand, firms that struggle financially suffer on many levels and lose their ability to compete and keep good talent. In today s economy, everyone is trying to squeeze every drop out of every hour and every dollar. The profitability of a law firm directly results from the number of hours the attorneys book, bill and collect. Even with alternative fee arrangements, or AFAs, hours are still important since they are still needed to determine the profitability of a matter and for firms that exist on strictly hourly billing model the hour is the ultimate metric. SEPTEMBER/OCTOBER

3 As a result of this, law firms have gone to great lengths to help attorneys maximize their timekeepers ability to book more hours. Technology has been the cornerstone of this change with smart phones, laptops, and 24/7 access to the firm s systems. However, very little attention has been made toward making timekeepers better at what they do. We made some rather sobering discoveries through our recent survey about lawyer timekeeping behavior and wanted to share this information with ALA s members since what we discovered can have direct effect on your firm s profitability and its overall welfare. THE TIMEKEEPING SURVEY In May 2010, Adam Smith and Smart WebParts, a time-capture software company, conducted an online survey available on the topic of timekeeping practices. The survey was also publicized through other online venues, and ran for three weeks from mid-may through early June. Of the respondents, 86 were partners, 72 were associates and 51 were senior staff at firms with titles such as CFO, CIO, Executive Director, Head of IT, Head of KM, and many directorlevel positions. The results were not only fascinating, but also quite astonishing in terms of the amount of time leakage that participants admitted to, as well as the sheer overhead and burden that was reportedly involved in tracking time. Apparently, law firms across the board fall down in the area of actually booking all the time their lawyers actually work. Imagine: Attorneys work so many hours and then don t ever bill for some of them, for various reasons. Day after day, week after week, this leakage accumulates and before you know it your firm has left thousands of dollars on the table thousands per timekeeper, that is! According to Todd Gerstein, CEO of Smart WebParts, There are ample economic reasons for firms to re-examine their timekeeping processes. Fixing timekeeping can provide a huge influx of revenue that flows directly to the firm s bottom line. Easing your timekeepers pain by improving the process is priceless. TIME LEAKAGE AT LAW FIRMS DRAINS REVENUE According to the survey, the average leakage, that is, lawyers and other timekeepers failing to report all billable time, ranges from $20,000 to nearly $40,000 annually, per individual. In other words, a law firm with 100 attorneys is leaving between $2-4 million on the table every year. Even if your firm is performing considerably better than our survey s respondents, it is highly likely that you are still leaving a vast amount of time un-booked, unbilled and uncollected. In addition, the process of timekeeping is burdensome and time consuming for attorneys. Not surprisingly, many lawyers hate timekeeping the bane of my existence and the worst part of law firm life were some of the comments from our respondent universe. This administrative task is a huge morale-killer and breaks lawyers concentration during their workdays. In terms of money, the survey showed that the overhead costs of tracking time are quite considerable, with a mean 3.1 hours/month per individual devoted to filling out timesheets. The average billing rate of respondents was $438/ hour. Multiplied out, this shows an imputed cost of $16,294 per person per year spent doing time/ billing entry. So a law firm of 100 attorneys is spending $1,629,400 worth of its collective billable time every year keeping track of its time a rather painful figure. Clearly, significant efficiencies could be gained if streamlined time entry systems were available. Given this premise, and lawyers recognition of the need for accurate timekeeping, they would be eager to explore alternatives that invite greater accuracy and, most importantly, would be easier to use. Gerstein notes, Over the years, there have been many attempts made to solve the timekeeping problem. I m convinced time capture is the answer. DEBUNKING THE AFA MISCONCEPTION Even if you think AFAs are the wave of the future, the need for accurate timekeeping doesn t disappear. Indeed, with AFA arrangements, it becomes all the more crucial to track hours in order to measure the profitability of the matter 36 LEGAL MANAGEMENT SEPTEMBER/OCTOBER 2010

4 We made some rather sobering discoveries through our recent survey about lawyer timekeeping behavior and wanted to share this information with ALA s members since what we discovered can have direct effect on your firm s profitability and its overall welfare. and to have an hour worked benchmark for the next bid. So, accurate and real time hours tracking becomes incredibly important. To explain, the billable hour is at its root a cost-plus system, meaning that any amount billed and collected embeds a built-in profit. In contrast, AFAs carry no such guarantee. The firm makes the same money whether a lawyer spends one or 20 hours on a matter, but since the firm is paying the lawyer the same either way, their profit margin hangs in the balance. Knowing the firm s costs, in as close to real-time as possible, is even more important under the AFA model than it is with a traditional unlimited hourly billing model. ACCURACY OF TIME TRACKING BEGETS CLIENT TRUST A chronic source of mistrust and suspicion between clients and law firms is skepticism that can be openly expressed by clients and tacitly acknowledged by lawyers, about the accuracy of timekeeping. Clients worry that their attorneys are over billing them so lawyers need to be vigilant about backing up their billing numbers with real substance and paper trails. Any tool that serves to convincingly increase the accuracy of this very fundamental metric could only be welcome as a step toward closing that gap and reducing challenges to firms bills based on posited inaccuracy. Nearly half, 47 percent, of all respondents reported that their timesheets are accurate over time it all evens out. Eighteen percent reported that their timesheets are somewhat accurate I guess a little [inaccurate]. Two percent reported that their timesheets are not very accurate - I guess a lot [inaccurate]. Thirty three percent reported their time sheets are 100 percent accurate by day. One has to wonder whether the reported degree of accuracy might be greater than reality. TIMEKEEPING BEHAVIOR VARIES GREATLY AMONG LAWYERS Several different approaches to timekeeping surfaced in the survey. Time entry methods tend to vary by individual, though a firm attempts to enforce certain rules and procedures. Among all survey respondents, 60 percent reported reconstructive timekeeping practice. That is, they entered their time at the end of the day or days later by looking at s, phone logs and appointments. Thirty eight percent reported that they entered their time contemporaneously as they complete activities. Less than 2 percent reported that they worked with their assistant to prepare time records. A majority, 54 percent, of the survey respondents reported preparing their timesheets daily. A third, 34 percent, of respondents reported preparing timesheets twice a week or weekly, the remaining 21 percent reported doing so twice a month or monthly. When looking at the subset of all partners who answered the survey, responses were similar to the total respondent base. Partners with hourly billing rates in excess of $501 evinced less prompt preparation of timesheets: 45 percent doing so daily, 40 percent twice a week or weekly and 12 percent twice a month or monthly. One-third of respondents reported that their firms request timesheets daily, 44 percent do so twice a week or weekly, and 22 percent expect timesheets monthly or twice a month. The mean time to prepare timesheets each month among all respondents was 3.1 hours, though this ranged from 0-2 hours, 40 percent; 3-6 hours, 39 percent; and 5 or more hours, 37 percent. These percentages largely held for all SEPTEMBER/OCTOBER

5 partner responders. For those partners with billing rates in excess of $501 per hour, there were variations from the total respondent base and total partners: 25 percent took 0-2 hours; 50 percent took 3-5 hours; and 25 percent took 5+ hours to complete a timesheet. TIME LEAKS ARE INEVITABLE When asked how much time they leaked, time they did not actually report, in a week the mean response for all respondents was 85 minutes, or 1.4 hours. Total responses ranged from 0 hours to 5 or more hours. Six percent reported that they were unsure. Projected annually, this could total leaked hours, depending on the number of days worked in a year. It s more likely than not that leakage is underreported, since no lawyer wants to admit to under-booking. With a reported mean hourly rate of $438 among all respondents, annual leakage could conservatively cost a firm $21,900 to $30,660 per individual. Results from both the all partners subset and the subset of partners with billing rates in excess of $500 were generally similar to all respondents. For this latter group, annual leakage could conservatively total $25,000 to $35,000 per individual. TECHNOLOGY SOLUTIONS TO PREVENTING TIME LEAKS Our survey yielded some surprising results that exposed many inefficiencies and challenges in law firm timekeeping. The good news is that if these time leaks are prevented or even mitigated, the firm stands to recoup significant revenue without any additional work on the part of their lawyers. Since lawyers are often resistant to change, legal administrators may need to usher in change slowly and incrementally. Open up a conversation with your timekeepers. For too long everybody said nothing could be done about the problem and consequentially nobody wanted to talk about it. As Todd Gerstein of Smart WebParts mentioned earlier, a number of time capture software products have recently entered the legal software market and they remove a significant portion of the timekeeping burden from the lawyers shoulders. These tools gather a person s activities and return a daily journal of the attorney s activities to assist them when they prepare their timesheets. HOW DOES YOUR FIRM STACK UP ON TIMEKEEPING? If you haven t done such a study at your firm or haven t done it recently, we suspect it could be equally eye-opening to get a rough estimate of the combined costs of leakage and imputed overhead absorbed by timekeeping, across all timekeepers in your organization. Remember that representative samples are fine; you don t need an exhaustive canvassing when you re just trying to come up with an order-of-magnitude number. If these expenses are sizable, and we would be surprised if they re not, you might want to see what measures you could take to cut them down. It may seem mundane but the revenue from additional time booked goes straight to improving the bottom-line. And the best part is that nobody has to work harder to get there. 38 LEGAL MANAGEMENT SEPTEMBER/OCTOBER 2010