200 Understanding the Numbers
conversation with one of his associates. She was expected to bill approximately
500 hours each quarter to clients. She had actually reported 570 hours, which
pleased him, but she had only brought in $70,500 when he would have ex-
pected $85,500 based on her standard billing rate of $150 per billable hour.
That was $15,000 below his expectations.
“She explained to him that on the Prescot case the partner that she was
assisting had asked her to do some library research on an alternative theory of
liability. She spent 80 hours working on this research, but in the end the part-
ner decided not to adopt that alternative theory. The partner instructed her
not to charge those 80 hours out, so, at her hourly billing rate of $150, that was
$12,000 of the total shortfall.
“As for the other $3,000, she explained that on the Klinger case the client
felt that the $150 per hour was an excessive rate to charge for an inexperienced
lawyer like her. The partner in charge of this case agreed to cut her hourly rate
to $125. She spent 120 hours on that case, so, at $25 per hour not billed, there
was the other $3,000. He summarized her results for me like this:
“In other words, as he explained it, she actually put in only 490 billable hours,
even though she worked 570 hours, as opposed to the expected 500 hours. She
charged an average $143.88 instead of the expected $150. They use these num-
bers to break their total variance into two parts: a volumevariance and a rate
variance computed as follows:
“They like to do this in percentage or index terms, too.
“So they know not only the total amount that their actual costs differed from
the budget but also causes of this difference, namely the drop in 10 hours and
the drop in the rate of $6.12, and they can identify the effect of each cause on
their costs in dollars and percentage terms. That way they can pinpoint the
areas that need particular investigation. Things that don’t need attention can
be safely neglected, leaving time to more carefully manage the exceptions.
“The percentage approach also enables them to introduce two other
indices, that of the hours billed to the hours actually worked, namely 490/570
or 86%, and the hours actually worked to those budgeted, 570/500 or 114%. In
other words, this associate worked 14% more than she should have but actually
Volume Index or a 2% dropRate Index or a 4% drop====..
.490
500098143 88
150096Volume Variance hours $150.00 = $1, 500
Rate Variance 490 hours = $3, 000=− ×
=−×()
$(.. )500 490
150 00 143 88Actual Billings billable hours per hour
Budgeted Billings billable hours per hour
Total Variance billable hours unfavorable== ×
== ×
=− =$, $.
$, $.
$, $, $,70 500 490 143 88
75 000 500 150 00
70 500 75 000 4 500