By the time I have money to burn, my fire will have burnt out. ~Author Unknown
There is much talk today about lawyers moving to alternative billing. We happen to be in favour of trying to bring the practice of law back to its roots in terms of delivering value to clients (ie results-based billing) rather than just time spent on the file (input-based billing). But does that mean that you as a lawyer can give up tracking your time? To those who say yes, we respectfully disagree. While you may not bill by the hour, tracking your time does one thing at least: it keeps you honest with regard to where you spent your time and whether or not you did apply yourself to the tasks at hand.
Let’s take a step backwards and go to a traditional accounting concept, that being the costs of goods (or, in our case, services) sold.
The first step in determining whether you were profitable on a sale of a service is being able to determine how much it cost you to deliver said service. To do that you need accurate costing mechanisms that can count both direct and allocated (or fixed) costs.
Direct costs are your time, plus any direct disbursements incurred in furtherance of the matter—court reporter fees, filing fees and the like. Allocated costs are the file’s share of the office overhead—staff salaries and benefits, rent, insurance, utilities and so forth.
Because the biggest direct cost is the time that you put into the matter, you cannot determine what it cost you to produce a given result unless you can track the time you put into it—billable, nonbillable, written off and so forth.
When it comes time to distribute funds among partners, not knowing the true costs of the matters handled compared to the income generated from them can lead to gross inequities. Most firms simply look at the gross revenue generated at the conclusion of a case, but this can be misleading.
Look at two files, each of which generated $100,000 in revenue (after disbursements):
- Matter A took three years and involved 400 hours of legal time (at $250/hr = $100,000) plus hundreds of hours of staff time.
- Matter B took six months and 100 hours of legal time (at $250/hr = $25,000) and the same amount of staff time.
Which case was more profitable? Not only was Matter B more profitable, you could argue that Matter A resulted in a net loss to the firm, since the total of legal and staff costs exceeded revenues.
If both matters were billed on an alternative-based fee, the firm would not have realized the difference in profitability without the essential time input data.
Don’t make the mistake of treating these matters equally! If you plan to move to value (or alternative billing) you need to know the costs to to the firm of different individual matters or the cost average of different types of matters to be able to correctly evaluate your value-billing program.
Tracking your time is an essential feedback mechanism that allows your firm to improve profitability over time. It allows you to ask: “Why did we spend so much time on X?” and “How do we become more efficient at handling these types of cases?”
Without that essential cost-of-time component, the firm is flying blind – and you may end up having your fires go out when you no longer have money to burn…