How to Count Billable Hours in Law Firms

billable hours in law firms

What are we talking about in this article?

Billable hours are familiar to a multitude of professionals nowadays. Many industries have workers that invoice depending on the time spent developing and delivering a project, like freelancers and contractors. Many other industries and vertical markets that center around creative thinking and problem solving need to employ some sort of time tracking within their projects in order to acquire the data needed to set prices, like software development companies, or marketing and advertising agencies. 

In the most basic sense, billable hours are work time dedicated to a client that must be compensated. But billable work is not always so simple. In the law practice things are slightly different, and just a little bit more complex. The challenges attorneys face while offering their legal service is complicated due to the requirements for billable hours inside law firms and practices. 

A possible solution for some of the issues affecting a lawyers work, is to adopt certain procedures to track time, in order to gain a deeper understanding of how the workday is distributed, what the hourly rate should look like, and how much invoicing should amount to, in order to keep the practice profitable. Let’s take a look at how legal professionals are different, and how they can improve their legal billing. 

Project Profitability

Requirements for billable hours

Law firms and attorneys carry a heavy load in their day-to-day workflow. They need to meet a minimum amount of time working for clients, that is to say: a minimum set of billable hours each year. There’s an enormous pressure to reach certain milestones and minimum billable hour requirements in order to keep their job. 

And that’s not even taking into account the many ways in which legal professionals are burdened, the need for constant actualization, which means having to go through enormous amounts of text, gathering data in order to correctly assess a case, listening to clients and offering their professional advice, and even dealing with administrative tasks. All of these are extremely time consuming and may be at risk of escaping the timesheets that dictate the scope of what constitutes billable hours.

The unique issue in law firms is that employers pay for every working hour, and not just billable ones. But in order for the firm to keep up margins they require their employees to meet a billable hour minimum per year to maintain their position, since the firm charges clients for billable hours directly invested in their case, these hours must cover employee’s salaries, overhead, and keep up profitability. 

And this can be extremely taxing for employees, while taking into account the many other tasks that consume time but are outside the scope of what can be charged to the client. The average number of billable hours an attorney must reach is around 1890, and legal professionals must work a great amount of hours to meet that criteria. 

A Yale Law School report indicates just how big the divide between actual hours and billable hours is. If the goal is to work 1800 billable hours each year, that translates into 2420 total working hours, without taking any sick or personal days or accounting for the commute, with a 10 hours workday. This can present some variations, depending on the legal market in which one does their dealings, if it’s a small firm, a public interest one, or if they are located in smaller towns. They may choose to invest more of their time into training, client development, or following new market segments.

Employing a practice management software with time tracking features, in order to help with time entries, can be vital in current markets. Legal technology has come a long way, and taking advantage of these advances could be the difference between accurate pricing or low profitability rates. Automated timekeeping can help optimize and improve a lawyer’s billable and non-billable hours as well.

Example of an attorney’s billable and non-billable hours

Let’s take a closer look and differentiate some examples of what constitutes billable hours or not.

Billable hours

  • Doing research pernitent for advancing in a client’s case.
  • Developing and working said case.
  • Communicating and giving feedback to a client via emails or phone calls.
  • Meeting with clients, or the other part in the case.
  • Revisions or reworks due to miscommunication by the client or any changing aspect of the context of the case.

Basically billable hours are any work hours that can be traced back to a client’s case.

Non-billable hours

  • Work regarding advancing the business side of the firm.
  • Responding to internal emails, or any email that’s not strictly related to a case. 
  • Gathering contacts, law school, or any possible training. 
  • In-house meetings, annual reports, team building seminars, etc. 
  • Planning for business growth.
  • Administrative and procedural tasks 
  • Searching for new clients, and developing a better relationship with current ones.
  • Lunch or coffee breaks, commuting, personal phone calls, or any kind of personal appointments.

Resource Management

Billable versus non-billable hours

The takeaway here is that most of the tasks dedicated to personal or firm growth are done without any payment. Any work done on behalf of a client is considered billable, yes. But at the same time, some tasks are not even accounted for either. Many employees don’t consider a 3 minute email response significant enough to annotate, and that’s an internal operational mistake.

Creating the space for business growth and scaling depends on reaching sufficient billable hours to secure a profitable operation. Profitable enough, to carry the non-billable time dedicated to improving the legal practice.

There are many ways to reduce the amount of non-billable hours in order to gain access to a more client dedicated workday. With the capabilities modern management softwares have it is possible to automate certain tasks and improve the all around employee’s utilization rates.

Using templates for communication and legal responses can facilitate several tasks that require drawing up, and redacting long statements. This can be very beneficial for dealing with clients as well, sending routine reports can help lower client’s anxiousness and keep them in the loop without having to dedicate hour-long calls on informing small pieces of news. Some softwares even carry features that allow for the invitation of clients into the software solution, with reduced access to their specific ongoing project. This greatly improves the bond between lawyer and client, driving up the trust in the firm and its work. 

Another positive aspect of using modern softwares lies in the possibility of automated administrative tasks, and those are responsible for eating away at a lawyer’s billable hours in a day. Automated cost reports, profitability estimates, easy and accurate scheduling based on data. These are the things that separate an organized and streamlined practice from a firm that is barely surviving. Management tools that are AI powered can be beneficial in the long run, managing to see what projects, services, and clients are the most profitable or costly. Allowing executives and upper management to make better decisions for the future of the business. 

How to calculate billable hours

People do not often dedicate the time and importance needed when setting prices. This is the heart of the operation, and even more so when managing a professional service business.

A simple rule would be to set the hourly rate for any of your billable hours, track and record said hours, sum them up, multiply them by your rate while adding any extra tax or expense and bingo! If only it was that simple. The fact remains that the main cost of production for legal services is the time employees spend working cases. And there needs to be differentiated data sets showing how those hours are spent. 

In order to really know the profitability a firm can achieve, you need a reliable time tracking tool in order to understand where the costs of the business are coming from. Employees sometimes think that small amounts of time are not worth reporting, and that’s completely understandable, but in the long run seconds amount to minutes, minutes to hours, hours to complete days employees are losing. With time tracking estimation features, this problem is solved, since an employee only needs to make small modifications before submitting their timesheet.

This translates to a more accurate representation of the efforts the talent provides every day. With more complete information management can see what is negatively affecting their employees’ time needs. Maybe there’s more time dedicated to talking with clients than previously thought, and that can be allocated in the billable hour area. Maybe meetings tend to run longer in the morning, knowing this allows management to change them to the afternoon. Maybe administrative tasks are eating up way too many hours, and it would be more cost effective to hire an assistant.

These types of changes can also improve the working environment for employees, allowing them to more easily reach their required billable hours, once the process has been streamlined. Letting them do their skilled legal work in a better run firm.

A good metric for this industry is the employee utilization rate. This is not meant to scare employees into burnout, but to better comprehend how things are run, and how the numbers accompany that narrative. Employee utilization (EU) rates is the best metric for knowing the productivity of a business. It basically shows how much of an employee’s available work time is spent doing billable tasks. The calculation looks like this:

EU= (Billable hours/ Total hours in workday) x 100. 

Calculating EU can help determine if the problems the firm is facing are an internal force, maybe a non optimal workflow, or if they are born somewhere else. Data is the way forward into a better and more profitable firm. 

Time tracking & estimation

Lawyer Lifestyle and Billable Hours

As we mentioned before, the main force behind a law practice work is their talent’s efforts and hours put in. So when legal firms set their targets for billable hours they consider their profitability and bottom line. But not every firm takes into account the extreme demands an attorney must follow to stay in their target billable hour. And this is extremely bad for business, because it translates into poor attrition rates, and attrition is extremely costly. 

And there’s enough data to support these worries. In 2017 the Bureau of Labor Statistics, explained that the average employee turnover rate was 15.1% of the total US workforce. The most recent report from the NALP foundation for law career research and education showed that attrition in the legal industry was at 18%. If that doesn’t seem high, it means 15 out of 20 associates left within 6 years. Among the listed reasons for departure, many listed poor work quality standards, poor productivity, headhunting from other firms with better benefits, and the pursuit of a better work-life balance.

High attrition rates impact the business in a very negative way. After the regular training when onboarding, the year dedicated to learning the ins and outs of that specific area of law and firm environment are lost, and that loss is only carried by the firm. Even the most passionate and hard-working lawyers need off time and doable working hours.

Time tracking features can really help with this issue. Real-time view of any employee’s load can help scheduling in a more efficient way. AI augmented task automation and task management can give a clear and transparent picture of how many hours are required to finish a task. These tools can help create a better work environment, and lower oversaturation and burnout. Let’s remember, healthy employees deliver better quality work that can drive up the value of the service provided. 

Here at COR we greatly value the work professional service businesses do. They are one of the backbones of our economy, and the recent year has been very hard on some of them. We want to help them bring back the real value they provide, take better care of their employees and stay profitable while doing so. If you want to take a step in the right direction, don’t hesitate, and request a demo today.

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