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!