Law firm budgeting and the billable hour debate

It's "budget season" again for most law firms...

I've posted some thoughts on this earlier...

How to set fee-earner budgets properly and profit big time...


Among all the vigorous, and usually healthy and useful, debate in the profession over the future of legal services pricing, and the gradual consignment of billing by the hour to it's rightful place...being just one pricing option of many in a more sophisticated approach, it's important when doing your fee-earner budgets not to confuse "babies" and "bathwater"!

In delivering my training around Australia and New Zealand in the last few months, in-house with firms and in KMS seminars, I've all too often found lawyers and managers confusing the continuing need to plan and manage critical labour resources, with the alleged short-comings and pressures of "the billable hour".

Another relevant earlier post...

Why Time-Recording Remains So Very Relevant To Lawyers

Of course there are many fundamentals that affect profitability in law firms...

Expenses are, in my twenty-five-plus years consulting experience, not a big issue...they're almost always under tight rein, often because cash is unacceptably tight...

Production per se is a real issue, and good quality productivity is key...in the right volume!

Insufficient volume with quality is a major stumbling block...

It's one thing to efficiently deliver a client great value for money, using wise pricing options, on a job well-scoped and quoted or estimated confidently and professionally...

That's productive and even potentially profitable...

The problem with many lawyers is that they don't do it often enough in a year to be actually profitable...

They are simply ineffective in terms of generating a decent margin above all necessary costs of having the various resources available to run the business and service clients' needs...

The bottom line is that little or nothing is produced in the area that really matters...the area of opportunity after break-even...where pretty much every dollar generated is profit...

This is probably the biggest financial problem I find in law firms...

It's eminently fixable with proper planning using WorkPlans™ and proper accountability via a good practical activity capture system...not a time-billing system or a costing system...

Billing clients is one thing...but making sure the expensive resources you have invested in are being applied correctly to your business plan is a much wider issue and in terms of profitability, a much more important one!

This technique of planning and monitoring application of resources is not about creating pressures of the billable hour...quite the reverse...

It's about making sure that the firm knows when a fee-earner doesn't have enough to do, is absent the the KMS-coined "healthy backlog", and organising urgently to do what needs to be done about that...

It's about treating team members as individuals and determining what their respective skill sets are, and how they can be best applied to the firm's business plan, and for how long...

It's about balancing the critical need to do billable work with the other critical needs...marketing, training, research, planning, product development etc...even including researching and testing pricing mechanisms that do not rely wholly and solely on the billable hour!

In my experience one of the keys to reducing stress in otherwise capable people is to have clear plans they understand and buy in to, backed up by a healthy backlog of work...

Having an otherwise capable person only spending, for example, 5 hours a day out of 8 working productively on Client files, does not guarantee you to be getting 3 hours a day of productive FirmTime...the facts found in the figures, and in the financial results, over the last twenty-five years say otherwise, and say it very strongly. Most law firm profits are relatively poor, both per se and also given the resources invested...

Having fee-earners with clarity in how they will invest their average day for you throughout the year, and having an activity capture system that is easy to use and gives good information about how your resources are actually used, will set you up to start managing the deficiencies that will be there for sure...

Don't let arguments about the pressure of the billable hour distract you from your main mission...to make a proper profit and have fun doing great work for clients who deserve you!

Implement a good WorkPlan™ system, and a good activity capture system, and make it's proper use non-negotiable...and you stand a really good chance of doing what many other firms have done...starting to generate profits in the time beyond your break even point otherwise presently being "utilised" by what are in effect "idle hands"...and we all know what sort of work the wrong influences find for those hands!