The accelerating interest in Alternative Fee Arrangements, and in particular Fixed Fees (in which a fixed price is developed and billed for a project), is prompting an abundance of articles and speculation about how to do it and the changes it will bring to law firms. One interesting speculation is that the transition to Fixed Fees will finally get lawyers out of the business of tracking their time. While the use of true fixed fees may well mean the end of billable time, it is highly unlikely to mean the end of tracked time. Firms that have been successfully engaged in fixed fees for many years generally continue to track time on such projects. (Admittedly, some do so only because “that is the way we have always done it” and old habits die hard. And some track time because, despite the assertion that they are doing a Fixed Fee project, their clients are agreeing to a price but mandating time records to make sure that they never pay more than the accumulation of hourly charges. But I digress…)
But why track time if no time and hours based bill is going to be generated? Almost every business in the world wants to know about both capacity and utilization, since they are critical elements to determine and manage profitability. Firms that have years of experience doing fixed fee work quickly figured out that they too need to know how much capacity they have for work, and how well utilized their lawyers are at any given time. Tracking time is critical to assessing profitability: As so many firms are now discovering, it is amazingly easy to NOT make money on a poorly managed fixed price project. Some will argue that time tracking can be underreported to enhance profitability and that is a possibility. Any examination of firms actually doing true fixed fee work shows it is typically a short lived problem, because any effort to minimize reported time on a project ultimately prompts questions about utilization, even when profitability is high.
Despite the reasons above, some argue that tracking time is unnecessary, invoking examples of other professional service firms that never bill, much less track timekeepers, by the hour. And that’s true—most other professional service firms don’t track utilization by the hour…but most do track it by the day. Other professional service firms track utilization in days largely because they don’t have the wide variety of project sizes that characterize most law firms. Even in the largest, most profitable law firms in the US it is common for many lawyers to bill fractions of an hour, in total, for ongoing clients. Most other professional service firms handle projects measured in minimum increments of days, weeks, or even months. And they also measure the profitability of that work, before, during and after the project.
Will timesheets ultimately disappear throughout the industry? For most of the people reading this blog – not in our lifetime.