Reaping the benefits of keeping time.

Plaintiff law firms differ from general practice firms in many ways, but one of the most obvious is the method by which they are paid for their services. The general practice firm is normally paid on the basis of hours worked multiplied by the hourly rates of the attorneys and legal assistants assigned to the project. Plaintiff firms are usually paid a contingent fee.

Under the contingent fee system, there may be no correlation between time worked on a case and the fee received, so lawyers in many plaintiff firms believe it is unnecessary--and in fact, counter-productive--to keep detailed time records. But accurate timekeeping makes sense for plaintiff firms for the same financial and management reasons that it does for general practice firms.

Timekeeping can help plaintiff lawyers better manage their firms in at least six areas: determining profitability, evaluating productivity, monitoring the settlement point, "buying out" departing attorneys, assigning asset values, and tracking legal fees.

Determining profitability. When hours are not kept, the cost of handling a matter for a client cannot be determined. The firm receives its share of the proceeds from the case but cannot assess whether the assignment produced an adequate profit based on the time lawyers and other staff spent working on it.

Keeping track of time is important in both large and small cases. Of course, a firm's partners are pleased when large cases are settled, and the attorney in charge is congratulated for a job well done. However, if the firm had adequate cost records, they might show that the project actually produced a loss rather than a profit.

Some firms accept smaller cases, even though they may produce losses for the firm, to attract larger ones. Good management dictates that the firm track how much is being lost and the extent to which firm resources are being used in these cases.

Profitability is also affected by expenses, and firms should have a logical method for allocating expenses to each attorney. Major expenses--compensation, benefits, and occupancy costs--can be fairly easily calculated and allocated to each attorney. Other expenses--such as office supplies, insurance, and continuing legal education--usually account for a small percentage of the total. These can be allocated to departments within the firm or to individual attorneys. To get an accurate picture of profitability, these expenses must be deducted from the proceeds of a case.

Law firm managers need to exercise care when they look at the profitability of an individual attorney's work. If cases are assigned to attorneys, it may be strictly chance that one lawyer happens to get a case that affords a much larger profit than others do. Managers must recognize the inherent problems in making profitability calculations for individual lawyers.

Evaluating productivity. In a plaintiff firm, a lawyer's productivity is usually measured by the number of clients obtained, the number of settlements achieved, and perhaps the average settlement per case.

Although these criteria are important, they do not properly evaluate productivity. For example, some attorneys" compensation may be too high relative to the cases they settle, especially if the amount of work the cases require is disproportionately small. If nothing else, good timekeeping indicates an attorney's industriousness and work ethic, which should be a performance standard used in setting compensation levels.

Timekeeping also makes it possible to relate the time the attorney spent in handling a case to the amount of the fee. For example, if an attorney accumulates 200 billable hours in a case and the fee is $10,000, the collection realization is $500 per hour. If the attorney's billing rate is $250, he or she has had a 200 percent realization on the billing rate. This statistic can be a useful tool for measuring a lawyer's overall productivity.

Monitoring the settlement point. Almost every case has a threshold level beyond which further work produces little, if any, reward. This threshold is known as the "settlement point."

Attorneys who keep time remain aware of the value of their time spent on a case. By comparing this time value, a lawyer can determine when settlement should be vigorously pursued. It makes little economic sense to continue to work on a case that has a settlement limit of $10,000 when the time value has already exceeded that amount. Most plaintiff lawyers who keep time records view this as the most important benefit of the practice.

"Buying out" departing attorneys. With lawyers moving from firm to firm in great numbers, more firms are trying to formulate buy-out agreements with their partners. Under these agreements, a departing attorney generally retains some interest in cases that remain unsettled at the time of his or her departure. When these cases are eventually settled, the attorney receives a share of the proceeds in proportion to the value of the lawyer's time spent on the case before leaving the firm.

Without accurate time records, it is difficult, if not impossible, to determine the departing attorney's share of the fee. This problem may lead to litigation over the fair distribution of proceeds.

Assigning asset values. A major law firm asset--usually missing from the balance sheet--is the value of the work its attorneys have performed on unsettled cases. Time records will help form the basis for this valuation.

Of course, it is possible to review each case and estimate a reasonable settlement value, but it is much easier and more accurate to reflect this value as a function of billing rates and billable hours worked to date.

In other words, a case can be valued at its work-in-process level or at some estimated amount. On large cases, this amount is often difficult to estimate.

Tracking legal fees. Many courts across the country now require evidence of fees accumulated on a case before approving a firm's fee request.

Time records can provide this evidence by documenting the time value charged to the client and may provide justification for the fees that are being requested.

These records also serve another important purpose. Sometimes, the client can become dissatisfied with his or her lawyer and decide to change counsel before the case ends.

When that occurs, the original attorneys often place a lien on the eventual settlement for what they consider their reasonable share of the proceeds. Good time records can provide evidence of the amount that would be due.

Timekeeping will not guarantee that a firm's cash flow or net income will improve. These depend on how the firm manages its cases from the time they are accepted until the time they are settled or tried. The firm needs to keep accurate records of the length of time that cases are open and make certain that they move through the system as quickly as circumstances permit.

The timekeeping process can help track how long a case has been open, when the last transaction took place, and so on. This may indirectly help with income and cash flow. But many other management ingredients--such as good case-management systems, expense control, and technology --must be present, regardless of how time is kept, to ensure that cases are concluded efficiently.

Practical issues

Firms that decide to begin timekeeping must be willing to incur some expenses for software, hardware, and possibly additional personnel. They can also expect to face some new management questions. The following are some of the practical issues that law firms will have to consider when they switch to a timekeeping mode.

Computer technology. Most plaintiff firms currently use case-management software rather than timekeeping software. Thus, the firm will need to buy either a new system or an additional timekeeping module for the current system. The cost, which will vary depending on the size of the firm and the number of timekeepers, could range from less than $500 to as much as $4,000.

The new software must he able to interface seamlessly with the old software, so that the case-management side of the system "talks" to the timekeeping side. This eliminates the need for duplicate entries of information.

Because of the amount of detailed data that will be stored in the computer system and the number of transactions that will be processed daily for each timekeeper, the hardware configuration may have to be upgraded for additional memory, storage, and processing power.

If a firm wants lawyers to be able to enter their time into the system remotely, and if it wants to give everyone on staff access to certain timekeeping data, it needs its computers to be linked in a network. The network connects the computers to a file server where all the data are stored. If the firm has only stand-alone units, installing a network could require additional spending on cabling, centralized printing, and communications software.

Personnel. Additional clerical staff may be needed to input daily entries of hours worked, assuming the current staff is already working at capacity. Although most systems permit remote time entry, either a secretary or clerk will have to key the time into the system.

Firm culture. Switching to timekeeping affects the culture of a firm. Under the new system, the firm keeps information that measures many aspects of attorney productivity. Lawyers who work herd will have an impressive record of hours to show for their work. The time records of those who work less will reflect that.

General practice firms tend to use billable hour information as a major criterion for setting compensation levels. Although this information is important, the number of hours a lawyer bills is simply one item in the mix of factors that firms should consider when setting compensation. In plaintiff firms, because of the way client fees are calculated, it is likely that the hours issue will be less significant than it is in a general practice firm, where the hours translate directly into fee collections.

Billing rates. Once a firm decides to use timekeeping, it must determine realistic and fair "billing rates" for each lawyer. Even though in a plaintiff firm no hours will actually be billed, setting the rates will allow the firm to keep track of the cost of handling the case.

Rates in general practice firms depend on many factors. These include competitive rates in the firm's geographical area; the overhead attributable to the attorney; the level of profitability desired; the number of hours the lawyer is expected to bill; the expected realization on the work performed; and the lawyer's expertise, experience, and compensation.

Some of these factors are important in plaintiff firms, and others are not. For example, the level of profitability obtained from a given timekeeper based on his or her billing rate may not be significant, because the real test of profitability is the lawyer's ability to obtain a sizable settlement. Also, compensation may not be a factor, since large settlements can inflate compensation levels and make them meaningless as a criterion for setting billing rates. In this case, the firm needs to use an estimated compensation amount based on what is paid to attorneys in general.

Nonattorney staff. The firm will also have to address the issue of timekeeping by non-attorneys. In general practice firms, legal assistants are usually assigned a billing rate, and their number of hours worked is important to the firm's profitability as well as to the assistants' own compensation.

In plaintiff firms, the definition of "legal assistant" is often unclear. In some cases, the legal secretary assumes this role and gathers the information needed to prepare the demand letter. Plaintiff firms also often have peripheral support staff such as investigators and intake personnel who sign up clients. To obtain accurate information about the cost of handling a case, the firm must require everyone on the staff to keep time records for each case in which they are involved (although members of the support staff are not assigned a billing rate). However, purely clerical or secretarial work that must be done in every case need not be recorded.

Nonbillable time. The firm must decide how attorney travel time will be recorded and whether the firm will record other nonbillable time such as firm management, client development, and continuing legal education. Although these activities may not contribute directly to the handling of a case, they are productive in other ways. At least some of the hours spent on these activities should be recorded so that a lawyer's total productive time can be evaluated yearly.

Worthwhile task

Most lawyers don't like keeping time records, but the benefits far outweigh the inconvenience of the task. It takes only a few minutes a day, and once a lawyer gets into the habit of doing it, the process is not as burdensome as might be expected.

Consistent timekeeping is particularly significant in firms with both general and personal injury practices, a combination that is becoming more common. If only some of the lawyers keep time records, the firm will have difficulty preparing realistic budgets, tracking financial performance of the firm, and monitoring each lawyer's job performance.

In today's competitive legal market, law firms must manage resources carefully. Firms need all the information they can get in order to ensure that cases are handled efficiently, productively, and--in the end --profitably.

John G. Iezzi is a certified public accountant and president of the firm Group, a consulting firm in Richmond, Virginia.