Practice Management Course · profitability. This unit urges practitioners to look at costs as more than a compliance issue, and to focus on best practice approaches to communication,

Practice Management Course Costs, Billing and Profitability

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Table of contents

1. Unit introduction ............................................................................................................................. 1 2. Costs and profitability ................................................................................................................... 2

2.1. The challenge of profitability .................................................................................................. 2 2.2. How profitable is profitable? ................................................................................................... 5 2.3. Focus on the 5% .................................................................................................................... 6 2.4. Profitability analysis ................................................................................................................ 6 2.5. Boosting productivity .............................................................................................................. 8 2.6. Key points............................................................................................................................. 11

3. Alternative fee structures and billing options ........................................................................... 12 3.1. Alternative fee structures ..................................................................................................... 12 3.2. How to offer fixed fees ......................................................................................................... 16 3.3. Developing value prices ....................................................................................................... 19 3.4. Explaining the deal ............................................................................................................... 20 3.5. Fixed fees disputes .............................................................................................................. 21 3.6. Key points............................................................................................................................. 22

4. Costs communication .................................................................................................................. 23 4.1. Costs: what clients want ....................................................................................................... 24 4.2. Initial costs communications ................................................................................................ 25 4.3. Cost and estimate updates .................................................................................................. 25 4.4. Key points............................................................................................................................. 26

5. Value, trust and resisting downward pressure on fees ........................................................... 27 5.1. Building client value recognition ........................................................................................... 27 5.2. Boosting client’s recognition of value ................................................................................... 28 5.3. Fees, differentiation and positioning .................................................................................... 29 5.4. Costs consciousness ........................................................................................................... 30 5.5. Managing the file to stay within the estimate ....................................................................... 31 5.6. Handling client resistance to fee estimates and rates ......................................................... 32 5.7. Key points............................................................................................................................. 33

6. Time and money ........................................................................................................................... 34 6.1. Time recording – value and purpose ................................................................................... 34 6.2. Time recording policies, training and guidance.................................................................... 35 6.3. Informative and transparent time entries ............................................................................. 36 6.4. Checking bills ....................................................................................................................... 37 6.5. Costing time ......................................................................................................................... 37 6.6. Estimating time ..................................................................................................................... 39 6.7. Costs, culture and ethics ...................................................................................................... 43 6.8. Key points............................................................................................................................. 44

7. Suggestions for improving performance ................................................................................... 45 Appendix 1: Costs management checklist ........................................................................................ 47

Queensland Law Society | Practice Management Course: Costs, Billing and Profitability Page 1 of 48

1. Unit introduction This unit is required reading as part of Queensland Law Society’s Practice Management Course (PMC).

Effective management of costs and billing is critical to ensuring client satisfaction and practice profitability. This unit urges practitioners to look at costs as more than a compliance issue, and to focus on best practice approaches to communication, management and administration to achieve compliance and ever greater client satisfaction and practice profitability.

At the end of this unit, you will be able to:

• describe best practice costs and billing arrangements to comply with regulations and ensure client satisfaction

• demonstrate knowledge and understanding of these elements and their implementation in a range of scenarios

• discuss the potential advantages and disadvantages of alternative fee structures

• identify and discuss alternative approaches to improving practice profitability.

Costs, ethics and professional standards Communicating value to clients, ensuring an enforceable costs agreement is in place and inculcating an ethical costs culture within the firm are all essential and complementary activities.

An over-emphasis on any one of these elements at the expense of another will impact dramatically upon long-term sustainability of the business.

Compliance requirements for costs are outlined in Part 6 of the Trust Accounting unit. Ethical considerations around costing are outlined in Part 3 of the Ethics and Responsibility unit.

Optional further reading • Balls, A (1998) Law Firms – Managing for Profit, The Federation Press

• Queensland Law Society (2014) QLS Costs Guide, qls.com.au

• LSC Regulatory Guide 8 Billing Practices – Some Key Principles, at http://www.lsc.qld.gov.au

• verasage.com (various articles and resources in relation to costs communication and value billing).

Glossary

Reference Description

LPA 2007 Legal Profession Act 2007 (Qld). All references to sections are to sections of LPA 2007 unless otherwise specified.

LSC Legal Services Commission

WIP Work-in-progress


2. Costs and profitability 2.1. The challenge of profitability

Profitability is a constant challenge. Increasingly demanding clients, growing competition, downward pressure on fees and upward pressure on internal costs are ever-present features.

This challenge is compounded by the time pressures of fee-earning: solicitors are so busy working ‘in’ the business that it is difficult to spend time ‘on’ the business.

The challenge of improving profitability is a vast subject. Broken down to fundamentals, profitability in legal practices that charge hourly rates is expressed in this equation:

Profit per equity principal = hours x rate x leverage x recovery x margin

Or

Profit per equity principal = Hours x rate x leverage x recovery rate

Costs


Leverage The ratio of principals to other fee-earners (the higher the ratio, the higher the profitability).

Hours How many chargeable hours solicitors work.

Rate The stated hourly fees.

Recovery Proportion of WIP ultimately paid by the client.

Costs Salaries, overheads and other costs.

This, of course, is not the only model to measure profitability. Practices that do not time cost might alternatively measure profit per equity principal according to:

• number of matters x average matter value / costs

• clients x average revenue per client / costs

• clients x number of matters per client x average matter value / costs

• sum of all matters net profitability

• sum of all clients net profitability

• sum of all fee-earners net profitability.

Focusing on the revenue potential of either individual clients or individual fee-earners, as compared to simply driving hours and rates, can bring significant business and cultural benefits.


Pulling levers? 2.1.1.

Using the time-costing model above, profitability can therefore be managed by seeking to:

• increase billable hour targets • increase or maintain rates • maintain recovery levels • cut costs.

Without the appropriate skills and systems in place, however, pulling a lever to improve the figures on one variable affects the others, and usually not to advantage.

Option Likely outcome

Rate up? Recovery down, due to client resistance or even loss of some clients.

Increase hours per fee-earner?

Recovery down, due to decreased efficiency, increased staff turnover and increased employment costs.

Increase leverage? Recovery down due to poor supervision.

Cut costs?

Over-aggressive cost cutting, particularly involving staff salaries, training, marketing, knowledge management and IT can severely weaken internal efficiency, the quality of work or the structural base for profitability.

The challenge of profitability can be compared to managing a country’s economy. If growth is boosted, inflation may increase. Tackle inflation with interest rates and growth suffers. The solution for a national economy is structural changes – boost productivity by investing in education or infrastructure, for example, enabling growth without inflation.

The solution is the same for legal practices; a cohesive approach to management and a focus on building a structural base for profitability. This guide discusses the skills and systems required to build such a structural base for productivity, with particular focus on pricing, costs communication and productivity.


•Effective, efficient supervision

•Costs communication •Communicate value •Billing practices

•Marketing •Client service •Productivity skills •Efficient administration

•Differentiation •Communicate value •Costs consciousness

•Confidence

Rates Hours

Leverage Recovery


2.2. How profitable is profitable? There are dramatic differences in both law practice profitability and individual profit per equity principal, particularly in smaller practices. For many smaller practices, profitability is not the only objective, with job satisfaction, control and work-life balance often equally important considerations.

Benchmarketing data suggests that the average equity principal ‘take-home’ earnings in practices generating fee income of less than $1.5m is in the region of $135,000 – $150,000. The data also shows that significant numbers of principals earn either less than $80,000 or more than $500,000.

Nominal partner salaries 2.2.1.

The ‘take-home’ earning figure doesn’t make any allowance for the equity principal’s own wage/salary. To get a true figure of profitability, in terms of a genuine revenue surplus after all costs have been accounted for, a ‘nominal partner salary’ should be accounted for that recognises a payment for the principal’s personal labour.

Values for ‘nominal partner salaries’ vary significantly between locations and practice size, but are broadly equivalent to the remuneration for a salaried partner, or the cost of recruiting someone to do the work of the equity principal.

For many small practices, the estimate of ‘nominal partner salary’ would similarly be in the range of $135,000 – $150,000, meaning that, on average, small legal practices, make no or little profit.

True profitability 2.2.2.

To be generating real profits, a small practice principal should therefore seek to generate earnings significantly in excess of that which they might be paid for their own labour. For most practices, this would mean moving from earnings of $150,000 to more than $200,000.

Practice value and succession 2.2.3.

Does the earning of ‘real profits’ matter, provided a small practice principal is personally satisfied with their revenue with respect to other objectives such as job satisfaction and work-life balance?

For many the answer is clearly no, but the failure to earn real profits has significant consequences in terms of practice value and succession.

Unless a practitioner can demonstrate that a practice has the capacity to earn real profits, it would be difficult to justify any value for the practice as a potential investment. To build practice value and ensure that the practice might be worth something for sale or succession, real profits have to be generated.


2.3. Focus on the 5% Improving each of hours, rate and recovery rate by 5% can have the effect of collectively increasing profits by more than 50%.

Consider a small practice with three solicitors (one principal and two associates), who each record 1000 hours a year (200 days x 5 hours). With an average hourly rate of $300, a recovery rate of 85% and 30% profit margin, the practice makes a profit of $229,500.

Hours

Q: If everyone billed an extra 15 minutes a day (assuming costs and recovery are constant), what is the effect on profitability?

A: 50 x 300 x 3 x 0.85 = $38,250 increase in profit (17%)

Rate

Q: If rates were increased by 5% (assuming hours and recovery are constant), what is the effect on profitability?

A: 1000 x 15 x 3 x 0.85 = $38,250 increase in profit (17%)

Recovery

Q: If WIP recovery increased from 85% to 90% (assuming costs and hours are constant), what is the effect on profitability?

A: 1000 x 300 x 3 x 0.05 = $45,000 (20%)

Small changes in revenue can lead to big changes in profitability, and small improvements in the way practices communicate with clients in relation to costs and value can bring big simultaneous results over each of the three measures above:

• More hours (due to better estimating, and lower resistance to estimates).

• A higher rate (due to practice improvements in communicating value.

• A higher recovery rate (due to improved client recognition of the value of the work).

2.4. Profitability analysis To boost overall practice profitability, law practice principals need to develop a good understanding of which areas of practice, individual fee-earners and clients are genuinely profitable and which are not.

Practices should not confuse revenue with profitability, and should be wary of assuming that all work is good work. Just because money is coming into the practice, it can be easy to assume that the work is profitable: it may not be.

Developing a clearer understanding of practice profitability will enable the practice to make strategic decisions to boost this profitability.

Areas of practice/types of work 2.4.1.

Practices need to allocate specific revenue and costs, including relevant overheads, to different areas of practice or different specific activities to assess the true profitability of each type of work.


With time costing, profitability risk should be lower because a profit margin should be built into the hourly rate, based on salary and related costs (see section 6.5). The bigger risk comes with fixed fees, particularly menu pricing, where fees are often set in response to competitor pressures without regard to internal costs.

For example, if a practice offers wills at $200 each but it takes a solicitor 2.5 hours to complete each will, is this profitable for the practice?

• If salary costs are $80,000, direct employment costs another $12,000, and the solicitor works 1400 hours a year, the initial internal cost per hour of the work might be ($92,000 / 1400) $65.71.

• The initial internal cost of producing the will might therefore be ($65.71 x 2.5) $164.28, a provisional small profit of $36.

This small profit, however, doesn’t take into account marketing costs, secretarial support, write offs, bad debts, supervision time, and other overheads such as rent and IT.

Once these are factored in, the work is unlikely to be profitable. As a loose rule of thumb, and to allow for overheads and a profit margin, direct fee-earner time costs should be kept under 50% of the fees charged (lower in larger practices).

Whilst some low-profitability work can often be justified in terms of client relationship management, keeping existing clients away from competitor practices, or in attracting new clients, these need to be strategic decisions based on a full understanding of the profitability implications.

Individual fee-earners 2.4.2.

Individual team member profitability is most commonly measured by simple salary/revenue calculations, with a loose rule of thumb being that fee-earners should look to generate three times their salary in revenue. Typical multiples of salary vary according to experience (see Practice Finance unit), but this remains a quick and effective way to measure individual fee-earner profitability.

A more sophisticated approach involves a more detailed analysis of internal costs that are involved in producing the revenue attributed to any individual fee-earner. As with above, this should include supervision time, marketing time, secretarial costs and an allocation of overheads.

Client profitability 2.4.3.

Some clients are more profitable than others due to possible differences in rates charged, the burden they place on fee-earners in terms of non-billable time, and in possible unrecovered time.

Through a mixture of detailed profitability analysis and personal experience, it will often be possible to identify clients that are either not profitable or produce low profitability. For many practices, up to 5% – 10% of clients will not be ultimately profitable.

Continuing to undertake such unprofitable work reduces the time available for the practice to do more profitable work.

Practices should therefore consider:

• a yearly or twice-yearly cull of unprofitable or low-profitability clients

• implementing client/matter engagement processes that proactively consider likely client/matter profitability, with the willingness to turn work away as required.


2.5. Boosting productivity Improving productivity is one of the most effective ways to improve profitability. With practices increasingly coming under pressure to keep rates down, for many practices it has become the primary or only means to maintaining or improving profitability levels. For this reason, most practices have seen increases in billable hour targets over recent years.

Recording an extra 15 minutes of billable time each day can increase revenue by 5% and profitability by 15% or more.

For practices that time record, increasing productivity requires more than setting increased billable hour targets – it requires sustained practice and partner support to record a greater proportion of time in the office as billable. Meeting billable hour targets by spending long hours in the office can be demoralising and is likely to be unsustainable.

The aim has to be to work smarter, not longer. In addition to damaging morale, an unrealistic budget can increase the likelihood of timesheet padding or over servicing. This is a significant risk to the firm’s reputation and ethical standards.

Productivity analysis 2.5.1.

In seeking to boost personal and practice profitability, practice principals should first seek to understand where time is being lost and the possible causes of any sub-optimal productivity.

In addition to general monitoring, principals should seek to use time data to help them analyse where and how time is being lost. Ideally, principals should ask their team to record both chargeable and non-chargeable time.

Such analysis then typically identifies four potential causes of sub-optimal productivity.

Time-recording insecurities

Costs communication

Productivity performance management

Personal and practice inefficiencies

Analysis


Costs communication 2.5.2.

One of the most common reasons for either time being written-off, or for a failure to record time is the risk of work-in-progress (WIP) and the bill exceeding the initial estimate. Both principals and junior fee-earners are often reluctant to record or bill extra time that would potentially cause WIP to exceed the estimate, and cause client dissatisfaction.

To address this situation, solicitors need to:

• improve their estimate accuracy

• develop their skills in ‘communicating value’ to the client to better justify a realistic estimate

• record all time

• discipline themselves to issue costs updates as required.

Time recording insecurities 2.5.3.

Junior solicitors are prone to a series of overlapping insecurities that affect their time recording. These include:

Term Description

Ethical insecurity Uncertainty about what can be ethically recorded as billable, and not recording when in doubt.

Efficiency insecurity Believing a task should be completed in an arbitrary time – perhaps a colleague took this long – and recording that time even though they took longer.

Value insecurity Insecurity about their ability to justify their time entries to their partner, and failing to record all the time taken for different activities.

Partners should address these concerns through guidance, support and formal policies in relation to ethical, commercial time recording practice, and implementing appropriate practice discipline to ensure all time is recorded accurately.

Personal and practice efficiencies 2.5.4.

High performing practices invest significantly in both practice infrastructure and in the development of the required personal skills to support high productivity. Areas of focus include the following:

Area of focus Considerations

Knowledge management and IT

Up-to-date precedents, efficient workflow arrangements and effective file management can significantly reduce time spent on non-chargeable or administrative tasks.

Personal time management skills

Individual time management skills can help improve discipline and behaviours in relation to work focus, prioritisation, perfectionism, procrastination and the management of interruptions.


Area of focus Considerations

Poor matter management

Spending too much time on out-of-scope activities that cannot be charged is one of the biggest causes of poor productivity. Fee-earners have to be disciplined and manage the file to stay within the estimate.

Delegation of administrative work

Fee-earners need to develop their delegation skills so they can efficiently and effectively delegate work to administrative staff, freeing up their time for chargeable work.

Delegation of professional work

Poor delegation of professional work can lead to productivity leakages in terms of:

• work delegated to wrong person (too slow, too expensive)

• poor explanation leading to slow, poor or unfocused work, and potential extra time costs.

Administrative errors Errors such as document mismanagement can lead to duplication of professional work and additional time costs.

Risk management Small or large errors that lead to either WIP write-offs or unbillable repeat work. Practices need to identify the causes of these errors and address the cause to improve productivity.

Productivity performance management 2.5.5.

As discussed in the Managing People unit, effective performance management requires a focus on expectations, assessment, abilities, support and motivation. The table below discusses the issues that law practice principals should focus on in improving team productivity.

Issue Considerations

Expectations Be clear about productivity and billable time targets, and explain the consequences of meeting or failing to meet these targets. Ideally set two targets:

• an aspirational target which will lead to rewards if exceeded

• a minimal acceptable target, below which will lead to negative consequences if missed.

Assessment Clarify exactly what is to be measured:

• Team or individual targets?

• WIP, billed amounts or recovered amounts?

• The importance of productivity compared to other performance criteria?

Abilities Ensure someone has training, mentoring and support in relation to both the legal work they are required to complete, and specific skills in relation to practice systems, time management and productivity.



Support Support your team through the provision of regular work, clear delegation and supervision, up-to-date knowledge management resources and appropriate investment in IT and support staff.

Provide further support by discussing productivity with your team, identifying where they could record more time as billable, or where they could delegate more non-billable tasks to others.

Motivation As with assessment above, motivate your staff to improve productivity by explaining the consequences of both high and low performance. Consider using peer pressure where there are productivity differences within the team.

Recognise and reward high performance.

Productivity where a practice doesn’t time record 2.5.6.

Whilst time-recording can hold significant benefits for a practice in terms of costs measurement and performance management, there can also be costs in terms of practice culture, ethics and fee-earner morale.

Many of these risks can be managed (see section 6.7) but aversion to time-costing remains and is understandable. Practices wishing to operate with time recording should seek to identify and use other ways to manage productivity and monitor internal costs. Common methods include:

• measuring file velocity/file completion rates

• task velocity/task completion rates

• comparing monthly billing figures to salaries.

2.6. Key points • For time costing, profitability is typically a function of hours, rates, leverage, recovery rate

and costs.

• Without the appropriate skills and systems in place, however, pulling a lever to improve the figures on one variable can adversely affect the others. Practices need to build a structural base for profitability.

• Improving each of hours, rate and recovery rate by 5% can have the effect of collectively increasing profits by more than 50%.

• To boost overall practice profitability, law practice principals need to develop a good understanding of which areas of practice, individual fee-earners and clients are genuinely profitable and which are not.

• Improving productivity is one of the quickest ways to improve profitability. Recording an extra 15 minutes of billable time each day can increase solicitor revenue by 5% and profitability by 15% or more.

• Four key ways to improve practice productivity are to:

• address time recording insecurities

• improve costs communication

• invest in personal and practice inefficiencies

• performance manage productivity.


3. Alternative fee structures and billing options 3.1. Alternative fee structures

Practices are used to the benefits of hourly rate billing: it is easy and efficient; manages cash flow; evaluates WIP; is objective and, above all, minimises financial risk to the practice. It also carries risks and efficiency concerns for clients who are increasingly seeking more flexibility from practices in relation to fee structures.

In addition to lower risk, clients also expect clarity, transparency and control over how fees are structured. Practices therefore have to work on providing clients with alternative choices.

To do this, solicitors need to understand the cost of production and the likely profitability under alternative arrangements. The goal is to understand what works for both the practice and the client and achieve the best outcome for both parties.

Time costing Value pricing Menu pricing

Time costing and cap Blended rate No-win, no-fee

All you can eat Secondments Hybrids


Comparison of billing methods 3.1.1.

Use when: Advantages Disadvantages

Time costing • accurate estimating is not possible

• the work is sophisticated, open-ended and high value

• solicitors lack the skills or data to scope, estimate, negotiate and manage a file to stay within the estimate.

• Low risk for practice.

• Easy and familiar.

• Aids justification in billing disputes.

• Some clients prefer it.

• Makes interim billing easier for better cash flow management.

• All cost risk to client.

• Increases risk of billing disputes.

• Many clients dislike it.

• Encourages inefficiency.

• Places limit on profit margin.

• Encourages short-term focus, ignoring long-term issues such as client loyalty, efficiency, staff development.

• Ethical and cultural risks.

Fixed fees 1: value pricing

Where a unique price is developed for each unique matter and client.

• there is a good understanding of a client’s situation and needs

• there is a good database of historical time/cost data

• solicitors can confidently scope, estimate and negotiate

• solicitors are able to manage files to stay within a budget.

• Eliminates client fears about spiralling costs.

• Drives efficiency.

• Aids differentiation.

• No limit on profit margin.

• ‘Risk premium’ can be charged/justified.

• Removes cost tensions from the client-solicitor relationship.

• Higher risk for practice.

• Skills in estimating, negotiation needed.

• Retainer must be scoped and defined in detail.



Fixed fees 2: menu fees and task based billing

Where the price is fixed to a defined product or service.

• work is repeated, process-based, high volume and commoditised

• task costs can be accurately calculated according to historical data.




• Moderate risk to practice.

• Investment costs (IT, knowledge management) of necessary efficiency gains.

• Failure to differentiate service offerings can prompt practices to compete on price, reducing profitability.

Time costing + cap • clients demand them

• there is a good understanding of a client’s situation and needs

• there is a good database of historical time/cost information

• solicitors can confidently scope, estimate and negotiate

• solicitors are able to manage files to stay within a budget.



• Aids differentiation.

• ‘Risk premium’ can be charged/justified.


• Highest risk to practice: loses out if WIP exceeds cap, but does not gain if WIP does not meet estimate.

• Skills in estimating, negotiation needed.

• Retainer must be scoped and defined in detail.

Blended rate • several solicitors will be involved

• the involvement of each level of seniority can be estimated and agreed.

• Simplifies cost arrangements for clients. • Significant ethical risks.

• Needs good management re delegation of tasks to appropriate level.

• Involvement of senior staff must be agreed with client in advance.

• Questionable when applied to non-professional staff.



No-win, no-fee • an informed assessment of the likelihood of success is possible

• an appropriate ‘uplift’ (percentage increase in rates) can be agreed.

• Low risk for client.

• Can be highly profitable, if cases successful.

• Overcomes buyer resistance.

• Practice bears all risk.

• Uneven cash flow.

• Cost of work to client can be high to offset risk of failure.

• Total fees still subject to ‘fair and reasonable’ cap – very limited scope to make up on the swings what was lost on the roundabouts.

All you can eat • client demands can be predicted and controlled.

• Locks in regular, secure revenue.

• Good for cash flow.

• Opportunity to identify and gain higher value work.

• Low-risk for client.

• Risk for practice where clients seek to exploit agreement.

Secondments • client demands them. • Strengthens client relationship. • Profitability is generally low or limited.

Hybrids • dealing with sophisticated clients on complex matters.

• Same advantages as above. • Same disadvantages as above.

• Hybrid nature tends to weaken any perceived advantages of single system.


3.2. How to offer fixed fees

Profitability and fixed fees 3.2.1.

For a practice that charges fixed fees, the profitability equation is:

Profit per fee-earner = Fees x leverage x recovery rate

Costs

The fixed fee levers of profitability are:

Lever Description

Pricing and cost management

Practices will be unprofitable if estimates are inaccurate and the cost of providing the service exceeds the agreed fixed fees.

Negotiation Solicitors can struggle to negotiate their own fees. Partners have to develop new skills to build value in order to raise the level of fixed fees and extract a premium for the fee risk accepted by the practice.

Efficiency and productivity

Working for a shorter time on each job lowers costs because more jobs can be completed with the same capacity, which means profit. Efficiency can be increased through investment in IT, knowledge management, risk management and supervision.

Repeats The more a type of work is done, the more efficiently it can be done, and the more time costs can be reduced. So, fixed fees are associated with commoditised work such as residential conveyancing.

The increased sophistication of financial analysis software makes it easier to consider a move to fixed fee or other alternative arrangements. Given accurate historical data, the likely time required and therefore the cost of regular work can be calculated with increasing accuracy.

Two avenues of profit are opened in this model:

• Using historical time/cost data to set an internal floor from which to negotiate upwards in agreeing a profitable fixed fee.

• Driving efficiency so that the time spent on each matter can be reduced, cutting internal costs and boosting profitability further.

Practices need to invest in developing solicitor skills in terms of accurate estimating, fee negotiation and learning how to talk in terms of value, including any fee risk premium, and not just time.

While efficiency gains are most achievable for regular commoditised work, good precedent libraries and knowledge management systems can provide guidance and shortcuts to documents and processes, improving productivity and profitability.

Time costs for mistakes and oversights cannot be passed on to the client so risk management and supervision are very important. IT supports this, as it supports efficiency gains generally.


Fixed fees and commoditisation 3.2.2.

There are at least two different types of fixed fees, with different implications for client perceptions and profitability:


Value pricing Fees fixed to the client’s specific needs.

Menu pricing Fees fixed to the legal product (the will, the Binding Financial Agreement, the house sale).

Fixing fees to the legal product is good for the client – it tells them what they have to pay, reducing anxiety and risk, and allows them to compare the cost of your service to other providers, and choose the cheapest.

But consider these questions:

• Does your practice really want to compete on price and be selected on that basis?

• How can the practice be sure it is meeting the client’s specific needs?

• Without understanding the client’s needs, how can estimates be accurate?

• Fixing the price to the legal product means commodification. Is this the future of the practice?

For a practice that tailors work to the client’s needs, charging every client the same sends the wrong message, and is bad for profitability.

Fixing fees to the client’s specific needs gives more scope to genuinely understand the client, do the work that meets their needs, communicate value and charge accordingly.

Fixing the fees to the client rather than the work requires more effort in understanding client needs, more sophisticated scoping, estimating and negotiation skills, greater discipline in managing the file to stay within the budget, and more focus on communicating value. It also differentiates your practice from commoditised offerings and should increase profitability.


Profit risk, swings, roundabouts and premiums 3.2.3.

By charging a fixed fee, practices accept the risk that they might underestimate the amount of time and work involved in a matter and therefore make a reduced profit, or even a loss. This should be balanced by the times that profit meets and exceeds normal expectations because work is overestimated or the matter is managed more efficiently than expected.

Over time and numerous transactions, and assuming fees are pitched at an appropriate level, profit levels should balance out around a normal distribution curve, with volume of transactions acting to mediate the profit risk faced by practices.

A practice’s willingness to accept profitability risk is valued by clients, and fixed fees provide an opportunity to convert that risk and value into higher profits. Given the choice between an estimate of $5,000 with the risk that fees could escalate to $15,000, and a fixed fee of $7,000, many clients would choose the latter.

This provides an opportunity to build a risk/value premium into fixed fee levels, in recognition of the profitability risk the practice is accepting and the value created for the client in fixing the fee.

The adoption of a risk/value premium requires an ethical consideration, and depends on the extent of profitability risk and the informed choices of the client. If the client is fully informed about the variables that could affect likely WIP levels and is offered a choice between time costing and fixed fees, this significantly improves the likelihood of any fixed fees being seen as fair and reasonable.

Staging fixed fee pricing adds complication but can assist in interim billing and allows a mechanism to adjust a fixed fee where there has been a significant change in circumstances – eg a matter settles rather than progressing to trial (see section 3.5 – fixed fee disputes).

Fixed fees: an end to time recording? 3.2.4.

Opinions are split about whether fixed fees provide an opportunity to stop time recording.

True advocates of the value pricing model argue practice costs, productivity and profitability can be measured through billing records, general profit and loss accounts and other tools such as file velocity – and that timesheets can be thrown away.

For others, the successful offering of fixed fees is dependent on the use of historical data to produce accurate estimates and quotes.

Practices will need to consider all this in light of their own arrangements.


3.3. Developing value prices Developing unique prices for individual clients can be a complicated process, involving not only sophisticated structuring and staging but also significant client collaboration.

It requires practices to develop a deep understanding of client needs – not only to inform accurate scoping and estimating but also so that value can subsequently be justified and communicated.

Action Consideration

Identify client needs and options for scoping matter

Identify all possible tasks that could be considered as necessary.

Stage the instruction Consider offering a fixed fee for part of the matter, with later stages to be costed as more information becomes available.

Control and collaboration

Work collaboratively with the client in defining scope and appropriate pricing. See section 5.5 of this unit.

Explain the deal Discuss the nature of value pricing with clients. See next section.

Accurate cost estimating

See section 6.6 of this unit.

Communicate value See section 5 of this unit.

Drive efficiency Invest in IT, workflow, knowledge management, risk management and support staff to reduce internal costs.

Issue scope and costs updates

If the scope changes, practices should seek to issue scope updates with related changes to the fixed fee costs agreement (costs should not be updated unless the scope changes).

Identify client needs and matter options Consider staging Collaborate

Explain the deal Accurate estimating Communicate value

Drive internal efficiency

Issue scope & cost updates as required


3.4. Explaining the deal The major difference with value pricing compared to time costing arrangements is that scope and activity have to be agreed in advance, in order for a price to be agreed upon.

For a client to assess whether a proposed price is fair and reasonable at the start of the matter, there needs to be a much greater degree of explanation, discussion and collaboration than might otherwise be the case.

If a client does not understand the deal they are being offered, or has not been given a chance to shape it, they are more likely to dispute costs at the end of the matter if they do not believe they have received value for money. Practices should therefore:

• discuss the work and likely fees

• explain the cost implications of different activities, and wherever possible, offer the client choices and alternatives in terms of scope

• explain that the practice is accepting the risk that the necessary work might exceed current expectations, and that it will complete this work with charging additional fees

• explain that the client in return accepts the equal risk that actual completed work might be less than anticipated

• explain your assumptions about the likely work in terms of the fee

• discuss expectations about how the matter will progress and how this has influenced the preparation of the fixed fee proposal

• explain arrangements for out-of scope work

• explain how fees will or will not be adjusted if in-scope work is not necessary or not undertaken

• provide as much information as possible to enable clients to judge whether the proposal is fair and reasonable.

Offer the client choice in terms of scope and extent of work

Explain the deal in terms of your expectations of likely work


3.5. Fixed fees disputes A common concern amongst practitioners is the extent to which fixed fees can be challenged through the costs assessment process.

The key point in response to this is that if fixed fee arrangements are managed well, the client has limited cause for complaint, because the bill would match the initial quoted fee.

The two main causes of fixed fee costs disputes are where:

• solicitors fail to give clients a sufficiently detailed description of the work they agreed to perform in return for the fixed fee

• the full fixed fee is charged where the work and activity completed is significantly less than anticipated in the original agreement.

In addition to providing a thorough explanation of the work, solicitors should therefore anticipate changes in scope and requirements, and should propose reduced fees, discounts or other provisions for reduced scope or other foreseeable events in any costs agreement.

If there are no arrangements for reduced scope in the costs agreement, the validity of the fee will then depend on the extent to which the solicitor can demonstrate that the client ‘agreed to the deal’ in terms of probable scope, and the degree to which that fee was ‘fair and reasonable’.

Fair and reasonable? 3.5.1.

All cost agreements and bills must be (1) ‘fair’ and (2) ‘reasonable’.

‘Fair’ focuses on the process by which the basis of the fees was agreed.

The challenge with fixed fees is that clients need to be provided with sufficient information at the outset to be able to act as a foundation for informed consent.

This requires a clear explanation of the work and the variables that could affect cost. In setting fixed fees, the solicitor’s advantage is the ability to assess the likely work involved, and related time demands. Efforts to address this knowledge imbalance will increase the chances that a proposed fixed fee, and related bill, are enforceable, reducing the risk of costs disputes and requests for itemised bills.

‘Reasonable’ is an objective test measuring the amount of the charge against the work done having regard to such factors as urgency, complexity, where the costs risk lay and the ‘going rate’.

Even if a client has given fully informed consent to a fixed fee, it can be set aside if the remuneration for the law practice is disproportionate to the services performed.

Queensland Legal Services Commission 3.5.2.

The Queensland Legal Services Commission (LSC) has produced a regulatory guide to fixed fee costs agreements, available from the LSC’s website at www.lsc.qld.gov.au.

http://www.lsc.qld.gov.au/


Itemised bills 3.5.3.

Section 332 of the LPA says that “any person who is entitled to apply for an assessment of the legal costs to which a bill relates may request the law practice to give the person an itemised bill” and “the law practice must comply with the request within 28 days”.

This requirement applies equally to fixed fee bills and arrangements as it does to time costing bills.

An itemised bill is “a bill stating in detail how the legal costs are made up in a way that would allow the legal costs to be assessed”.

Although solicitors offering fixed fee agreements can still be required to provide itemised bills, this does not mean that they have to itemise bills according to time – merely that they have to itemise the work in sufficient detail to enable the client to make an informed decision whether to have the costs assessed, and for the costs to be formally assessed if required.

Ideally, and as discussed above, solicitors should produce such detail as part of client discussions, and confirm this in the client agreement.

3.6. Key points • There is no single best fee structure: practices should work together with their clients to

develop fee and pricing arrangements that provide the best outcome for both parties.

• There are at least two different types of fixed fees:

• Value pricing: fees fixed to the client’s specific needs.

• Menu pricing: fees fixed to the legal product.

• Fixed fee levers of profitability include:

• pricing and costs management

• negotiation

• efficiency and productivity.

• The challenge with fixed fees is that clients need to be provided with sufficient information at the outset of the matter to be able to assess whether the proposed fee is fair and reasonable.

• Although solicitors offering fixed fee agreements can still be required to provide itemised bills, this does not mean that they have to be itemised according to time – merely that they have to itemise the work in sufficient detail to enable the client to make an informed decision whether to have the costs assessed, and for the costs to be formally assessed if required.


4. Costs communication Costs are the most common cause of complaints or dissatisfaction by the consumers of legal services. The LSC Annual Report 2012-2013 reported that over 31% of enquiries and 35% of consumer disputes were primarily concerned with costs issues.

Underlying this is a great deal of informal client dissatisfaction about costs, evident from complaints directly to practices, client satisfaction surveys and general public concern.

Causes of dissatisfaction include:

• alleged overcharging

• bill significantly exceeds estimate

• no estimate given

• poor costs communication and updating

• unreasonable charging of disbursements

• work, and therefore bill, exceeded scope of retainer

• unethical charges, for example, charging for entertainment

• unnecessarily aggressive billing and debt recovery practices

• combinations of the above.

The key underlying causes are:

• unethical behaviour – dishonesty or a lack of integrity in relation to costs

• inadequate management systems

• inadequate solicitor-client communication.

This unit suggests that systems and communications account for the vast majority of these failings, and further, that most are avoidable given an effectively implemented best practice approach to costs.

Information about the general causes of costs dissatisfaction is useful, but the most valuable information is specific to an individual practice and its clients. Information on clients’ needs and subsequent level of satisfaction can be sought in a number of ways:

• At opening and closing meetings.

• Through client satisfaction feedback forms sent out at the end of the matter.

• Through annual satisfaction surveys.

• Through analysis of internal complaints.

• Through general staff feedback.

Billing statistics such as speed of payment and the recovery rate (the percentage of billed WIP that is actually paid) are also a good indication of the strength of a practice’s costs and billing arrangements.

The point to emphasise is that if practices are committed to improving client satisfaction in relation to costs and thus reaping the benefits in terms of reputation, referrals, profitability and working capital management, they must listen to their clients’ needs and comments, and change their work practices accordingly.


4.1. Costs: what clients want Clients focus on a mix of many of the following elements.

Area of focus Description

Communication Clients welcome solicitors proactively raising the issue of costs, as it demonstrates that the solicitor recognises the importance of costs for the client.

Good communication involves listening as much as telling, and understanding clients’ needs and preferences in terms of the pricing of services.

Control Clients want, as much as is possible, to be in control of costs. This means discussing, or advising about, cost implications before costs are incurred, and providing as much cost information and client choice as possible.

Flexibility Be prepared to offer alternative arrangements for fees and billing, and help the client identify which best suits them. Consider hourly rates, blended rates, fixed fees, staged fee arrangements, additional services, no-win no-fee, volume discounts and capped fees. Be flexible about the timing and format of bills.

Extras Clients hate to see hidden or unexpected extras, overheads or disbursements appearing on a bill. State clearly at the outset what expenses and disbursements will be included in the final bill and limit them as much as possible. The LSC has published guidelines for charging outlays and disbursements.

Certainty and reliability

Fee arrangements that provide certainty are popular. This will usually mean moving away from the traditional hourly fee towards fixed fees or fee caps.

Transparency Clients want to know exactly what they are getting for their money. Be prepared to explain the necessary work in detail, provide details of time recording policies before the matter also to offer any costing details requested by the client.

Value Clients want to know they are getting good value for money. Law practices should focus on demonstrating that value both in the way they provide services and in the way they communicate about costs.

Risk sharing No-win no-fee arrangements have become common in recent years, primarily in the claimant personal injury area. Many other clients, including commercial clients, would consider similar arrangements. Note s. 325, which deals with contingency fees.

Efficiency Where time costs money, clients expect practices to work efficiently and implement arrangements to get tasks done as quickly as possible.

Regular cost updates

After an estimate, keep the client informed about the progress of costs, and issue interim bills and interim estimates whenever possible, including a detailed explanation of additional costs. It is much better to do this than to wait until the end of the matter and shock the client with a bill in excess of the estimate.

Volume or loyalty rewards

Clients like to be appreciated, and loyal clients increasingly expect that loyalty to be rewarded through volume discounts or other rewards.

Leverage Clients appreciate the experience and reassurance that the involvement of partners or senior practitioners can bring to a matter, but may be reluctant to pay a premium for it. Discuss leverage with clients to ensure they recognise value in any proposed approach.


4.2. Initial costs communications Client anxiety about costs can start before the first meeting. A major concern relates to what is free and what is not. To facilitate effective communication, advise about the cost (if any) of the first meeting, and provide information about standard fee and billing arrangements, hourly rates and other costs.

While solicitors can be cautious about discussing costs, clients value an open and frank discussion and don’t like to have to raise it themselves. An early open discussion about costs can go a long way to avoiding costs dissatisfaction down the track. Key to this is managing expectations. If clients understand the variables that can affect cost, they are less likely to be shocked or dissatisfied when costs rise.

Formal costs disclosure 4.2.1.

Costs in excess of the regulated amount1 must be disclosed by a formal process set out in the LPA 2007. Failure to comply may render your costs agreement unenforceable. (See QLS Costs Guide (2014 ed) Chapter 3, Information flow to clients.)

Compliance with the formal requirements is essential to allow recovery, but the information is conveyed in a technical way that makes sense to lawyers, not necessarily to clients.

Treating these legislative obligations as a starting point for formal cost communications, not as the only or even the most important consideration, is a step in the direction of good costs communication.

Following up by phone after a client agreement has been sent can allay concerns and deal with misunderstandings to avoid future problems.

4.3. Cost and estimate updates The best cost and estimates updates:

• are those that offer the client control and choice over costs before these costs are incurred or committed to

• involve the proactive discussion of value/benefit of the extra work and costs above and beyond simple notification of changes in any initial estimate.

In addition to these discussions, formal costs disclosure must be updated throughout the matter. (See QLS Costs Guide (2014 ed) Chapter 3.1.10, Ongoing disclosure.)

Implement arrangements to provide updates:

• Record cost and estimate update requirements prominently on each file.

• Train staff and work towards a culture of proactivity in relation to cost and estimate updates.

• Train staff in project managing a matter to stay within an estimate.

• Diarise key dates for cost and estimate updates for each matter.

• Arrange regular, systematic checks of WIP against the initial or latest estimate for each file and consider whether an estimate update is required.

• Arrange for an automatic alert when WIP is at 70% of the initial or latest estimate, and consider whether a revised estimate is required.

1 Currently $1500, see Regulation 80, Legal Profession Regulation 2007

http://www.austlii.edu.au/au/legis/qld/consol_reg/lpr2007270/s80.html


• Include requirements to compare WIP to estimates in matter checklists, to prompt consideration of a revised estimate.

The final costs or estimate update should be sent (or ideally discussed), if required, immediately before a bill is sent.

It is good practice to telephone the client before the bill is issued, advise the final costs tally, explain any recent or unexpected costs and seek feedback. If you have been communicating regularly, difficult conversations should be rare.

4.4. Key points • Costs are the most common cause of complaints or dissatisfaction by the consumers of

legal services.

• Clients value a range of features in costs and costs communication, including:

• proactive communication

• control

• flexibility

• certainty and reliability

• transparency

• value

• risk sharing

• efficiency

• regular costs updates

• recognition of loyalty.

• The costs disclosure requirements in the LPA 2007 are only a starting point: solicitors need to meet the higher standards of their clients in costs communication.


5. Value, trust and resisting downward pressure on fees 5.1. Building client value recognition

It’s great to feel appreciated. To not only know for yourself that you have helped someone, but to see and hear that they recognise your talents and appreciate your efforts is not only personally rewarding and vital to maintaining personal morale and wellbeing, it is also critical for practice success and profitability. Too often, however, clients do not recognise the true value in legal work and do not appreciate the efforts of their solicitors. This can lead to legal services being seen as ‘grudge’ purchases, cost disputes, downward pressure on fees, client resentment and an unrewarding experience for all.

The legal services ‘grudge’ purchase 5.1.1.

It needn’t be like this. Clients may not understand the complexities and value of legal work and should not be expected to – it is up to the solicitor to build their understanding. Building communication skills and being willing to explain your work helps clients recognise its value and is a valuable investment in future client satisfaction.

Building client recognition of the value of legal work helps clients appreciate it and makes it easier for you to record and bill, confident in the knowledge clients will recognise the value – boosting productivity, recovery and profitability.

The satisfied customer 5.1.2.

So, how can you build the client’s appreciation of your work?


5.2. Boosting client’s recognition of value Client recognition of the value of legal work is critical for practice success and profitability, as clients who do not recognise the true value in legal work do not appreciate the efforts of their solicitors.

Building client recognition of the value of your work will help in:

• raising fees (or at least reducing downward pressure)

• including more time in the estimate

• recording more time

• billing more time

• recovering more time

• generating more referrals

• generating fewer complaints.

Understand what the client values 5.2.1.

Understanding what the client needs and what they value is the first step to them recognising the value of legal work. Take a few extra minutes in the first meeting to discuss the broader business/personal challenge in the context of the matter at hand, and think about what this means for the way you handle or talk about the work.

Look for client value triggers by remembering the ‘TERMS’ model:

• Time – how you can save or make the client time.

• Emotion – how you can remove client pain/anxiety stress.

• Risk – how you can reduce or eliminate client risks.

• Money – how you can save or make the client money.

• Situation – how you can increase convenience for the client.

Will saving time, stress or money be valued by the client?

Build the pain 5.2.2.

Ask questions that build client recognition of the potential costs of not being able to solve or address their issue/problem. This will improve their assessment of the value of your solution.

• What if you did nothing?

• What would the impact be if you (we?) couldn’t resolve this issue?

• What if this project failed?

• What will you be able to do that you can’t do now?

• What would the risk be to your reputation?


Communicate value! 5.2.3.

Explain how legal services can resolve, reduce, control or compensate for the client’s threat, injury, anxiety, risk or other pain. Explain:

• what you will be doing

• why you will be doing it

• why you will do it this way

• the risks (to the client) of not doing different tasks

• how the activity will benefit the client (in terms of their needs).

Do this throughout the matter – in initial meetings, cost updates, time recording narratives, matter updates, ongoing discussions and in the bill.

Before you send the bill, ring the client to explain what you’ve achieved for them, and help them focus on the value of your work, rather than the cost.

Scope for value 5.2.4.

• Only do work the client values – and educate the client about the value in things they don’t at first understand or appreciate.

• If the client doesn’t value it, don’t do it.

• Ask if they understand the value of the proposed activities.

• Suggest alternatives: could the client do more? Could another adviser get involved?

Believe in your value 5.2.5.

Never apologise or be defensive about your fees. If you do not believe you are worth your fee, a client never will. State your fees confidently to show you believe that these demonstrate good value, and that you are worth it.

5.3. Fees, differentiation and positioning Increasingly, as client sophistication grows, professional fees are judged with reference to competitor rates.

To justify your rates in a market where it is nearly always possible to find a cheaper solution, law practices now have to work harder than ever in justifying their fees, and giving clients a reason to choose them over cheaper competitors.

This in turn requires clear differentiation and the development of messages that define your difference in terms of:

• who you provide services for

• what you do

• how you do it

• why you do it

• how such difference creates value for the client.


Specialisation and differentiation gives you greater pricing leverage, and the opportunity to provide premium rates.

Failure to differentiate will risk leaving clients with the perception that your services are the same as everyone else’s, as lacking any specific value, or as a commodity offering, leading to downward pressure on fees.

5.4. Costs consciousness Clients’ perception of value is not limited to a simple costs/benefits trade-off: there is a third factor that has been identified: ‘costs consciousness’.

Cost consciousness was uncovered in research for a Melbourne Business School doctoral thesis in The University of Melbourne in the mid-1990s. Dr Margaret Beaton was researching how members of Australian Corporate Lawyers Association and Chartered Secretaries Australia perceive the value of solicitors’ services.

Costs conscious firms are mindful at all times of the costs incurred in a matter, and give the impression of managing legal spend in the clients’ best interests, rather than seeking to increase costs wherever possible.

The latest research by Beaton Capital is that costs consciousness accounts for approximately 40% of clients’ perceptions of value.

Client perceptions of value

Practices can seek to build costs consciousness, and therefore reduce client sensitivity to fees through the following actions:

• Genuine collaboration in setting fees.

• Asking the client what their budget is and explaining what can be done for them within their budget.

• Proactive discussion of costs variables and time costing policies.

• Explaining in detail the costs implications of different courses of action.

• Providing an example of what the bill might look like at the end of the matter – and asking the client if they would be happy with such a bill.

• Asking if the client would like to do some work themselves.

• Proactively suggesting ways to reduce fees.

• Giving clients choice and control over costs – both initial and ongoing.

• Managing the file to stay within the estimate.

20%

40%

40%

Costs

Perceived benefits

Costs consciousness


• Offering flexibility in scope, value and structuring of fees.

• Offering to cap or fix fees.

• Transparency and demonstrable efficiency.

• Regular estimate updates before costs are incurred, with explanation provided and permission sought to incur the additional costs.

• Using technology to provide ‘real-time’ costs information.

• Adding $0 entries in bills for activities which are not being charged for.

These activities help to build trust in the value of the work being undertaken, and help to significantly improve client perceptions of value for money and reduce client price sensitivity.

5.5. Managing the file to stay within the estimate Failing to keep WIP within the estimate leads to either internal write-offs and profitability drains, or client dissatisfaction and complaints. Clients interpret estimates as quotes, and are entitled to expect a final bill to fall within the estimate, particularly if it has not been updated.

Failing to stay within estimates might be due to poor estimating skills, poor work management, or might be unavoidable due to circumstances. Whatever the reason, clients view it as poor service and potentially as an ethical breach.

To stay within the estimate:

• spend the time in the first meeting to define the scope of the matter and understand risks that will affect time and cost

• improve estimate accuracy (see section 6.6) and communicate value to justify a realistic estimate

• build a buffer – estimate then add something (say up to 20%) – it is good relationship building to come in under rather than over-estimate

• consider capping fees at 20% more than the estimate

• treat the estimate as a fixed budget/quote for the work, not as a flexible target

• develop a detailed matter plan with budgeted WIP benchmarks for each stage or activity

• project manage the matter with a view to staying within the budget for each stage or activity

• don’t undertake activities that are out of scope or which exceed benchmarks without seeking approval for a revised costs estimate.


5.6. Handling client resistance to fee estimates and rates Clients routinely dispute or complain about fee estimates, with typical comments such as:

• “That is very/too expensive.”

• “That’s a lot of money.”

• “That’s more than I was expecting.”

• “That’s significantly more than XXX charge.”

• “Can I have a discount?” / “Can you do it cheaper?”

In reacting to such comments, solicitors should firstly recognise that many people or businesses routinely attempt to negotiate on fees irrespective of the level of fees quoted. This can actually be seen as good business practice: such negotiations are often successful, so why pay more than you need to? Procurement personnel in large organisations will often select primarily on factors other than price, but they wouldn’t be doing their job properly if they then didn’t try to get the best price possible.

Practices should also remember that a proportion of the population will instinctively choose the cheaper option, and should expect to lose some opportunities on the basis of price. If clients always accept the price proposed, this is a sign that the practice isn’t charging enough.

Precisely how many clients a practice is prepared to lose to competitors on the basis of price will depend on strategic positioning choices, but practices should accept that a minimum of 10% of enquirers may ultimately prefer to go elsewhere on the basis of price.

The message from the above is for law practices to resist the temptation to discount or reduce fees, and to instead focus on justifying and defending fees on the basis of client value. The table below offers some suggestions.


Demonstrate confidence

If solicitors do not believe they are worth what they are charging, clients never will.

Identify the challenge Try to identify whether the client genuinely can’t afford your services, is questioning your value in absolute terms, or is questioning your value compared to the competition. This will inform how you respond.

Emphasise your focus on client value

A good initial response to any client challenge on fees is to assert your commitment to providing good value for money. This immediately focuses the conversation on the value of your work, rather than simply its cost. It also indicates a willingness to discuss further without any defensiveness about fees.

Identify client value triggers

Ask questions that help to clarify what the client is trying to achieve. This builds the value of the solution and should help you better explain the value of your work in terms of client needs and wants.

Identify competitive value differentiators

Emphasise how your services offer better value than your competitors in terms of the client’s specific objectives.

Explain the value of different activities

Discuss the work in more detail, emphasising what you are doing, why you are doing it, the risks of not doing it, the risks of not doing it a certain way, and how this benefits the client.



Offer the client choices and collaborate on scope and fees

Don’t force a client to choose between you and your competitors.

Offer the client different choices in terms of alternative scope and estimate options. Work with the client to develop an approach that provides good value without compromising profitability.

5.7. Key points • Building client recognition of the value of your work will help in:

• raising fees or reducing downward pressure

• including more time in the estimate

• recording, billing and recovering more time

• generating more referrals

• generating fewer complaints.

• Specialisation and differentiation gives legal practices greater pricing leverage.

• Costs consciousness – the perception of managing costs in the clients’ best interests – accounts for 40% of clients’ perceptions of value, according to research by Beaton Capital.

• In handling client resistance to fee estimates and rates, focus on client value and offer the client choice.


6. Time and money 6.1. Time recording – value and purpose

There are three reasons solicitors should record their time: billing, performance management and internal cost measurement.

Even where practices do not time-cost, therefore, there are still good reasons to time-record.

Time recording forms the basis of management accounting because it allows practices to accurately cost the production of work. Failure to accurately measure the cost of producing work makes measuring and managing profitability significantly more challenging.

The discipline of recording time means time is used more effectively, and performance management of time recording through the implementation of billable hour targets allows the practice to effectively measure and manage both practice and individual productivity.

Practices on full time recording are able to produce a range of management information:

• Chargeable hours for each fee-earner on a daily, weekly or monthly basis.

• Information on average hourly fees – by dividing the chargeable hours recorded into the fee-earner’s billed fees.

• Non-chargeable hours for each fee-earner.

• An analysis of non-chargeable time.

• Total value of work done each week or month.

• Total value of WIP for the practice and for each fee-earner, team, department.

Alternatives to time recording 6.1.1.

Whilst time-recording can hold significant benefits for a practice in terms of costs measurement and performance management, there can also be disadvantages in terms of practice culture, ethics and fee-earner morale.

Many of these risks can be managed (see section 6.7) but aversion to time-costing remains and is understandable. Practices wishing to operate with time recording should seek to identify and use other ways to manage productivity and monitor internal costs. Common methods include:

Tim

e re

cord

ing

Billing

Performance management

Internal costs measurement


• measuring file velocity/file completion rates

• matter velocity/matter completion rates

• comparing monthly billing figures to salaries.

6.2. Time recording policies, training and guidance Most of the rules about time recording can be narrowed down to four basic principles:

1. Time should only be recorded as billable where it is specific to a single client or matter – general or background activities should not be recorded as billable.

2. Never duplicate time recording or record the same time on more than one client file.

3. Consider client expectations and disclose or discuss cost implications of various actions.

4. Professional activities are usually billable. Administrative duties are usually not. Within limits, permissible billing is determined by the costs agreement. The firm billing policy must match the agreement.

Practices should develop their own time recording policies and consider making a version of these available to clients as well as staff. Clients would prefer to know in advance what will and won’t be charged for, rather than waiting for the bill to find out. Specific issues are addressed in the table below. Contrary policies may be possible if allowed for in the costs agreement, but risk to the practice will increase. The further a billing practice strays from the established path, the harder it will be to achieve informed client consent to the agreement.


Units and rounding When time is recorded in units, time spent is routinely rounded up or down to the nearest unit. Rounding up may be justified to recapture time lost in small activities that are important but not billable, but the practice is open to abuse: consistently recording a six minute unit for actions taking a minute is clearly unethical, especially where each action is really part of a logical series, such as drafting, typing, proofing and signing correspondence.

Practices should monitor rounding behaviours to check for unethical practices.

Research It is legitimate to charge for exceptional research that is necessary, specific to the single client matter and clearly disclosed. Background research or research which is not necessary for any specific matter should be recorded as non-billable.

Learning on the job by a solicitor who knowingly accepts instructions beyond the level of competence expected by the client would be seen as unethical.

Waiting Clients increasingly expect solicitors to use technology to make waiting time productive. Whatever the regulatory/ethical view of recording waiting time, consider client expectations and discuss the cost implications of waiting.

It may be legitimate to record time spent waiting for a client provided it is a result of the client’s requests or is a necessary consequence of the work for the client. The client should always be advised that waiting time may be billable. Under no circumstances should the same (waiting/working) time be recorded twice.



Travelling Time may either be recorded as travel, where legitimate, or for work done on other files during travel, but never both. As with waiting time, consider client expectations and discuss the cost implications of travel.

Supervision/ discussions between solicitors

There is a wide range of practice approaches to recording of supervision time. Whilst professional supervision time relating to client work on a particular file may be recorded against the matter files by either supervisor or supervisee, it is rare for both to record time.

Many practices prefer not to record supervision time as chargeable due to client resistance. Non-matter specific supervision should be recorded as non-billable.

File administration Professional file administration, including file audits and other activities that mitigate file risk or otherwise benefit the client may be recorded as billable, to the extent it is specific to a particular file, subject to the general principle that work done for the firm’s benefit should be at the firm’s expense.

Pure administration (eg filing and preparing costs agreements) and management activities that are not specific to individual files should be recorded as non-billable.

Entertainment Entertainment should be recorded as non-billable. Even where client matters are discussed in a professional capacity during an entertainment event, consider client expectations before recording any time as billable. Charging for time during an entertainment function risks negating any goodwill generated by the entertainment.

Software licenses Do not attempt to have a number of staff use the same input code on time recording software in an effort to save license fees. It is prima facie fraudulent for administrative staff to use a solicitor’s code to enter time, and if individual staff are not accountable for time billed, it is extremely difficult to maintain internal controls.

6.3. Informative and transparent time entries Time should be recorded in a way that provides as much information as is necessary for a supervisor or a client to understand the activity and assess its value or validity.

Time is usually recorded through a mixture of existing standard codes or entries in an IT application and drafted narratives.

• Review standard codes or entries regularly, ensuring all common tasks are included and the descriptions are informative and value-building. This ensures clear and understandable entries and makes recording time easier and quicker.

• Drafted narratives should be informative for clients and supervisors, and concise enough so their drafting does not become a time stealer. Guidance or training can assist in this.

• Bear in mind that a Third Party Payer (who may be hostile to your client) can be entitled to an itemised bill. Narrative entries describing time spent must strike a balance between describing the activity without waiving privilege.

All time should be recorded as if the client is the next person who will look at the entries. Block or large time entries that provide minimal information are vague and might lead clients to question the amount of time or the value of the activity, and should be avoided.


In developing standard codes or entries and guidance and policies on time recording, refer to Court Scale of Costs (available in the Uniform Civil Procedure Rules 1999). Consider tailoring standard entries to those in the scale and recording others separately. If this is the process, be aware of the need to update tailored entries when the scale is updated.

6.4. Checking bills When reviewing individual bills, make these checks:

• Sanity check – is the bill fair and reasonable for the work done?

• Estimate check – how does the bill compare to the original estimate?

• Ethics check – should any listed time entries be non-billable? Is there any evidence of padding?

• Double entry check – has time been entered twice against the same single task?

• Wrong matter check – has time from other matters been misallocated?

• Overworking check – is there any evidence of unnecessary activities, such as overzealous due diligence?

• Narrative check – are the narratives sufficiently clear and detailed?

• Privilege check – has advice privilege been waived? Does the description (eg consulting expert ABC) give away a tactical advantage? Have disclosure and technical requirements been fulfilled? If there is no disclosure or no valid costs agreement, it is misconduct to render a bill on a contractual basis.

Remember – in addition to the firm principal, the practitioner that signs or supervises the preparation of a bill is responsible for its content. Overcharging is prima facie professional misconduct (the more serious offence) and can lead to a solicitor being disciplined or even struck off.

6.5. Costing time Most hourly rates are fixed not by calculation but by a mixture of incremental increases on past rates and competitive comparisons. Unless costs of production are clearly understood, however, it is difficult to make well-informed decisions about fees and profitability.

A basic calculation of time cost is easy: all costs involved in the production of the service (salary, related employment costs and overheads) should be apportioned and then divided by the number of hours that each fee-earner will be expected to record as billable time.

A simple equation looks like this:

Employment costs + overhead allocation = Provisional hourly cost

Number of chargeable hours recorded

This figure provides a provisional cost.

To arrive at an hourly fee, the provisional cost has to be increased to allow for profit margin and recovery rate.

• The achievable profit margin is dependent on many factors, but practices should aim for a profit margin of at least 25-30%.

• It is rare to recover all billed time, so allow for time written-off and discounted bills. Recovery of 80-90% of time is an achievable goal.


The calculation for the hourly rate might therefore look like this:

Employment costs + overhead allocation

$120,000 + $50,000 x Profit margin

x 1.3

x Recovery margin

x 1.2

= Hourly rate

= $230 Number of chargeable hours recorded 1200

Overheads 6.5.1.

These calculations show how factors such as overheads and recovery rates affect costs of production, so it is sensible to analyse these costs within different teams and adjust charge-out rates accordingly.

To accurately cost time and subsequently analyse profitability, the more costs that can be allocated to individuals or a team, rather than the practice as a whole, the better. These might include:

• individual employment costs: salary, payroll taxes and super contributions – these can be calculated for each individual and allocated to them

• department overheads: secretarial, marketing, training and library costs

• practice costs as a whole: accommodation and insurance.

The process of allocating overheads leads to much discussion. Teams use secretaries, paralegals or knowledge management resources to greater or lesser extents, with costs allocated accordingly, but complicating the calculations brings little benefit. For example, a discussion about the family law team’s share of PI insurance compared with the property team is unlikely to move the costing process forward. Be cautious about allocating expenditure across teams unless the allocation is based on a genuine measurement.


Example overhead calculation 6.5.2.

Consider a practice with 10 solicitors: three in the family department and seven in the property department. The practice decides that of their total overhead bill of $500,000, $150,000 should be allocated to the property team and $50,000 to the family team, with the $300,000 balance allocated on a per capita basis.

Each property solicitor will be allocated a share of the general overheads ($300,000/10) plus a share of the property department’s overheads ($150,000/7) to give a total per capita overhead of $51,428.

A solicitor in the family team is allocated the equivalent overhead, slightly less, at $46,666, which recognises that team’s lower usage of secretarial and paralegal staff.

Practice – General

Property Department

Family Department

Overheads $300,000 $150,000 $50,000

Fee-earners 10 7 3

Per capita overhead allocation $30,000 $21,428 $16,666

Redistributed per capita overhead allocation

$51,428 $46,666

This process should be undertaken twice yearly, and provides a valuable understanding of costs of production, facilitating discussion about costing work and making decisions about profitability and practice direction.

6.6. Estimating time Estimate accuracy can have a dramatic impact on productivity, profitability and client satisfaction. Practices need to invest in both personal skills and practice systems to improve the sophistication and accuracy of their estimating.

Myths about estimating 6.6.1.

Consider two myths about giving accurate estimates to clients.

Myth 1: The accuracy of the estimate does not have a strong influence on the profitability of the work – because whatever the estimate, the bill and fees recovered will depend on the actual hours recorded. It is wrong to suggest that the accuracy of the estimate has little bearing on the profitability of the work. With practices on average recovering about 85% of WIP, the link between WIP and fees is not as strong as is sometimes assumed, especially where the final bill exceeds the estimate.

Research shows that accurate estimates increase recovery rates and limit write-offs, improving profitability. In addition, if the final bill comes in close to the estimate, solicitors are quicker to bill and clients quicker to settle, improving cash flow and releasing cash for investment, reduction of bank overdraft or partner drawings.

Given that, in the market, fees above an estimate are seen as negotiable, fees for work done without an estimate are likely to feel very negotiable, leading to a larger proportion of the final bill being treated as negotiable and at risk of being written off.


More accurate estimates lead to higher recovery and a significant increase in profitability. This example shows a 66% rise in profits.

Estimate WIP Notes Recovered fees

Profit @ fees less

75% of WIP

$8,500 $10,000 Partner notices fees are more than the estimate and reduces bill to $9,500 to please client. Client is still upset. If he pays the extra $1,000, he has to justify it to his boss and it affects his budget for other work. He scrutinises the bill and sees $500 has already been written off.

This makes him believe there is scope for a bigger reduction. He asks for another discount.

$9,000 $1,500

$10,000 $10,000 Client is happy with the bill and pays quickly.

$10,000 $2,500

Accurate estimation opens the door to a fixed-fee or capped fee approach for some matters or for specific elements of some matters. Practices that accept some of the cost and profitability risk can look at charging a ‘risk premium’ to further increase profitability.

Myth 2: Accurate estimates are not possible: the work is potentially complicated and there are too many variables that could affect the final size of the bill.

Although some legal work is genuinely unique and ground-breaking, the vast majority of matters a practice accepts instructions for have been done before. The practice should be able to draw on historical time and costs data to identify what past jobs, or their constituent parts, have cost.

Using historical data to provide accurate estimates is an obvious approach. It requires a combination of legal knowledge and accounts analysis skills that neither solicitors nor accounts staff have fully acquired. Solutions include training solicitors in estimation skills or to change the accounts focus from billing to estimating.

Breaking up legal work into constituent parts is vital for accurate estimating. As well as providing accurate figures and more information, it increases consistency and so the perceived fairness and accuracy of a bill, even where the overall costs cannot be accurately predicted. For example, it might not be possible to reasonably predict how many documents of a certain type will require review as part of a matter. However, it is possible to predict what each review will cost, for instance, either three hours or about $750. If a practice can quote, stick to and refer to these estimates, then the final bill will be consistent with the estimate, irrespective of the number of documents reviewed.

Expectations about costs can be managed, even if accurate estimates are not possible. A final bill that is consistent with initial indications should give little room for dispute. This is why it is in a practice’s interest to provide as much information as possible about costs, explaining the variables and minimising the risk of failing to manage client cost expectations.

Time spent estimating fees is rarely wasted – it focuses both client and firm on what is and is not in the retainer (limiting risk) and means the file author has a good overview of the steps to be undertaken from the outset (maximising efficiency).


An estimating process 6.6.2.

Solicitors who claim extensive experience in a particular area but then cannot produce precise and accurate costs estimates frustrate clients.

The most common reasons for poor estimate accuracy are:

• poor initial interviewing that fails to gather the required information to inform a rigorous estimating process

• an inability or lack of confidence in justifying the value of the work to clients, leading to under-estimating

• launching straight into the ‘substantive’ work on the file without paying adequate attention to essential first steps.

Consider these steps in developing a system for accurate estimates based on historical data.


Segmentation of stages/tasks

Develop a range of matter templates that break matter types down into stages, and then segment each stage into tasks and related sub-tasks.

Time recording guidance and training

Record all time, including non-billable time and time written off, otherwise the historic data and cost projections will be flawed. Train staff and provide guidance on time recording.

Make sure the IT system can measure the time taken to complete the identified stages and tasks.

Develop database of historical task times and costs

Using the data, calculate the average time to complete each task and sub-task, and develop data for varying circumstances and different staff.

Segment tasks/stages

Time recording guidance and

training

Develop time/ costs database

Effective interviewing

Compare scope to historical data

Consider risk factors

Check, discuss, review



Effective time-cost information gathering

Gather all the information required to do an accurate costs estimate during the first meeting. This will include the relevant tasks, to be broken into stages, and any risk factors that could affect time spent on each task or stage, or on the matter overall.

A prompt, checklist or matter template outlining all possible tasks or stages and all potential variables assists.

Compare scope to historical data

Refer to the historical database to produce time estimates for the stages or tasks identified for the new matter.

Consider variables and risk factors

Refer to the historical database for information on how any identified variables or ‘risk factors’ might affect the estimate.

Risk factors or variables include:

• inexperience/incompetence of the other side

• foreign jurisdictions

• multiple clients, financiers, agents or other parties

• delay: if a matter isn’t completed by a certain time, costs might increase significantly

• client capacity

• client’s communication/service/project management demands.

Check and review Before finalising the estimate, briefly discuss it with a supervisor or colleague. A second pair of eyes might identify another variable.

Formalising the process prompts greater consideration and incorporates more data and variables, ensuring greater accuracy.

This process looks complicated. However, a practice that is disciplined in recording data and can streamline the process through the use of support staff and appropriate IT will benefit.

Measurement, discussion, review 6.6.3.

Another way to improve the accuracy of costs estimates is to measure accuracy as part of regular supervision and performance management. As well as focusing attention on the estimation process, discussing it can lead to ideas for improving accuracy and developing best practice.

By comparing bills to estimates, solicitors learn to identify where they have underestimated time and can use this knowledge to improve the accuracy of estimates in future.


6.7. Costs, culture and ethics For many years, hourly fees and billable hour measures have been the basic unit of practice profitability, providing a simple, low-risk model to confidently calculate, manage and lock-in profitability.

Criticisms of the hourly fee, time costing or the billable hour system are targeting three different things, which should not necessarily be linked together:

• Time recording – the internal process of recording time against matters.

• Time costing – the basis by which you calculate your fees and bill.

• Individual, or team, billable hour targets – the internal targets for solicitors to record or bill a certain number of chargeable hours each day/week/month/year.

It is possible to use time recording without individual billable hour targets. It is also possible (and a good idea) to have time recording and time recording targets without using them as the basis for charging clients.

It is also common for practices to appear to charge clients according to an hourly fee, but for the fee to bear little relationship to the tally of recorded hours. A partner may decide to decrease time recorded, for example, according to an estimate of what the client is willing to pay, or the time a solicitor ‘might have been expected’ to need to complete the work, according to their experience and expertise. This raises ethical and profitability issues which are also discussed in time recording, below.

The terms ‘billable hours’, ‘time costing’ and ‘time recording’ are not interchangeable. Many cultural or ethical concerns can be avoided by separating them and considering each on their own merits.

To understand the drivers and motivations for the concerns, it is important to separate the practice from the individual. Time costing prompts concerns at practice level, whilst billable hour targets can lead to questionable individual behaviours.

Time costing and billable hour targets 6.7.1.

The main criticisms of time costing and billable hour targets are as follows:

• Together, they can encourage institutionalised inefficiency. Working more quickly, recording fewer hours and so generating fewer fees, could encourage solicitors to allow available work to expand to fill the time.

• Together, they encourage padding or lead to unnecessary additional work (such as overzealous due diligence).

• Together, they can lead to a reduction in important non-billable activities such as client service, communication, the development of precedents or personal professional development.

• Together, they can create a long hours culture, adversely affecting employees’ work-life balance and limiting their ability to effectively manage their commitments at home or to social engagements.

• Individual billable hour targets discourage team co-operation and support (billable hour targets for a team can, with good management, encourage co-operation and support).


• Demanding team billable hour targets, when made the responsibility of a partner, increase the risk of bullying or unreasonable demands on individual team members. Billable hour targets emphasise quantity rather than quality, which can lead to lower quality work and low morale if performance management is exclusively based on billable hour statistics.

• Time costing does not provide the client with predictability on cost, leading to anxiety, a lack of accountability, inefficiency, and the potential for disputes.

Together with other negative cultures, the cumulative effect of these ethical and cultural strains can lead to an increased risk of claims and complaints, low morale and motivation, high staff turnover and stress and depression.

Suggestions for avoiding these consequences include:

• effective supervision, delegation and workload management to provide the work solicitors require to meet their billable hour targets, reducing the temptation to pad or work inefficiently

• make padding and inflation of timesheets a disciplinary offence

• agree reasonable and achievable billable hour targets, rather than imposing them

• develop career pathways and salary levels for individuals who are not comfortable with high billable hour targets so they can contribute productively

• develop balanced performance management arrangements, of which billable hour targets form only one part

• develop policies and provide training on time recording, then supervise the practice of time recording to both eliminate unethical practices and offer support to fee-earners

• develop work-life balance arrangements to enable people to meet billable hour targets whilst still maintaining their home and social commitments.

6.8. Key points • There are three reasons for legal practices to require solicitors to record their time:

billing, performance management and internal costs measurement.

• Practices that do not time record should seek to measure productivity through other means such as file velocity, matter velocity or billing measures.

• Practices should develop time recording policies to guide their team internally and also make a version available to clients in the interests of transparency.

• Estimate accuracy has a strong influence on both the profitability and cash flow of any given matter.

• Accurate estimating requires effective interviewing and the structured use of historical time/costs data.

• Time recording, time costing and billable hour targets are three different things, which do not necessarily have to be linked together.

• There are a number of ethical and cultural risks to time costing and billable hour targets that need to be considered by practices.


7. Suggestions for improving performance Here are 10 suggestions for improving performance in relation to costs, billing and profitability.

1. Think beyond LPA 2007

Costs can be seen as a regulatory issue or as a bureaucratic burden on the ‘proper work’ of solicitors. Since good management of costs and billing is vital to client satisfaction and profitability, a best practice approach brings rewards.

Practices that set higher standards than compliance with LPA 2007, and then implement arrangements to ensure those standards are met, will benefit. Practices that treat costs as an exercise in compliance will not only miss their target occasionally, they will also miss the benefits arising from a best practice approach.

2. Listen to clients

The management of costs is central to clients’ perceptions of the service provided, driving perceptions of value that affect rates, recovery, hours and ultimately profitability.

Over-reliance on a regulatory approach at the expense of client feedback ultimately leads to lower standards of service. Codes of conduct set minimum standards or basic benchmarks, whereas clients demand the highest standards – which is what professionals should be aiming for.

Clients – through first meetings, complaints data, satisfaction surveys or feedback forms – should be consulted about concerns and expectations in relation to costs, and how successfully the practice offers reassurance and meets their expectations.

3. Focus on time recording

All billable and non-billable time should be accurately and promptly recorded. Whether or not time recording is the basis for charging clients or setting productivity targets, understanding how staff time is spent is vital. Without this, informed management decisions, including about performance management and profitability, cannot be made.

Support all staff by providing guidance and training on how to record their time. Where possible, invest in the most appropriate software solutions to make it easier to record time and to subsequently analyse the information.

Instead of focusing only on billable hours recorded, measure the percentage of the day that has been accounted for (with a goal of 100%) and the percentage of that time which is billable.

4. Monitor and understand your internal costs of production

Work cannot be priced effectively unless costs of production are calculated and understood. Although most practices set hourly charge-out rates, the minority actually calculate the cost of producing work each year. Pricing the cost of work might seem laborious, but making the calculation twice a year will provide invaluable information for pricing, management and strategic decisions.

5. Build confidence and flexibility in relation to costs

An understanding of internal costs and the mechanics of profitability can build confidence and competence for costs discussions. Solicitors who understand their internal costs are better placed to negotiate and respond to client preferences in relation to billing and fee structures.


Developing the capacity to offer a range of options gives costs negotiators confidence, as providing alternatives makes it more likely a solution that suits practice and client can be found.

6. Communicate value

Build client recognition of the value of your work through the consistent discussion of differentiating factors, by ‘building the pain’, and by explaining how the work benefits the client.

7. Improve the accuracy of estimates

Improving the accuracy of estimates brings benefits in terms of client satisfaction, profitability and cash flow. Training, better information capture, the use of historical data, measurement and internal discussions improve the accuracy of initial costs estimates.

8. Manage cultural and ethical risks

Time costing, time recording and high billable hour targets have been linked to low morale, stress, high staff turnover, poor client communication, padding of timesheets and overcharging. Practices should monitor these risks and amend their arrangements to minimise them.

9. Build a structural base for profitability

Trying to move one of the levers, without the required underlying skills, systems or investment in place, will not help profitability. Focus on efficient time recording, accurate and informative costs disclosure, client satisfaction, developmental supervision and risk management will allow effective adjustments to the levers of profitability.

10. Apply supervision and performance management

Whatever support is provided for time recording, implement arrangements to ensure that all bills are ethical and comply with practice policy. Having a supervisor or partner check and approve bills before being sent provides an opportunity for discussion about any concerns, for amendments as necessary and to identify areas where staff might need additional training or guidance. The knowledge that all bills will be checked adds discipline to time recording.

Benefits flow from measuring and monitoring the following aspects of practice and individual performance:

• The percentage of each day accounted for – the goal is 100%.

• Key performance indicators for billable time each day/week/month.

• The recovery rate for each team and solicitor.

• The accuracy of initial estimates.

• Unbilled WIP for each solicitor or team.

• The debtor days for each solicitor or team.

• Team and individual profitability.

• Client satisfaction about costs and costs disclosure.

Such monitoring will identify issues to focus on, and prompt consideration of the need for new systems or additional training, guidance or support.


Appendix 1: Costs management checklist

Does your practice… Yes/No Responsible

provide regular training to fee-earners in relation to the costs requirements in LPA 2007?

periodically review costs agreement templates to ensure that billing practices match what has been agreed with the client?

review its costs disclosure statements for compliance and its ability to respond to client needs?

always proactively discuss costs with clients in a first meeting?

use IT or other systems to prompt a costs update?

regularly measure client satisfaction in relation to costs disclosure and billing?

allow for flexibility in fee and billing arrangements?

encourage and support flexibility in fee and billing arrangements?

have a formal system for estimating the likely overall cost of a matter?

audit and measure the promptness of costs updates to clients?

measure the accuracy of initial estimates?

provide training or guidance about accurate estimating?

use historical costs data as a basis for providing costs estimates?

have agreed policies on time recording that cover issues such as research, travelling and supervision?

provide regular training in relation to its time recording policies?

provide training on the drafting and content of time recording narratives?

provide details to clients of its time recording policies?

make padding and other unethical time recording a violation of employment terms?

implement arrangements to limit the cultural and ethical risks that can arise from demanding billable hour targets?

implement delegation and workload management arrangements to ensure fee-earners have sufficient work to meet billable hour targets without the temptation for padding or unethical time recording?


Does your practice… Yes/No Responsible

ensure bills are reviewed by a supervisor or partner before being sent to the client?

‘build value’ in cost estimates and bills or when discussing costs?

provide training to fee-earners on costs negotiation?

automatically provide (or offer) clients a full printout of all recorded time at the completion of the matter?

measure fee-earner performance according to a number of measures, not just billable hours?

measure the percentage of the working day that can be accounted for?

regularly review internal costs for different areas of work?

measure WIP days and debtor days for different practice areas?

measure recovery rates for different practice areas?

Documents

Practice Management Course · profitability. This unit urges practitioners to look at costs as more than a compliance issue, and to focus on best practice approaches to communication,