Today the overwhelming majority of law firms in the world uses time based billing to charge for their services. Clients have to pay for all the time that lawyers spend on a matter. As a consequence all law firms keep a time-sheet and each lawyer has to keep accurate track of the exact amount of time spent on each matter every day. Time is typically tracked in 6 minutes installments (0,1 hour).
The problem is that most lawyers are not very disciplined in tracking time. You might be surprised by the number of lawyers who are more than one day behind as it comes to entering time spent on a matter into the timekeeping system. Entering time with a 0,1 hour precision based on the memory of what you did the day(s) before is beyond human capability. As people tend to underestimate the time they spend on tasks, time and thus income is leaking away.
An installment of 6 minutes or 0,1 hour is incredibly small compared to the duration of a -working- day.
Let’s examine the financial consequences if every fee-earner would write 3 extra units of 0,1 hour each day:
230 workable days per year
3 x 0,1 hour per day (18 minutes)
Results in 69 hours per lawyer per year
By not keeping very precise and accurate track of time spend, on an annual basis 69 hour per lawyer could easily evaporate. The financial impact for the firm will obviously depend on the hourly rate and the number of lawyers:
52 lawyers and a blended rate of 275 will lead to 1 million in lost revenues
Please let this sink in for a moment. Even a relatively small law firm with a very modest blended rate could annually easily make 1 million extra. If we assume a leverage of 3,5 the firm will have 12 equity partners and the 1 million would lead to 84.000 extra profit per partner.
It is ever so easy to lose 3 units per day. Based on our experience keeping better track of the time that is actually spent and being more conscious of the value of every 6 minute installment will easily make the firm a million on an annual basis. Only because of more accurate charging for the same matters. Please note that this article is about accuracy and awareness, not about overcharging. There is never an excuse for charging for more time than time actually spend!
Improved accuracy will easily make you a million
Besides lack of accuracy there always is a second factor that is eroding potential revenue: 'modesty'. The present arrangement with clients is that the lawyer will charge for all time spent on the matter. The agreed hourly rate takes into account the level of experience and expertise each lawyer has. The more experienced, the higher the rate. This is fair because the more experienced lawyer will need less time to come to the same result. The lower rates for less experienced lawyers take into account that they will need more time to get to the same result.
The problem is that it happens quite frequently that lawyers feel guilty about the amount of time it has taken them to prepare a document or part of a matter, so they artificially lower the number of hours as they enter time into the system. This form of ‘private initiative’ should be strictly forbidden in any law firm. It is of utmost importance that the real time spend is accurately entered into the system. I would advise every firm to actively and regularly communicate this to each individual fee-earner.
Should there be a legitimate ground to write off some of the hours, this decision should only be taken at the end once the matter is completed. Only at this stage there is a complete overview of all time spend and does it become apparent if someone has spent unreasonable amounts of time on an aspect of the matter.
Being less 'modest' will easily make you an other million annually
Time based billing as such is a very poor way of measuring value to the client. I personally foresee that eventually the industry will move away from this and turn to value based billing. The theory behind this thinking is explained in my upcoming book: ‘Data & Dialogue, a relationship redefined’ [reserve your personal copy now]. I will also write about this topic in one of the next blogs.
As long as there is time based billing lawyers have entered into an agreement with their clients that the client will be charged for all time spent on the matter. Humans in general perform very poor as it comes to estimating the time they spend on tasks. Would you for example accurately know how much time you spend yesterday in total on fetching and drinking tea or coffee during the whole day (included at home)? Typically we tend to (vastly) underestimate the time spent. That is why we are always pressed for time: things take much longer than expected. Lawyers are no different. Time is lost by memory, modesty and inaccuracy. All fee-earners being more precise and aware will easily make your firm an extra million.