Note: This article was originally prepared for lawyers. It has been modified to address issues for all professionals who either bill their time or derive fees based on hours estimates.
Timekeeping is a critical part of good business practice for the healthy professional services firm. Significant revenue may be lost if good timekeeping measures are not in place. Good timekeeping also enables better management of the firm’s personnel, better financial analysis of the business, and better communication with the firm’s clients.
The following article discusses why good timekeeping is important for all professionals who issue bills or derive fees based on time, and suggests methods for even the most reluctant timekeeper.
Think of the professional services firm as a factory. What does the factory sell? Although possible answers include knowledge, intellect, designs, advice, justice, etc., the common answer, in most cases, is that the professional services firm sells time. And time, as we know, always seems to be in short supply. This article will provide guidance on how to make the most of it. Because diligent timekeeping maximizes time, the primary product of the professional services firm factory, and time truly does translate into money.
Whether or not the professional services firm bills by the hour, it is easy to assess how many "billable" hours are expected per annum from each professional, what the average hourly billing rate of each is and, with some simple multiplication, calculate the expected revenue from each. A profitable professional services firm must sell enough hours to cover the expenses of the business, salaries and owners’ draws. Many firms budget for and some require professionals to bill a minimum number of hours on an annual basis in order to meet their financial forecasts. However, for one reason or another, some firms find themselves in financial jeopardy.
If a firm is unprofitable, there are only three ways to cure the problem:
- Decrease expensesi;
- Increase effective rates; or
- Increase billable hours produced.
The direct correlation between hours billed and revenue cannot be ignored. The problem with hours is that they are finite. Every person has 24 per day. Most people limit their work time on a daily basis as well. Assume a professional chooses to devote ten hours a day to her business and 25% of all time in the office is administrative or otherwise non-billable. That person has maximum potential billable hours of 1,900 (10 hours per day x .75 billable time x 5 days x 48 weeks).ii
It is crucial that the professional capture all of that billable time.iii Consider a person who fails to capture one billable hour per day. Assuming that her billable rate is $200 per hour, the loss of one billable hour per day will cost the firm revenues of $200 per day, $1,000 per week and almost $50,000 per year. Good timekeeping habits are essential to good financial health for firms that live and die by the billable hour.
It is equally important for those who charge in a manner other than the billable hour to develop good timekeeping skills. As stated above, the income of the firm must cover expenses and owner compensation. Even if the firm does not charge by the hour, one can perform an analysis of the revenue needed by referring to the billable hour. In that case, timekeeping provides information and, consequently, better economic decision-making.
Total Firm Expenses: $200,000
Total Owner Compensation: $400,000
Total Revenue Required: $600,000
Each professional in the law firm of Will & Hope, LLP bills 1,500 hours per year, so the required Hourly Rate in order to cover expenses and compensation = $600,000/3,000 hours = $200/hour.
In Example A, Will’s entire practice consists of preparing wills. He charges $1,000 to prepare a will but since it is a flat fee billing arrangement, he does not keep track of how long it takes him to prepare each will. If Will begins to keep track of his time spent drafting wills and learns that, on average, it consumes six hours to prepare a will, he will have to decide whether he wants to spend less time preparing each will, increase his flat fee charge to $1,200 ($200 x 6 hours), or ask Hope to work harder in order to support the losses he is creating.
Will’s partner, Hope, has a problem, too. Hope works on contingency matters. She has experienced some great victories, some okay settlements and some complete losses. She does not keep track of her time because itis obvious to her that as long as she brings in $300,000 per year, she has covered her half of the firm’s revenue needs. However, Hope is missing an opportunity to strengthen her practice. If she tracked her time, Hope would see that she spends many hours on slip and fall cases that result in relatively little revenue to the firm on a per hour basis. On the other hand, her medical malpractice work is extremely lucrative. Timekeeping would give Hope the knowledge that she should pursue the more lucrative medical malpractice work.
In conclusion, good timekeeping is critical for firms that bill by the hour as it maximizes revenue. For practices that do not actually bill by the hour, timekeeping provides an ability to perform a numeric analysis, assess the firm’s profitability and also maximize revenues. Timekeeping can also be used to measure the profitability of specific matter types, clients or the like.
Good timekeeping is like exercise. It hurts to get into the habit but, once you do, the benefits are obvious. Detailed time records inure to the benefit of the client and the firm in other ways.
First, certain firms provide detailed bills to their clients. The bill should be treated as seriously as any piece of work product. It is an excellent communication tool and an opportunity to let the client know what the professional has been doing for him or her. Although a novel is not required, a time entry should be detailed enough to justify the time spent on the tasks described. Moreover, the descriptions should contain action verbs rather than blunt descriptions of tasks. The bill must show that the professional is working for the client (and for the money).
If there is more than one professional billing on a project or matter, there are bound to be certain inconsistencies in timekeeping. For example, use of present or past tense, references to names of firm personnel or outsiders and use of abbreviations may vary. The firm may wish to prepare a simple memo regarding billing guidelines and style. Also, the professional reviewing the bill must confirm that the “story” makes sense; i.e., two people who attend the same meeting should agree on the date of and time spent at the meeting, the associate should edit the memo after the partner reviews the memo, etc.
A detailed time record also serves the professional well in the case of fee disputes. When a fee dispute arises, time records are often the first document requested by the former client’s counsel. Similarly, when time records must be submitted to a court or other dispute resolution body, complete and comprehensive records will be more impressive.
For purposes of employee management and evaluation, detailed time records enable supervisors to evaluate the work of junior employees. Remind junior employees not to cut their own time; this is the job of the supervisor or project manager. Finally, accurate timekeeping records provide a sound basis when a professional is asked to prepare a budget or estimate fees on a new matter.
The instructions on how to keep good time records are short and simple – whatever works.
Billing software programs proliferate and with good reason. Software programs provide professional looking invoices, speed up the process of generating bills (as distinct from time entry) and provide detailed accounts receivable reports.
The most efficient method of keeping time, in the sense that it involves the least number of steps, is for the professional to input time entries directly into the billing software program. Many software programs have a timer within the time entry window that the professional can turn on and off as he works on that specific matter. However,this efficiency is lost if the professional is a poor typist, finds accessing the program to be an interruption or is billing significant time when not able to access the program physically (think about whether your firm can offer phone apps to help with this issue).
A thought about contemporaneous timekeeping would be relevant here. In addition to efficiency of the time entry function, it is critical for the professional to keep track of time on a contemporaneous basis. Obviously, the memory is most fresh at the time the task is performed. It is in the nature of many professional practices to thrive on interruptions--the 10-minute phone call and the details of it are easily forgotten. In fact, studies have shown that if one records time on the day after the work was performed, up to fifteen percent may be lost; professionals can fail to recall up to forty percent of their billable time if they wait until the end of the month to record it.
Professionals who need to get into the habit of contemporaneous timekeeping should aspire to log all billable and non-billable time until they are used to accounting for the entire day. Personal time should be noted as such. If you are trying this exercise with junior employees, it should be made clear that there will be no negative implications arising our of their honesty with respect to logging personal time, so long as hour requirements are met. You should also commit that any personal information posted will be kept confidential. (When I have asked clients, without additional instruction, to keep track of personal time in their billing programs, you would be surprised at the wide range and detailed information I get about beauty treatments available out there.) Moreover, by capturing and recording non-billable time, some professionals are able to make an informed decision to limit it, thereby increasing individual productivity.
If the professional is not comfortable using technology, either the computer or a PDA, to record time (and there are still a few out there), then he must seek out a low-tech method with which he is comfortable such as a diary, spiral-bound notebook, or timesheet which can be purchased or created. The point here is to have the professional find the method for time entry with which he is most comfortable and stick to it. Similarly, the professional should have convenient access to a clock or a watch at all times. Jay Foonberg in his seminal treatise, How to Start and Build a Law Practice,iv suggests that the attorney keep a clock in his office right next to a picture of his family.
Generally, it is better to use one method to keep track of time rather than several methods. Otherwise, billable time may be lost if all sources are not checked when it is time to integrate the time entries into the billing program, and time entry in general will be less efficient. There is one important exception. If a professional's practice involves frequent brief phone calls, the professional may wish to keep a note pad next to the phone. At the least, the professional should mark down on the pad the name of the caller and the beginning and ending times of the call. This creates a record of all telephone calls, and also an accurate time log. Studies have shown that we tend to underestimate the length of telephone calls in particular.
Bills must be issued in a timely manner. Bills which are received a month or more after services are performed (not unusual) convey to the client that the professional is not all that anxious to get paid. In addition, the client tends to forget quickly all of the great things the professional has done on his behalf.
The primary delay on the billing preparation process at the beginning of each month is the preparation and review of time entries. Not only does the firm lose money because the professional fails to capture all of her time, but the collection process is lengthened as well.
Sometimes professionals need some additional inspiration to submit and review their time entries in a timely manner. Given the economic impacts suffered by the firm due to tardy timekeepers, a small economic incentive may be well worth it. For instance, in my former law firm, each attorney started out the year with a timekeeping bonus of $1,000. If complete time entries were not submitted for the prior week by 5:00 p.m. on Monday, the bonus pot was docked $100. If the attorney was late more than 10 times, we began to deduct the $100 penalty from the regular year-end bonus. This was a very effective tool for our firm, particularly once we let our attorneys spouses’ know of the arrangement. Other inspirational methods I have heard of include making the tardy professional have to collect his paycheck in person from the managing partner, withholding partner draws and eliminating direct deposit benefits for the habitually tardy timekeeper.
There is an old joke that a lawyer appeared at heaven’s gate and St. Peter said to him, “You look great for someone 114 years old.” The lawyer replied “but I’m only 80,” to which St. Peter responded “That’s not what your timesheets say.” Here’s hoping we all die at the right age.
Most firms attempt to cut expenses first. Often this exercise involves a great deal of effort with minimal results or the wrong expenses (e.g., the marketing budget) are cut.↩
Taking into account holiday and vacation time.↩
The professional may elect not to bill all of the time worked but that is another topic.↩
Jay G. Foonberg, How to Start and Build a Law Practice (5th ed., American Bar Association, 2004).↩
I know, I know...you are operating a design firm to make the world a more beautiful/structurally sound/energy efficient/livable place.
The ancient Roman historian and politician Sallust said “Every man is the architect of his own fortune.” Many readers of this article have the architect part down; it is the fortune that is difficult to grasp.