In considering a firm’s profitability, it’s important to keep in mind that billable time doesn’t necessarily equate to revenue for firms.
How do you measure productivity and predict profitability?
With time-based billing, the simplest way is billable hours. How many hours can (and should) timekeepers work in a period of time and how many of the worked hours are billable? If we assume only two weeks of vacation per year and a forty-hour workweek, the formula will look something like this:
40 hours per week * 50 weeks per year = 2000 hours
Billable Hours / 2000 = annual productivity
Setting Reasonable Expectations
In a law firm, billable hour goals are typically measured monthly or quarterly. In setting goals, it’s tempting to strictly adhere to the above formula. After all, this will result in the greatest revenue for your firm. This method, however, overlooks a lot of activities that should be considered when taking inventory of how time is spent. Productivity needs to be considered holistically and profitability forecasted accordingly.
Some necessary activities that fall outside of the billable hour, and can ultimately impact a firm’s profitability, include:
- Business Development – Whether you’re a solo practitioner or an associate at a large firm, everyone should be working to bring in more business. That time is valuable as it leads to future revenue for the firm. If you don’t allow for business development, you may be doing extremely well today, but failing to build a pipeline for future business. Even if you have large clients that account for most of your revenue, you need to be developing new business while maintaining relationships with your current clients. Members of your staff who don’t do any billable work, but bring in clients that generate large amounts of revenue (billable hours for other attorneys) can have great value.
- Continuing Legal Education (CLE) – Lawyers have continuing education requirements. If you don’t keep up with your requirements, you won’t be able to continue to practice. Is it reasonable to expect timekeepers to bill forty or more hours per week and do CLE as well? Consideration should be given to this time requirement.
- Administration – Even if your firm has administrative staff, there’s certain work that attorneys must do that cannot be billed. Attorneys should, for example, be checking the trust account against the bank statement since, ultimately, they are responsible. In fact, to reduce the risk of fraud, a senior member of the firm should be opening the bank statements and reviewing the checks. Attorneys generally need to review bills before they can be sent and may need to spend time on collection. All of this reduces time that can be billed.
- Pro Bono – While it may not be required, doing some amount of pro bono work can be good for the soul as well as for the firm’s reputation and culture. Deciding how much pro bono work to do and who should do it is your firm’s decision, but needs to be considered when reviewing billable time.
In considering a firm’s profitability, it’s important to keep in mind that billable time doesn’t necessarily equate to revenue for firms. Write-offs and collection delays can have a major impact on a firm’s bottom line (and the revenue attributed to any one timekeeper).
Billable vs. Billed Time
In assessing productivity, it’s important to note the difference between billable time and billed time. An associate may have spent three hours on a task that the partner feels should have only taken two. So the partner writes off an hour before the bill goes out the door. The associate had three hours of billable time but only two hours of billed time. There’s value in the time as a learning experience but there is a write-off. The firm should be measuring these write-offs when evaluating the firm members. It may indicate someone who needs more development or direction in order to grow, or it might indicate a different issue that requires investigation.
A legal practice management solution with robust timekeeping tools and reporting can be critically important in providing productivity insights and recognizing profits and losses.
Adjustments to Billed Time During the Collections Process
Once a bill goes to the client, there are two things that need to be measured: write-offs and collection time.
If a client complains about the amount of a bill and the bill is subsequently adjusted, that write-off reduces the amount of the bill as well as the value of the hours on the bill. Whether the write-off is specific to one person’s time or just a general amount, its value needs to be measured.
It’s understood that you need to collect money owed to the firm, but the faster the money is collected, the better. Work is appreciated most when it has been recently completed, so it’s important to get the bill out to the client quickly.
If collection is not done promptly, there are a number of costs. Delays, aside from making it more likely that you will “make a deal” and reduce the bill, cost valuable time. When you are trying to collect, you spend time and energy reaching out to the client. Whether by phone, email or snail mail, that time reduces the hours you could be spending more productively. And, as every finance person will tell you, a dollar collected today is worth more than a dollar collected several months from now. While interest rates may be low, there’s still value in knowing that the money is in the firm’s hands.
Measuring Productivity and Profitability
With all these different variables, measuring the productivity and profitability of any one timekeeper, let alone an entire team, can be complex. This is especially true if your firm has timekeepers who work on both time-based and flat-fee matters. A legal practice management solution with robust timekeeping tools and reporting can be critically important in providing productivity insights and recognizing profits and losses. If you are evaluating new solutions, make sure you take this into account when making your decision.
Written by CARET Legal partner, Caren Schwartz. Caren has been serving the technology needs of the legal industry for almost 30 years and leads the accounting services team at 3545 Consulting – Global. Caren’s key focus is back office services, analytics and best practices for law firms. Caren is the author of QuickBooks for Law Firms.