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Alternative Fee Agreements: Does This Mean the Death of Timekeeping?

By Todd Gerstein
CEO & Founder, Smart WebParts

If your firm is implementing alternative fee agreements, does it mean your attorneys can stop keeping time? At first, it is an intoxicating thought:  No more timekeeping.  A get-out-of-jail-free card. Attorneys don’t agree about much, but the one thing they do agree upon is that they all hate timekeeping.

I concede the point that you don’t need the recorded hour for billing AFAs. But what about the other uses of the recorded hour? How are you going to measure the profitability of the engagement?  What about attorney evaluation? Even with an AFA, does the client still have the right to request an hour’s report? To get some answers, I talked with two leading management consultants in the legal industry.

Getting the Experts’ Perspective 

The first expert I talked to is Jerry Kowalski, J.D., a nationally recognized consultant and adviser to law firms, who advises law firms on a variety of matters, including strategic planning, trends in the profession, compensation, alternative fee agreements and mergers.  His latest book is Navigating the Perfect Storm:  Recruiting, Training, and Retaining Lawyers in the Coming Decade; Lessons Learned and New Opportunities Exploited.

I also spoke with Ed Poll, J.D., M.B.A., CMC. In addition to his consulting role, Ed is  a nationally recognized coach and author who has consulted to law firms in the areas of strategic planning, profitability analysis, and practice development for over 20 years. His latest book is Growing Your Law Practice in Tough Times.

Question from Todd Gerstein: Is it essential to track time in an AFA?

Jerry Kowalski:  Tracking lawyers’ time in AFAs is essential. It provides a number of vital tools. First, it provides legal project managers with a tool to measure timeliness and compliance with the project’s timeline.

Second, it provides law firm management with a means by which to measure productivity, in connection with (a) any particular matter, (b) identifying individual lawyer’s demonstrated efficiency when assembling a team for a subsequent matter, and (c) annual associate and partner reviews.

Third, astute and well-informed clients frequently require its law firms to provide real-time access to the firm’s time accounting system and monitoring the time provides a method for the client to check on both efficiency and timely compliance with the timeline presumably incorporated within the terms of the scope of the engagement agreement.

The well-managed AFA engagement also should require regular discussions between client and the firm’s client relations manager regarding the progress of the matter. Maintenance of accurately reported timekeeping provides client and law firm to have well-informed discussions on the progress of the matter.  

It certainly hasn’t escaped me that the irony is that in the former model of hourly billing, lawyers were incentivized to keep their pedals to the metal and bill large amounts of time. In the new AFA paradigm, lawyers will be incentivized to go light on the pedal to demonstrate efficiency.

Q:  How do you measure the profitability of an engagement without knowing what was spent on production?

Jerry Kowalski: Tracking of time in AFAs should also require some radical re-thinking by law firms of the metrics used for measurements of profitability. In the hourly billing model, profitability was measured by an equation under which time recorded was multiplied by a firm’s standard hourly rates, less write-downs and write-offs (or in some instances, plus a premium added to a bill), yielding a realization rate.

The fact is that under generally accepted accounting principles, as well as under the practice in virtually all industries, this metric does not provide an accurate measurement of profitability. AFAs permit law firms to measure profitability of an engagement using more conventional metrics: That is, the calculation of the actual cost of labor, namely the compensation of the timekeeper, together with an allocated portion of G&A, measured against the fee received. Nonetheless, recording of time is still of the essence of both an AFA and a conventional hourly billing model.

Q:  But what about measuring lawyer productivity? If you abandon timekeeping, you need to come up with some other criteria by which to measure attorney productivity. Till now, the booked hour has been a major evaluation metric. Without the hours metric, associate evaluation could seem utterly subjective.

Ed Poll: There is nothing wrong with subjective evaluation, except that most young people do not trust the evaluation of them by the older generation. There is always perceived a subjective bias.

You also degenerate into the ability to test lawyer productivity by reference to hours. Hours by themselves do not mean productive. Coming up with the correct solution is the objective and taking five minutes to do so instead of three hours doesn’t mean you’re less productive; on the contrary, you’re more effective. A further element of productivity is technology … one lawyer uses the right technology and a second lawyer may not use technology at all, inputting many hours of personal time … does that make him more productive?

Q:  Even with an AFA, do clients still have the right to ask for an hour’s accounting?

Jerry Kowalski: The question as to whether a client who does not require access to time records in connection with an AFA engagement should still be entitled to review time records is not susceptible to an easy answer. Certainly, the law firm might take the view that time actually expended in the engagement should be a matter of indifference to the client.

However, a client may make the request, or perhaps should even require, disclosure of these records so that it is afforded the opportunity to have some measure of the firm’s actual costs and profits (realizing that the client would be unaware of the actual cost of labor and G&A) in order to negotiate the next AFA on a more informed basis, compare efficiency with other providers of legal services and provide its input as to the selection of professional personnel in subsequent AFA engagements based on a particular lawyer’s proven efficiency. Law firms’ responses to such requests, in the absence of a prior agreement on the subject, will be driven by issues of maintenance of quality client relationships.

Ed Poll: That depends on the rules of professional conduct and on the terms of the engagement agreement.  Generally, I would say “yes,” but not necessarily without reference to the RPC and agreement contract

One thing you didn’t raise, however, that I believe to be important:  The current rules of professional conduct require that a fee be reasonable (not unconscionable in CA); the first element among a series of factors for the disciplinary board or trier of fact is always hours spent. Thus, even in an AFA environment, I think the rules of professional conduct are going to require actual timekeeping, at least in the near term.

Wrapping it Up

After my conversations with Ed and Jerry, I am convinced that time will remain an invaluable metric in the law firm. It can settle questions of productivity, efficiency, profitability and competitiveness. In fact, the biggest reason lawyers and firms hope that AFAs do away with timekeeping is because it is so painful. Take away the pain (hint: technology) and suddenly tracked hours seem like information no firm would want to be without, even if it’s only used internally. So, regardless of how a firm bills, it seems to me that it is premature to predict the death of attorney timekeeping.

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