One of the great things about non-hourly billing is that it frees you from the tyranny of timesheets.  You stop thinking about billing and start thinking about results, about outputs, about deliverables.  That approach is an anthema to the many vendors who specialize in products that help lawyers find more time to bill to their clients.  Timekeeping companies are not fans of non-hourly billing.

Smart Time is a timekeeping company that claims to have “reinvented” timekeeping for lawyers and others. It’s CEO recently identified 7 reasons why timekeeping is still essential to lawyers using AFAs.  Let’s explore these.

Reason 1: Measuring timeliness and compliance. Project managers still need a tool to evaluate how timekeepers are performing with regard to a project’s expected timeline.

Wrong! There is a huge difference between “how long” and “by when”.  Project managers and those performing a project need to be very focused on “by when.”  Timekeeping does not come close to measuring “by when.”

Reason 2:  Planning for estimates. While your client may perceive flat-fees as a good value, you must make them valuable for the firm, by accurately estimating to cover your costs and make a profit. Looking at previous time investments will help you to know exactly how much time it takes to perform specific tasks.

Most wrong! The truism that flats fees need to be profitable is not debatable, but timekeeping and cost, that is the amount that one subtracts from revenue to determine profit, have little to do with one another.  An the what value of knowing the amount of time one spent doing a project before brings to mind the saying about the value of learning to do the wrong thing better.

Reason 3: Client trust. Many, if not all, clients will still want the ability to monitor and check in on the engagement, and hours are one good way to do that. AFAs don’t do away with client-firm discussions on the progress of the matter.

Wrong! Clients are concerned about outputs, deliverables and results.  They care about strategy and the timely completion of projects and tasks.  Few truly care about the amount of time spent doing a task. They have been victimized by this approach for too long.

Reason 4: Keeping to budgets. How else can a timekeeper review and stick to a case or matter budget, if they don’t know how much time they’ve spent on it? In an AFA, following budgets strictly is key.

Wrong! The key is when, not how long.  The quality of the deliverable should not be artificially restricted.   The “budget” and the “fee” are the same–you make money by having the fee exceed the cost.  Cost and the time spent have little relation to one another.

Reason 5: Measuring profitability.  Without timekeeping its impossible to measure the profitability of the engagement.  Hours are still the best measure of cost. Understanding how much it costs, in time, to complete the engagement changes a firm’s focus to efficiency and value.

Really wrong! Hours are not the best measure of cost–they have nothing to do with cost. Cost is the best measure of cost.  You measure profitability by subtracting cost from revenue. Hours don’t fit into the calculation.  What the author appears to be suggesting is that one measures profitability by comparing the fee to what you would have made had you billed by the hour.  That’s not how business works.

Reason 6:  Continuous improvement of the AFA model. If you track time, you can refine your pricing based on increased understanding of costs and clients’ needs. Potential pricing systems might contain inclusion of some hourly rates, as well. Just remember to keep any pricing system easy for the client to understand.

Wrong! This falls in the close but no cirgar category.  The key for delivery of service is “by when.” Know when you can deliver something is important to pricing.  Just as focusing on learning how to accomplish delivery faster.

Reason 7:  Rules of professional conduct.  If you end up in a fee dispute with your client, you’ll need hours expended to defend your position in court.

Wrong! This is nothing but fear-mongering of the worst kind.  Restated, the argument is that if you get into a fee dispute with your client (how often does that happen, really?) and a court declines to follow the terms of the fee argeement, you’ll need to have hours recorded somewhere.  Does the concept of self-interest enter anyone’s mind here?

I get why companies that sell timekeeping software and services are concerned about AFAs. Freedom from the constraints of timekeeping is the dream of countless lawyers, as is the desire to avoid having to buy software and services that add no value to the business.  But these kinds of arguments are disingenuous and misleading.

 

  • Thanks Patrick. Very recently I had a chat with a transnational NYC attorney who obsessed over capturing additional 15min per day (or ~1hr per week).

    Regardless of his hourly rate, my feeling was that he would have been much better off if he invested the same amount of time thinking about how to escape that business model, and discover the value which he could price accordingly.

    Then, the time captured becomes irrelevant. I agree with you that all of this is a huge overhead for partners as firms. I wrote more about why I feel so here: http://legaltrek.com/blog/2014/11/law-firm-billing-is-this-essential-function-becoming-an-overhead/

    Upfront value-based pricing removes the overhead entirely.

    Thanks,
    Ivan

  • Spencer Stromberg

    I get that in an AFA situation, there is not necessarily a direct relationship between time spent on the project and the success, profitability or client satisfaction of that project. However, given that time is one of our limited resources, and given that attorneys and other staff tend to want to give over only a certain portion of their time to work, and given that the cost of doing a project involves wages divided by time, doesn’t it make sense to understand how much of this resource is going into a given type of project? How else would you know whether the project is profitable for the firm? Or whether certain types of projects are highly profitable while others might be marginally so?

    This is true of all kinds of industries. I used to work in a real estate development/general contracting firm. Even when we worked on a construction job on a fixed price, we tracked the hours of the employees involved so that we could see whether the job was profitable in the end.

    Obviously, things are a bit different for a solo attorney where there is not necessarily a “cost” to the time going into the project, but even then the attorney probably has (or should have) income goals. Knowing which work is bringing in the most profit per hour worked will guide the attorney in deciding what kind of clients and projects to take on or reach for.

    I struggle with time tracking as much as the next lawyer, but even as my partner and I are moving more toward a fixed fee model for most of our work, we and our staff are tracking our hours—just with a somewhat different purpose. Pricing AFAs based on the billable hourly rate x hours involved may be misguided, but that doesn’t mean the time involved doesn’t itself have a cost that has to be accounted for in some way. I am all for AFAs, but I don’t think we can entirely get away from tracking time, since it is such a precious commodity.

    • Thanks for your comment, Spencer. If your firm had a chance for revenue, say $5,000, but your allocated cost was $6,000, would you decline the engagement? Would it matter if the $6,000 were fixed rather than variable costs? Would it matter if there was no other work competing with this “unprofitable” engagement? My point is that so much more than time and “cost” goes into pricing and profitability that time should not be a determining factor. The goal needs to be less time, more value and a higher fee that the client happily pays.

      • Spencer Stromberg

        In my firm, we could probably still happily take that project, since our allocated cost from a time standpoint would largely be attorney time based on a desired realization rate, rather than a fixed out-of-pocket cost. I could see that in a larger firm, though, that they might want to decline that project if their allocated cost was based on salaries and benefits for attorneys and staff. Of course, if there truly is no other work competing for the time, and if the wages of the people involved are going to be incurred regardless of whether the engagement occurs (i.e., twiddling their thumbs if not working on this project), it probably makes sense to take the revenue even if it is “unprofitable” since it improves your bottom line by reducing the loss you’ll sustain over that time period anyway.

        I would restate your point that more than time and cost goes into pricing and profitability that time should not be THE determining factor. And I definitely agree with you statement of the goal.