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.           

Ndarala Group Series on the Economics of Professional Services

Over on the Ndarala Group blog we have begun a series on the economics of professional services. The material is drawn from internal Group material that I prepared. We are publishing it in this form to make it more broadly accessible.

So far we have put up seven posts, with a lot more to go. In some ways the blog form is not really suited to something like this, but it does at least get it out into the public domain. Later will consolidate it and post it to our web site.

If you are interested in the series, you will find the introductory post here.

Chris Marston's 4C's of Value Pricing

Rather a good post by Chris Marston on Inside the Firm of the Future, The 4 C's of Value Pricing: Get it or forget it!

Starting with a quote:

Let me start out by explaining that the Price of work in a Value Price model has NOTHING to do with your time. Say it with me now " The Price of work has NOTHING to do with time." Write it on the board 50 times and say it out loud at least 3 times a day. Value Pricing is about Adding Value to the client and Charging for the value you add. . . . It is ENTIRELY based on Value to the client. Yes, I'm going to have to ask you to repeat that to: It is ENTIRELY based on Value to the client.

Now I know that clients, especially Government clients, make this hard by actually demanding precise, visible, time estimates. They do this even though it reduces value to them. I also know that there are contract worlds in which value pricing does not work.

But all this said, I do commend this post to you as a good introduction to value based pricing.

Professional services - pricing, positioning and service areas

I finished my last post by commenting: Even in a single professional field like law, there are considerable variations between customer types and fields of law in areas like pricing, the pattern of WIP creation, write ups, write offs and billings. These need to be understood and accommodated.

Because I am still mulling these issues over in my mind, I thought that I would make a short supplementary comment, taking law as an example.

To begin with, there is considerable variation within law as to the extent of fixed price quotes. This varies between customers, law firm practice and fields of law.

Some customers demand fixed prices, others require firm estimates, still others are prepared to accept conventional time based billings. The willingness of law firms themselves to accept fixed prices varies. It is common in some fields of law - estate or conveyancing for example - for service offerings to contain a mix of fixed price and time based elements.

There is also considerable variation in customer payment patterns. Again, this varies between customers, law firm practices and fields of law. Some firms bill monthly, some against milestones, some at the end of the job. There are some fields of law - estates and conveyancing are again examples - where there can be quite long lead times in translation of WIP to billings.

Each firm needs to analyse and understand its own business, taking current and prospective clients into account as well as any variations between fields of law. From experience, particular problems can arise where the firm operates in several different fields with different patterns.

The most common problem is simply failure to recognise the differences, leading to the application of firm wide policies and procedures that do not properly take variations into account. This can be a particular problem where firms are moving into new fields of practice.