How to Set Up Billing for Your Word Processing

We are continuing to talk about the fourth area of the five areas that make up every business in the world. As you know, this fourth area is "billing." We have previously talked about the three areas which are as follows:
1. "Clients" or "customers";
2. "Administration"; and
3. "Getting the work done."

I think you can see by review of these articles that the five areas we have chosen are broad enough to be able to cover the five parts of every business in the world, but in particular, the five areas that make up the practice of law.

This week we are going to talk about charging for "word processing." I stated last week that you were probably asking yourself at the end of last week's article, how can a lawyer justify billing for word processing? Well, here's the answer.

The first thing you have to do is to put a paragraph in your engagement letter or contract with your client that states something such as the following: "It is our policy to utilize the personnel who can most efficiently handle the task to be accomplished. In addition to our hourly rate charges, which are billed in quarter (1/4) hour task increments, we will bill for all out-of-pocket expenses incurred on your behalf, including all charges for photocopying, long distance telephone calls, postage, word processing, telecopier, court filing fees, court reporter fees, mileage and travel costs, parking charges, file storage fees, office supply fees, consultation fees for outside professionals, exhibit and witness fees, delivery fees, service of process fees, subpoena fees, and all other necessary and incidental expenses incurred on your behalf."

We put this paragraph about expenses in every single engagement letter. You will remember that we have gone to engagement letters in lieu of contracts because we have found the engagement letters to be more user friendly. We absolutely, positively, have an engagement letter executed with every client for every matter. When the client signs the engagement letter which contains a paragraph on expenses such as the one you see above, you and the client enter into a contract where you will bill the client for the expenses that are enumerated, and the client agrees to pay the same.

Over the next several weeks we are going to be talking about exactly how we handle the billing of each of these expenses and where it shows up in our bills.

So, this week let's talk about billing for "word processing."

With the advent of the word processor, the manual typewriter went by the wayside with regard to attorneys putting together their correspondence, their documents and their pleadings the old fashioned way. The advent of the word processor sped up everything in the practice of law and made instantaneous corrections the "name of the game." Along with this new technology came new expenses for the law firms. The age old question had to be asked by the law firms, "do we absorb this cost or do we pass it onto the client?" If we absorb the cost, our profits go down; if we pass it onto the client, do we do so by higher hourly rates or by a specific expense for the client? Many lawyers felt that their hourly rates were already pushing the upper limits and that they would not be able to increase the hourly rates without a "hue and cry" from their clients. We were certainly one of those law firms in the late '70's and early '80's. What we elected to do at the time was to increase the technological ability of our law firm, but to try to pass on the cost of that technology to the client as an expense rather than as an increased hourly rate. We decided to start putting the expenses in our engagement letters and passing the cost onto the client. With regard to all of our new word processing equipment was a charge for word processing. We started out charging a modest amount per hour for the word processing and eventually now have raised that rate to $15 per hour.

What we did was to give each one of our secretaries a method of writing up the time they spent in word processing and put that on our clients' bills as an expense. We have been doing that now for over twenty-five years, and in that total period of time I can only think of two clients who have ever questioned us about the expense. By far, most clients simply pay the bill that includes that expense because they agreed to do so in the engagement letter.

When you stop and think about how we have been able to hold down our hourly rates by being able to pass on these expenses to the clients, I think you would agree that if our rates have in fact been held down, that we have continued to be competitive against comparable lawyers in comparable sized firms. One of the interesting byproducts of billing for word processing time is that the secretaries now become a profit center instead of a pure overhead item. Anytime you can convert a pure overhead item into a profit center, you are again moving towards "law firm nirvana."

With the advent of the computer and so many people being so computer literate and keyboard facile, the ratio of secretaries to lawyers in our office has dropped dramatically. The ratio we now have is one secretary for four lawyers. All of the lawyers except for one, do their own word processing. In the case of the lawyer actually key stroking a letter, a document or a pleading, we do not charge an additional charge for word processing but rather charge the lawyer's hourly rate for the time spent key stroking the document. This is an even better set of circumstances than just billing a secretary for "word processing."

I still believe there is an ongoing argument that lawyers can talk faster than they can type but until voice recognition software becomes virtually totally accurate and foolproof, I think you are still going to find many lawyers who want to type their own letters, documents and pleadings. I am not a keyboard facile person and I know that I can talk way faster than I can type; therefore, I still dictate and my secretary is also my typist. Because of my lack of keyboard facility, I have tried to convert my secretary into a profit center and thus she bills for word processing and whenever she is working on a substantive issue for a client, she bills time as well.

The sum and substance of billing for word processing time is that if you put it in your contract, the client agrees to pay it, you keep track of it and bill it properly, then the expense is a legitimate expense that needs to be paid by the client. What we have tried to do is to set the hourly rate for the word processing at an amount that seems reasonable to be able to pass on the cost of the equipment as opposed to the actual time of the typist. I think if you were to push the envelope and add a cost for the operator to the cost of the equipment, the charge would end up being more than I believe the clients think would be reasonable or fair.

One way to attack trying to figure out what to bill per hour would be to take your total computer cost on a yearly basis, including hardware, software and maintenance, and then see what percentage of that cost you could charge on a per hour basis. Then pass the cost onto the clients so that it becomes a net zero sum on your income and expense statement.

Law office economics is a greatly overlooked area by lawyers. At best, my experience tells me that most lawyers handle it on a macro basis, and almost never on a micro basis. Lawyers seem to be concerned with macro economics in terms of, at the end of the year, how much money did they make? Rarely, it seems, do lawyers look at areas that are areas of expense and think of ways that those areas can become either profit centers or net zero sums against their overhead.

As we go through these areas indicating what expenses we have that can be billed, I think you will see that we have tried to look at everything in our office in such a way that if it is possible for it to be passed on to the client, it is! Over the next couple of weeks we are going to talk about each one of the things we pass onto the clients with regard to expenses because I think you will first of all see the overall philosophy that I have articulated in this article but you will also see some nuances with regard to each of these expenses that justifies you passing them onto the client and teaches you how to look at each one of the expense items in your law firm from a micro economics point of view.

Next week we are going to talk about copy charges. I think you will be surprised to find out our copy machine is our number one profit center in our office with regard to expenses. You are probably asking, how can this be? Next week I'll tell you.

Talk to you next week.

Jim Wirken is a civil trial attorney and the Chairman of the Board of The Wirken Law Group in Kansas City.