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I Know You Hate Keeping Time Sheets, but Even in the New Era You Must Still Do So and Here’s Why

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                                                                                      Jerome Kowalski

                                                                                      Kowalski & Associates

                                                                                      December, 2012

 

Some time ago, I wrote that even in the era of alternative fee arrangements and value billing, it remained essential for lawyers to record time.  I’ve been asked to revisit the issue and still come to the same conclusion, perhaps even more forcibly. There are myriad reasons that compel this conclusion.

First, despite the continued proliferation of AFA’s and value billing arrangements, the American Bar Association Model Rules of Professional Responsibility does not specifically permit for pure value billing.   Accordingly, well informed lawyers must be exceedingly careful in drafting their AFA agreements so as to meet the Model Rules.  But, even in a carefully drafted AFA, with both parties negotiating in good faith, some courts have continued to hold that fixed fees are unethical and unenforceable, requiring a plaintiff law firm suing a client to prove the value of its services based on the hours actually billed.

Sure, as others observed the old model of the client getting in your cab and all that you were concerned with was that the meter is running, but the taxi driver didn’t really care where you’re going no longer applies. In the old days, it was just about getting your fare. Today, you need to be far more concerned about where your client is going, but you need to keep that meter  ticking away for a variety of reasons, not all of which relates to collecting your fare at the end of the ride.

Just yesterday, the Delaware Chancery Court, in a derivative case in which plaintiffs’ counsel obtained a judgment of some $375,000,000,000, the court awarded plaintiffs’ counsel total fees of $285,000,000 (no, those are not typos).  The fee award came to a staggering $35,000 an hour.  Defense counsel argued for fees of less than $14,000,000.  Clearly, the battleground was neither the plaintiffs’ counsel’s customary and hourly fees nor the amount of hours billed to the case.  But, in order for these plaintiffs to celebrate a huge payday, they were required to submit a written application, which included details of its hourly billing, Similar rules exist in every bankruptcy court in the nation, which approves every fee application for every professional, save for those rare instances for which the court previously approved either a fixed or contingent fee.

In a case decided just last May, noted New York attorney Thomas Puccio successfully prosecuted a class action on behalf of New York City police entitled Scott v City of New York officers and thereafter filed a fee application for some $2,000,000, based on reconstructed time records. Puccio’s award was knocked down to $515,000,  The reason:  Puccio and his colleagues did not keep detailed contemporaneous time in derogation of Second Circuit rules which provide:

 “All applications for attorney’s fees, whether submitted by profit-making or non-profit lawyers, for any work done after the date of this opinion should normally be disallowed unless accompanied by contemporaneous time records indicating, for each attorney, the date, the hours expended, and the nature of the work done.”

As one commentator on this case observed:

“This issue arises because the lawyer for New York City police officers, who successfully sued New York City for overtime violations, sought over $2 million in attorneys’ fees. He submitted a 96-page attachment to the fee motion reflecting more than 2,000 hours of work. But these were not contemporaneous records. The lawyer acknowledged that “the entries were prepared instead ‘by my office working with outside paralegal assistance under my general supervision'” and that “the paralegals based the entries on ‘an extensive database of incoming emails maintain by my law firm in a computer folder.'” In other words, the time records in support of the fee application were prepared after the case ended, not contemporaneously. The time entries were also riddled with errors and mistakes.”

The simple point is not simply that keeping accurate, detailed and timely time records is not simply the gold standard, it remains the only standard.  Yes, virtually every lawyer abhors the notion of justifying his or her daily existence in twelve minute increments, and, yes, we all now know we sell valuable services not hours, time accurate, detailed and timely record keeping still remains with us.

But, there is more.

We have also recently learned essential the need to engage in project management, particularly in AFA engagements. Project management requires maintain GANT, PERT or similar charts, identifying critical paths and projections of the time necessary for each player to reach each critical path. Each player must also provide estimates as to when he or she will reach each critical path. No project manager can effectively carry out his or her responsibilities without tracking  in real time the time expended by each player. And at  the end of the day, in order to measure the profitability of the project and the efficiency of each player, an analysis of the time expended is a vital, indeed, essential tool. Lessons learned in the required post mortem of every completed project leads to more informed decisions on future pricing. Indeed, many RFP’s require law firms to describe their project management programs.  Some clients also require that the project management software be available to the client on an extranet.

Time management is also an essential tool for risk management.  In a recently well publicized case, a counsel at a large law firm was arrested for allegedly defalcating with many millions of dollars of client escrow funds.  While all of the facts are not in, it appears that the alleged perpetrator was handling work for some regular firm clients, not recording their time and privately charging the clients for his work.  These moonlighting activities ultimately apparently required the alleged perpetrator to deposit funds in an escrow account.  Since the matter was not recorded on the firm’s records, the young lawyer apparently went across the street and opened an escrow account in the firm’s name and he was the sole signatory.  The funds in this escrow account seem to have disappeared, with the law firm being the subject of claims for the funds as well as a failure to adequately supervise the alleged miscreant. It may well be that if this lawyer’s time charges were more carefully monitored, the entire problem may well have been avoided.

While you cannot always foil a determined and clever thief, requiring lawyers to account for all of their time, including non-billable time does serve as a deterrent.  Yes, banks with security cameras and guards stationed on the banking floor do get robbed.  But, some number of thefts are deterred.

Finally, I have long advocated that finders, minders and grinders all need to be equitably compensated.  In this more perfect world, lawyers who make contributions to the firm by entertaining clients, blogging, attending conferences, speaking at seminars, writing important articles, as well as those lawyers who toil away at pure client services or engage in the thankless task of managing the enterprise, are entitled to compensation for their efforts.  These efforts shouldn’t be simply recalled anecdotally, but recorded on a timely basis.

So you’re still incredibly annoyed about recording your time in twelve minutes increments, I am afraid  you’re just going to keep sucking it up. You’re probably equally annoyed about developing creative methods of pain and pleasure to assure timely compliance with time keeping requirements, but that annoyance is not quite going away either.

As they say, there’s an app for that:  A wide variety of timekeeping programs allow a timekeeper to toggle on and off at his or her computer time working on client matters.  And for the road warrior, there are IPad, IPhone and Android apps that you can also toggle on or off and the information is downloaded to your mainframe or your cloud.

The Law Firm of the Twenty-first Century isn’t your granddaddy’s law firm. But it still requires detailed, accurate and timely time keeping of all of your activities.

© Jerome Kowalski, December, 2011.  All Rights Reserved.

 Jerry Kowalski, who provides consulting services to law firms, is also a dynamic (and often humorous) speaker on topics of interest to the profession and can be reached at jkowalski@kowalskiassociates.com

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14 Responses

  1. I think the hourly rate is only a part of the calculus. If someone made $35,000 an hour, I like to know the type of risk they took and the investment they made in the case before thinking the rate was excessive.

  2. I’m sure this post would be a shock to all the law firms out there that do not keep timesheets. I think the cases you discuss are the exception, not the rule, and could easily be identified upon intake.

    We shouldn’t let the tail wag the dog. Timesheets are inferior tools to perform project management, cost accounting, and certainly pricing. There are superior methods, and they are already being used by law firms around the world that do not maintain timesheets.

    • Ron —

      I am an enormous fan and admirer of your work.

      But I must confess I haven’t found any tool that meets all of the issues I described in my post, short of old fashioned time keeping which I know you abhor.

      For example, I have testified as an expert in a number of fee disputes and as much as I am a proponent of value billing, I’ve yet to see any judge receptive to anything but time records.

      I also haven’t been able to come up with any model that works for project management, short of time recording.

      And I haven’t seen any discussion concerning even addressing a proposed change to the Model Rules that would specifically sanction value billing.

      I only wish it were so that the cases I mention are exceptions. There is very little contrary authority that I have found.

      Jerry Kowalski

      • We do have tools to perform project management, KPIs, pricing, and cost accounting, all without reference to historical timekeeping.

        As for cases where a judge actually looks a timesheets, from my conversations with hundreds of litigators, this is a rare situation. Further, these cases can be identified upon intake. So why strap the entire firm down with a useless ritual for the 1% of cases that may require timekeeping?

        If you look at Model Rule 1.5, you’ll see some 14 factors that go into deciding if a fee is reasonable. Only one deals with labor time, the others are mostly subjective. But because time is the only one that can be measured, everyone relies on it. This is just laziness. Lawyers should change the Rule if it doesn’t reflect economic reality.

        I wish you’d go into firms that operate without timesheets, Jerome. It can, and is, being done. The firms are much better for it.

  3. Jerome – If Model Rule 1.5 lists 14 factors, why don’t judges throw out contested legal fees for failure to maintain contemporaneous measures of the other 13 factors? Are they not equally weighted? If not, why not? Are they less important because they are subjective? Why do courts not require, with each time entry, an assessment of the difficulty of the task, the amount at stake, the lawyer’s experience in that aspect of the law……? I think Ron is right – the courts are lazy on this point. They speak in terms of a “lodestar” method as if it were some magical incantation – when it’s just another way of saying “sounds about right to me.”
    By the way, I worked extensively with engineers in another life – and they were very proficient project managers, but they didn’t keep time sheets. They estimated times to complete tasks in days or weeks, not tenths of an hour, by taking into account a rough idea of how long it took for a similar task in another project, and then adjusting downward or upward for the fact that they’d been down that road before, or for a more complex task. Based on this, they estimated completion dates, not total time expended. Dependencies were modeled in – e.g. testing can’t begin until beta code is complete. From time to time managers would ask their team “Are you going to meet your projected completion dates?” If someone was behind they would say so and the schedule was adjusted. Never once did someone say “The plan calls for 10 hours of programming and I’ve already got 12 in it, so I better stop or we’ll lose money.” You worked until the job was done. If you blew your date, you estimated longer next time, or they put someone faster on that task next time. Because you see, computer code and electronic designs don’t care how long you stare at them – they don’t work until they are done. And they aren’t worth anything at all if they don’t work, no matter how long you spend on them. Law is a lot like that. You can’t file a brief if you don’t have a prayer for relief, and cites that have been checked. It doesn’t matter how long you’ve spent – you can’t file until it’s done. And every one is different, so you can’t say “Briefs should take 10 hours” just because that’s the average of the last ten you did. You might say – “I better allow myself a couple of days” but getting more precise than that is futile, counterproductive and a waste of time. And time is valuable, even if it doesn’t make sense to measure it in tenths of an hour.
    Tom Bowden aka fujirider

    • Tom –

      It’s not about tenths of an hour. It’s about tracking time. If you have a brief due in ten days, you may, for example, have one lawyer charged with briefing the facts and preparing supporting affidavits. He or she may budget two days to complete that part of the project. The two other lawyers assigned to research and write legal arguments cannot complete their tasks until the first lawyer has completed his or her part in connection with fact gathering and writing. If the first lawyer runs materially behind, well, Houston, you may have a real problem.

      And as we discussed in the past, other than exchanging unreliable anecdotal information, there really is no objective metric to manage efficiency and productivity (except, perhaps the Kowalski Value Index, which is yet to be widely adopted or the particular contributions of all of the stakeholders.

      Jerry Kowalski

  4. As an attorney running a mid-sized, new era firm that is exclusively value billing, I can tell you for certain that the conclusion of this post is incorrect. We are exclusively 100% value pricing, No timesheets and have won significant recognition from the ABA, International and local attention for being a leading innovator. In deciding to ditch timesheets and hourly billing, we did extensive research on model rules and ABA Model Rules and all states that I am aware of recognize OTHER methods of proving value other than time inputs in case of a court challenge. First, let me point out the impracticality of the basis used to reach a conclusion here. I RUN the firm and I can tell you that in the six years we have been doing this, only one of hundreds of cases ever even reach a point of evaluation (this is actually less that 1% of the revenue for even the single year this happened!), and the court is and WAS able to recognize broad based resource utilization as well as a mere look at the significance of the filings in the case to support the value we provided. I would equate the conclusion by the court to be exactly the same is it would have otherwise come out. Even so, the court AND the rules impose NO requirement to keep time sheets as a condition precedent to recovery. Furthermore, something that drives your workforce crazy and costs MORE to do than it saves you (even in the worse case where you “hypothetically” get nothing) could hardly be construed as prudent.

    The reality is that attorneys are adverse to risk without regard to the practicality of the business impact and this post plays on the fear of a less than 1% occurrence that would have not more than a 1% impact on revenue in its worse case, which I have yet to see. The cases cited here are not the 1/100 either, they are 1/10,000. As a leader of a firm of the future, I can say that value billing is alive and thriving and most courts actually DO “Get it”.

    That being said – There IS merit to Mr. Kowalski’s point that IF you are going to ditch the timesheet, you MUST be willing to identify and implement adequate systems to understand the value and productivity of your team. Value billing does require that you prove value delivered, which one of the multi-point factors considered by the model rules. That being said, if you are reading this and interested in how TO DO IT, rather than why you should be afraid to try, feel free to take me to coffee! 🙂

  5. Upon Further Reflection: Upon further reflection I also wanted to point out one thing that the conclusion reached by this post does not recognize: Timesheets DID NOT EXIST in the legal profession before the 1940’s (and not widespread until early 1960’s)! For hundreds and hundreds of years the legal profession around the world has provided VALUE to customers WITHOUT regard to time inputs. It is simply crazy to think or conclude that the legal system has lost its memory of its long and honorable history, somehow forgetting that our goal as a profession is, in fact, value delivery, not being accurate timekeepers! To say it is not prudent to ditch timesheets is to say it should not be done the way it has always been done, for centuries! Increments are excrement. Keeping time is alternative billing, not the other way around!

    • Prior to a Supreme Court ruling in the early ‘70’s, law firms billed based on a bar association promulgated schedule which mandated that fees were required to be charged based on a percentage of the value of a transaction, The bar association rules further declared it unethical to depart from that schedule, particularly downward. The Supreme Court found these rules violative of the antitrust laws and in the 1970’s. Subsequently, law firms began using time charges, which, ironically, were first developed at the turn of the century by the former managing partner of Hale & Dorrr, in his capacity as chairman of Boston’s Legal Aid Society, in order to manage and improve the work flow of lawyers with the society.

  6. Okay, I have read this discussion and have come to an unalterable conclusion: I’m unqualified to have this conversation. I’m a plaintiffs’ lawyer that never handles cases in which I’m seeking to be paid by the hour. You guys are having an important discussion that does not need my uninformed two cents.

    Thanks for your kind words, Jerry.

  7. Jerry, thanks for starting this important discussion. My response is here: http://www.clientrevolution.com/2011/12/timekeeping-and-fearmongering.html

    Spoiler alert: I don’t think you’ll care for it.

    As for your challenge to Chris for a court case expressly approving priced representation, my response is “Who cares?” There is no court case expressly approving the constitutionality of the Air Force, yet it still exists. The rules of professional responsibility allow it. That’s good enough for me.

    Jay Shepherd
    http://prefixllc.com

    • Not that I disagree with you, Jay, the Air Force analogy doesn’t work for me, Jay. What I would really like to see is a case where a law firm sues to recover a fee and predictaes its claim on an AFA type fee agreement. I have seen them enforced in arbitration settings, but not in any reportedopinion.

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