The insidious side of hourly rate billing

15 11 2010

Much has been written about the demise of hourly rate billing by some excellent writers, and rightly so, much of the focus is on why hourly rate billing doesn’t work for clients. Encourages inefficiency, doesn’t relate to value delivered or market rate for work, makes bill auditing onerous etc etc.

These criticisms are absolutely valid and it is undoubtedly clients who are driving the nails into the coffin of the hourly rate.

Time's up for chargeable time

But I want to look at hourly rate from another angle, and investigate some of the problems it causes within law firms.

Starting with the most obvious, chargeable hours targets for lawyers. Still the numero uno metric for measuring law firm performance, and still causing associates heartache in so many ways.

The number (be it 1,400 p/a 1,800 p/a or if you’re at a US firm maybe 2,400 p/a) it’s still the main criteria that lawyers are judged in the performance management cycle. Many law firms talk a good game about recognising non-chargeable work and rewarding high performance outside of pure client work, but speaking to associates at some of these firms, this type of recognition only occurs once the chargeable hours box has been ticked.

  • Want to have your business development truly recognised? Just make sure you hit your chargeable target.
  • Want to spend some time studying an emerging area of law? Fine, as long as you hit your target.
  • Like to spend some more time with clients, learning about their business? No problem, as long as it’s chargeable.
  • Up for partnership? Better knock your hours target out of the park this year.
  • Want to devote some time on pro-bono or other CSR initiatives? That’s great, do it at the end of the day when the timesheet is full.

There are so many activities that create value in law firms, yet so few of them get real recognition in comparison to chargeable hours targets.

Note also that many of these activities above represent an investment in the future health of the firm (you may remember David Maister talked about the tension between short term firm hygiene and longer term health) as opposed to the short term focus on current revenue.

One of the consequences of this is that lawyers fit in all the additional work over and above what are sometimes very onerous chargeable hours targets, leading to the inevitable work/life issues which are a hot topic over at the Careerist right now (http://thecareerist.typepad.com/).

And yet more frustratingly still, chargeable hours as a key metric has so many flaws

  • Do chargeable hours reflect the quality of work produced or client satisfaction? Nope
  • Do chargeable hours demonstrate profitable work or good financial management? Afraid not.
  • Do chargeable hours promote effective delegation and encourage senior lawyers to mentor train junior lawyers? Absolutely. Sorry, only joking.

I’m not necessarily suggesting the total abandonment of time recoirding. Indeed Peter Drucker, one of my favourite authors, talks about the importance of understanding where you spend your time in his brilliant book “The effective executive” which is one of the reasons I spent over three months as an inhouse lawyer recording my time. Also, capturing time utilised on client projects is important for calculating cost and determining profitability, and can also highlight development needs (if for example one lawyer takes 30% longer on a task than his or her peers).

But for as long as hourly rate billing and chargeable hours as the key metric continue staggering round like a zombie that just won’t die, I’ll continue wielding my personal chainsaw to send them to the grave!

About these ads

Actions

Information

9 responses

15 11 2010
The Mole

Nice post but raises questions.

The hourly target debate goes to the heart of the law firm cost:revenue structure. How do we encourage long term thinking and recognise that associates want recognition of long term investment, but also get associates to understand that they need to make a long term investment in their careers and accept that year on year rapid salary progression is not sustainable.

The market won’t give law firms a get of jail card by allowing thicker margins. Unless the firms work on reducing our cost of production overall, how are they going fund ongoing investment?

15 11 2010
Steve

Thought provoking as ever and I agree with your reflections.
The billable hour is a pretty blunt tool from many perspectives. One of the challenges faced by law firms is working out whether particular work / business is profitable and recovery based on the billable hours is an easy, though particularly ineffective, tool used for those purposes. One of the issues is lack of other effective tools to make this analysis on an immediate basis.
In reality, lawfirms only really seem to be able to determine profitability at the end of the financial year – or over a number of financial years – by reference to profit and loss accounts. However, that means the analysis is horribly retrospective and undynamic…

16 11 2010
Julian Cuppage

The billable hour debate is always conducted supply side which must reflect its closed shop roots. Rarely is it discussed demand side. As a former managing partner I held a Janus like position resolutely refusing to buy anything on a time basis or entertaining any time based arguments for after the event price renegotiations from suppliers whilst at the same time demanding (in most areas) that clients accept time based billing and swallow sometimes significant overuns on original estimates. All my career I have been amazed that clients put up with it. Less and less nowadays it seems.

22 11 2010
A. Magician

Good post, but I don’t think it tells the whole of the story which could run to several volumes and has a number of different facets which need discussion (hopefully I won’t come across as an hourly rate apologist – but equally I think they get a worse press than they deserve):

Fixed fees work really well when scope is clearly defined at the outset and is not changed throughout the course of the work. Not every client is as good a client as you must have been / are……. I have worked for a number of clients who have asked for one thing, been presented with a finished product at the agreed time and bang on the agreed fee (everybody should be very happy) and then they decide no, they want it done another way, or (having grilled them at the outset of the transaction for all relevant information) they then drop the bombshell that one thing they had said wasn’t quite true which completely blows the proposed structure out of the water. Queue difficult conversation regarding why the fee is about to increase………..

Yes, there are ways of dealing with variations in scope, but some of my clients prefer to feel that they are in a taxi and can therefore ask me to take the scenic route at their discretion. As long as both parties communicate and understand what is happening this can work. This seems particularly true in some overseas jurisdictions where clients do not have the same clear understanding of what their lawyers are best employed at doing for them………

Manufacturers need to understand the cost of producing widgets – in a “people business” the cost of producing widgets is the contracted working hours of your staff (whatever your basis of charging for those widgets, ‘chargeable hours’ is surely just a term referring to direct costs of production, rather than, say, marketing budget). As you mentioned, chargeable hours, as a sole criteria of performance, are useless – but they do offer some useful information – as they can help to reveal (amongst other things) whether somebody is: doing a disproportionate measure of the team’s work; or failing to delegate; or, conversely failing to pull their weight; or is perhaps not quick enough. As you mention it is only one metric of a number which are equally relevant and important and needs to be viewed in that light – what you then do following the assessment is important – management training to encourage delegation – seeing why x is doing less chargeable (are they doing something equally valuable that is non-chargeable?) and not just clubbing somebody with the “do more hours” mantra.

As you also said, the firm also needs to remember that the production and sale of widgets needs marketing and various other support functions which also add value to the bottom line – even something as intangible as supporting team morale can add value to the bottom line). The successful management team should recognise all of this.

Encouragingly – especially since most external people seem to assume the opposite, the teams I have worked in at magic circle firms have taken a far more ‘holistic’ view than in some other firms I have worked at and chargeable hours have barely figured in performance discussions – if my busyness is in line with the rest of the team that has been viewed as more than acceptable, irrespective of how that measures up to the target.

Capped fees are my particular bug bear!! I do not have a problem with a fixed fee, or some form of pain / gain sharing, in fact, I’m a big fan of both as it usually means that we have a reasonably well defined scope to price off – one of my thoughts for retirement is to do proper old school development advice with a property lawyer mate of mine, simply charging a percentage – as ultimately, isn’t that all that a developer wants to know “what percentage comes off the bottom line for legal fees…..”, but I digress. Anyway, the “heads you win, tails I lose” principle of a capped fee when I can almost guarantee that the scope will be amended part way through – yeeuchh!! I think it encourage all of the worst aspects of chargeable hours and fixed fees and can never understand why anybody would offer it.

25 05 2011
Why your lawyer’s not a social media ninja

[...] unwritten hurdle is of course time. When the primary method of measuring lawyer performance is the chargeable hour, anything outside that category, especially something where the return on investment is less [...]

16 06 2011
While timesheets rule but chargeable hours suck

[...] written a fair bit around what I believe the problems with charging by the hour are, not least the impact this has on the firms as well as how it affects the client relationship. My mind often turns to a partner I know who runs [...]

30 08 2011
Lawyers – Just. Do. Something. « The Intelligent Challenge

[...] many law firms have with change generally (which I’ve written about before), and some of the negative behaviours driven by the hourly rate billing model,  I think there are a number of other reasons why it’s not top of mind for every law firm [...]

28 10 2011
Excuse me, I think your pricing is broken

[...] common refrain from private practice lawyers (especially those who know how I feel about hourly rate billing) is that in-house lawyers who talk about value based billing really just want to pay less, and are [...]

11 07 2012
London Lawyer

Totally agree with this. I really think lawyers should be measured on the quality of their work, productivity and business development rather than the hours they do. Hourly billing encourages fraudulent time keeping and inefficiency, not to mention destroying work/life balance. Why should a client pay for a lawyer taking 5 hours to do something which should only take them 2 hours when they were messing around on the internet, chatting to colleagues etc, but we still have to meet our targets. How is this right?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s




Follow

Get every new post delivered to your Inbox.

Join 175 other followers

%d bloggers like this: