Thoughts on ways to improve the management of professional services firms

Monday, February 15, 2010

Time based billing goes round and round

Interesting article by John Chisholm in Lawyers Weekly, A billing discussion worth its time, on billing principles.

Reading John's remark's reminded me how little had really changed over recent years where time based charging is concerned. The discussion on alternatives to time based billing in law seems to go round and round and round.

The real problem as I see it is a simple one. Time based charging is easy, whereas alternative methods are much harder, requiring very different approaches.

When I first started as a consultant, my firm actually used four different pricing models:

  • time based billing usually associated with a cost estimate up front
  • fixed price contracts, especially where Government contracts were concerned
  • retainer style arrangements where clients paid a standard monthly amount in return for exclusivity and an agreed package of services
  • and fixed prices for certain types of work such as training or information products.

Running four different pricing systems posed its own problems.

To begin with, we needed a practice management system that would allow us to measure time inputs and various types of disbursements. This had to mesh with the general accounting system. We still attached value to time via hourly rates not just because of the continued presence of time based charging but, more importantly, because of the need to monitor costs on fixed price jobs and to compare relative profitability between areas.

Generally in time based charging, things such as marketing time get allocated to firm time. We could not afford this approach because of, among other things, the presence of significant size fixed price bids. Marketing costs need to be measurable because they were a major cost component; in some smaller open tenders, the total cost to bidders of tender preparation can in fact exceed the value of the tender, creating a an effective zero sum game.

In order to get a better measure on marketing costs and to to aid recover, we created a special time code called work in anticipation. This covered all bid costs plus time investments in looking after specific clients.

General marketing was measured by another time code. The attachment of job and client codes to WIA allowed us to measure direct marketing costs, both time and disbursements. With client support, the aim was to recover WIA over time through new work from that client. With fixed price jobs, the aim was to recover the WIA through the tender price. This type of measurement has some salutary effects because it quickly throws up potentially unprofitable activities.

While the system did generate the type of information used in conventional billing and performance management systems, there were no charge targets as such. Instead, we used the concept of effective time. This varied from person to person and might include not just billable hours, but also WIA, other marketing and business development time and product and personal development time.

A person studying, for example, might have study time included in effective time, removing the conflict that can arise between approved study and billings. Similarly, the inclusion of marketing time in effective hours removed the conflict that arises in so many firms between getting the cash in now and laying the basis for later cash.

We used manual rather than computer based time recording systems. Our people travelled all the time and were usually working on multiple tasks. It was just easier to scribble on a time sheet once the necessary discipline had been installed. This also allowed for multiple time recording. For example, in travelling on a client job, travel time would be charged to the client. However, dead time might also be used on and recorded to another task.

Each Friday, all staff transferred their time data to summary sheets that went to admin staff for data entry. This was obligatory, no matter where staff were so that full weekly firm performance data was available for review by Monday lunchtime by management, client officers and project managers. Weekly data was essential because of the presence of relatively large contracts that needed to be closely monitored.

I am providing this personal example simply because it illustrates the type of complexities that can arise when you move from conventional time based charging to other models. Other models may be better, I believe that they are, but they also require changes in systems and culture that are not, of themselves, easy.           

Wednesday, February 10, 2010

More on Allen & Overy in Australia

Since yesterday's post, Allen & Overy to open in Australia, I have been mulling over just what the implications might be.

When i wrote yesterday I did not have the names of the people who had left Clutz - Australians like shortening things, so Clayton Utz is commonly called Clutz. Since then I have seen a list provided by ALex Boxsell in the Australian Financial Review. I can't give you a proper link because it's behind the fire wall.

This was quite some people raid. The fourteen who left Clutz included:

  • Geoff Simpson, partner in charge, Perth office
  • Michael Reed, national managing partner corporate
  • David Wilkie, national head of real estate
  • Michael Parshall, joint head of mergers and acquisition.

I must say that I was quite fascinated by the machinations that must have gone on to organise this coup.

There has been something breathless about the reporting on this issue. "British bombshell a shock for local firms" read one headline, "UK raider sparks legal talent war" another. Obviously this type of raid will force all major firms to review their strategies. However, I also think that we need to keep a bit of perspective.

  Allen & Overy is a big firm, with annual gross revenues in 2008-2009 reportedly at $A1.96 billion. However, the current strategy is essentially high end niche, with A&O planning to grow its partners from 17 to a possible 30 in the immediate future.

Depending on the average charge rate achieved and the leverage adopted (A&O is reportedly looking at 50-60 associates for the its starting partners), we are looking at a projected fee base of perhaps $A55-$A60 million in the first instance. Substantial, but still not large in a total legal services marketplace of around a reported $A12 billion, of which the top eight firms control perhaps $A3 billion.      

Tuesday, February 09, 2010

Allen & Overy to open in Australia

Interesting article in The Australian by Legal affairs editor Chris Merritt on the plans by Allen & Overy to open in Australia next month. The firm will open with seventeen staff, fourteen lured from national firm Clayton Utz.  

While Australia is the world's 14th largest economy, its relatively small size together with its remoteness from Europe and North America has kept it a little below the global horizon. This has actually given local firms something of a protected market. 

Australia's recent economic performance has been quite astonishing by global standards. This plus the China link has focused more attention on the country. 

Allen & Overy's core practice areas in Australia will be energy, mining and natural resources; finance; infrastructure; investment funds; mergers and acquisitions; private equity; tax; telecoms, media and technology.

These are generally all areas where Australia has a significant local market for legal services. It will be interesting to see how Australian practices respond.