The Lawyer's Office

For most people, “good time” means doing something that is fun and relaxing. To this law firm manager, “good time” means any hour we can bill that becomes cash in the bank - and the sooner the better.

Most of the material in the ISBA Solo and Small Firm Conference program, “Show me the Money: How Finance and Accounting Systems Can Increase your Income,” is a look at the process of converting an attorney's available time into billable hours, and subsequently into cash, in the most efficient way.

The program is designed to cover the systems to maximize one's available capacity, to create an awareness of the flow of the conversion to cash process, and to review the need for good feedback methods to measure how well the system really works.

Systems are more than just computerized time-and-billing programs. They include the policies, procedures and methods to efficiently convert billable time into cash.

Not every lawyer bills on an hourly basis, but the hourly rate still is the best way to measure profitability and efficiency. Track and record your time as if you were billing by the hour.

By doing this, and using some of the tools I recommend for those who do bill hourly, you can determine your effective hourly rate, evaluate the profitability of each matter, and perhaps even introduce some efficiency in the cash flow process.

As your profitability changes, or your effective hourly rate expectation fluctuates, you have the option to make pricing adjustments to your fees, particularly those using flat rates.

This will allow you to price your rates competitively and effectively to provide both service to your clients and reasonable income to yourself. For those who bill on contingency, it's the best way to evaluate profitability.

All service-based professions are challenged with the task of measuring profitability effectively. It's no wonder the hourly rate remains as popular as ever.

The “ABA Commission on Billable Hours Report” in 2002 reached the following conclusion on the state of the profession at that time:

“The reality is that hourly billing survives, indeed reigns supreme. It's prominence has withstood much criticism and waves of management initiatives, such as bill auditing, task-based billing, Legal Electronic Data Exchange Standard, Activity Based Costing, Total Quality Management, partnering, and knowledge management, all of which failed to change this deep-seated style.

“The dominance of hourly billing rests on interlocking and reinforcing pressures: simplicity, familiarity, profitability, efficiency and amiability. Of these forces, simplicity and profitability are most prominent, followed by psychological issues of amiability and efficiency.

“These forces have led to the ubiquity of hourly billing and its embedded familiarity, and the difficulty of implementing alternative arrangements.”

In my view, not much has changed since that report. There are still many proponents of alternative methods, and although many clients talk a good game about wanting alternative methods, there still seems to be a comfort level on both sides with the billable hour.

The law firm revenue model for those who bill hourly is very similar to that of a hotel or an airline. There is a fixed potential every day to generate revenue. If that opportunity is missed, there is no way to recover it.

An attorney has 24 hours per day to generate revenue, a hotel has a fixed number of rooms to rent out, and an airline has only a number of seats it can fill.

In all three models, a 100 percent utilization is unrealistic, so actions should be taken to reach the rate that is typical for that particular type of business.

When a lawyer or law firm is operating at a level where all the available hours can be filled with billable work, it's particularly critical to have systems in place to capture all of the time. The leak occurs when it isn't captured properly.

Any attorney who records all his time, at the end of the week or at the end of the month, from memory and stray

notes cannot possibly be accurate. This means either the client is being treated unfairly or the firm is being shortchanged.

If you work 1,700 billable hours per year, at an average of $150 per hour, but record only 80 percent of your time, you're giving away $51,000.

If you don't bill by the hour, keeping accurate time records is still the best measure of your return on your efforts.

It may not cost you directly, as it does an hourly billing lawyer, but you won't have all the facts when it comes time to quote future flat rates, or to measure the profitability of that last contingency case.

If you're capturing all your billable time and still falling short of your revenue or income expectations, then use some of your available time to find more billable work. The process is called marketing.

Spending useful hours each day on marketing efforts will almost always yield positive results. Look at marketing time as an investment in your future.

If you compare the revenue model of a law firm with a business that sells a hard product, you can see the importance of maximizing every available hour.

A product-selling business can tolerate days with zero sales because subsequent days could have sales with twice the normal daily average.

But every day is critical in a law firm. Hours lost are dollars lost. The message is simple: Take advantage of every hour of every day. Record how you use it. Have a good time.