Two Inconvenient Timekeeping Challenges

Why do professionals still make themselves and their team (but only those team members labelled as "fee earners") keep timesheets?

I keep asking myself that all the time.

The prime reasons/excuses I constantly hear why professionals still record their time in 6,10 or 60 minute increments are:

  1. We need timesheets for pricing.
  2. We need time recording for project management.
  3. We need timesheets to evaluate the efficiency of our "fee earners"(yuk).
  4. We need timesheets to undertake cost accounting—to look at profitability per client, per matter or per "fee earner"(yuk).
  5. Our clients want to see our timesheets
  6. Time recording is accurate, transparent and ethical,
  7. The regulatory environment mandates us to keep timesheets, and
  8. no professional firm can be financially successful if their "fee earners" (yuk) don't record time.

I won't waste "time" here repeating why each of these reasons/excuses are flawed and have no merit whatsoever. Every single one of them have been totally debunked over and over, again and again. ( See here and here for example). Notwithstanding the ever increasing number of professionals who have moved to a timeless culture all this empirical evidence does little to deter the advocates of time recording in professional firms.

In this post I would like to concentrate on reason #6 as to why these time recording advocates justify keeping timesheets- in order to undertake cost accounting.*

Here are 2 Thought Experiments I would love timekeepers to respond to.

Thought Experiment #1

"Firm A and Firm B both pay their attorneys on an annual salary plus bonus, and the salaries are the same, as is often the case in "biglaw" firms. Let's also assume they have the same rent, malpractice rates, etc - the same cost structure. Firm A "requires" 2000 billable hours, and charges an average of $300 per hour. Firm B only requires 1500 hours, but bills them at $400. So total theoretical revenue is the same - 600K per "timekeeper."

Let's further assume that, in reality, neither firm enforces its billable hour requirement rigorously, and associates end up billing about the same number of hours in each firm. Now, along comes a client who says "I'll hire the firm, but I won't pay more than $350 per hour. Firm A says yes, but Firm B says NO - we can't sell below our cost! In other words, one firm has taled itself out of additional profit by fooling themselves as to their true costs.

Said differently, if the only difference between the two firms is their self-chosen numbers for hours and rates, but one will take the business and the other won't, then clearly, there is a problem with their decision model - Both of them. Firm B could actually make more money - more profit, just by saying "Oh what the heck, let's demand 2000 hours and charges $300 - but we won't raise salaries. Now, magically, they see the business as "profitable" just like Firm A - but nothing has really changed. They both picked hourly rates and billable requirements out of the air, and one firm magically makes more money than the other, just because they factored 600,000 differently, by choice.

Clearly, their decision is based on flawed assumptions and/or flawed reasoning."Thomas Bowden

Thought Experiment #2

"Assume you are a sole proprietorship, and have $100,000 of fixed overhead this year (rent, wages, equipment, etc.).

Further, let’s assume you plan to work 3,000 hours, and expect one-half of this to be “billable,” and the other half “non-billable.”

The first question is do you divide the $100,000 of costs by 1,500 or 3,000 hours? Forget adding your desired profit, as that is not cost accounting but profit forecasting.

The theory of hourly rates says you would divide by the number of hours you expect to bill, not work, so that is $100,000/1,500, or $66.67 per hour of allocated costs per hour worked.

Let us also assume that you have billed 1,500 hours between January and November 30th of the current year, and you’ve completed all of your work, looking forward to your month off.

Now, on December 1st, a new client engages you to perform 100 hours of additional work that month.

Your cost allocation now becomes $100,000/1,600, or $62.50. Therefore, you have been over-allocating your costs by nearly $5 per hour for eleven months of the year. Allocated costs are obviously highly dependent upon volume of activity.

Now reproduce this simple example for a large firm with thousands of employees, with clients coming and going, and account for all the fudging in completing timesheets—the eating of time, non-recorded time, and all the other games played—and you have an egregiously incorrect cost allocation scheme that bears no relation to operations or reality. Yet the numbers are treated as if they are gospel, creating an illusion of precision and control." ( feel free to change the dates to reflect your appropriate financial year.) Ron Baker

 

If you don't agree or can find flaws in either of these Thought Experiments I would genuinely love to hear from you either publicly or privately.

If I don't hear from the time recording aficionados I can only assume that they privately concede that there is only one reason to record time- and that is to retrospectively bill their clients by time.

Regards

John

* for a more in depth look at why cost accounting is such B.S. have a read of Dr Reginald Thomas Lee's book "Lies,Damned Lies and Cost Accounting"

 

 

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