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Billable Hours: Are they the culprit?

by Larry Bridgesmith JD, CEO of Legal Alignment

LPM,NewLaw Biz Model

We love scapegoats. Just load the sins of the people on the poor goat and send him/her out into the desert to die. Whew! That feels better.

For many years, billable hours have been the goats we love to hate. We've tried to kill them, contain them, vilify them and in every other way blame them for the misfortunes of the legal profession.

Here's our dirty little secret. Billable hours are not to blame. We are.

Who's we? Those of us in law firm management who have used billable hours on which to base our budgets, incentivize performance, measure success and identify our heroes.

Billable hours are such an easy metric. The more we have, the better. They demonstrate dedication. They reflect success because they suggest popularity and value. They generate revenue (even though not necessarily profits). The best lawyers have lots of them because their clients want their time and are willing to pay for it . . . sometimes.

The debate over billable hours rarely examines realization, the metric that reflects the percent of time spent which is 1) billed and 2) collected. Global averages of realization have been declining as clients push back on bills since the Great Recession. About 86% of hours actually worked for clients get billed and 82% of hours billed get collected. That's a dismal 72% return on time/value for lawyers that don't "do math". Not many businesses can survive with those margins.

However, billable hour advocates can manage that poor return easily enough: just raise the rates.

Alternatively, if clients demand rate discounts, that too is easy to deal with: just bill more hours.

However, the economic debate ignores the obvious. The entire billable hour system depends on integrity and trust.

Surely, no self respecting lawyer would fudge the numbers. Few admit it, and fewer still understand the power of implicit bias in quota based incentives.

If 2% of the Wells Fargo workforce have lost their jobs (5300 out of 254,000 employees globally) for creating phony credit card accounts, how many more were incentivized to consider doing so? Why? Sales quotas were so aggressive at Wells Fargo that good people did what few of them would have thought about doing except for the pressure of quantifying success and avoiding termination by satisfying numerical goals. Others quit.

When lawyers are motivated to sell hours to measure success, meet the budget, make partner and "get a paycheck", unconscious bias can motivate unethical, even illegal behavior.

If 2% is a representative number of people who will bend to the illegal incentives of success by quota, that would amount to 26,000 US lawyers (2% of 1.3 million). How many more are inclined to guess the time spent on that last task was .5 hours rather than the .3 hours it actually took? No intentional fraud, just a mistaken guess motivated by a powerful subconscious need to succeed.

Clients understand this inclination and our credibility has suffered significantly.

How many clients have told of the phone call they received from their lawyer wishing a happy holiday only to find it on the bill in January as a "service rendered"?

What lawyer can't tell of suggesting the settlement of a case until the managing partner states, "The file hasn't been worked enough yet"?

In extreme cases, lawyers have been held up as models of productivity and success by their peers for billing 26 hours a day while on vacation.

When these examples are cited by clients or lawyers, the common response is "I don't know who you work with, but no lawyer I have ever known would do anything like that!"

Perverse Incentive​

Billable hours are not the culprit!

In a recent survey of 250 lawyers, over 50% of them admitted being improperly influenced in their billing behaviors by the quotas on which success is measured. The law professor conducting the survey labeled the quota system a "perverse incentive" which invalidates the appropriate use of time to measure value.

It only takes 2% of bad apples to ruin an entire barrel.

Those who rely on a simple to compute quota system to motivate performance are the culprits. Billable hours are merely the scapegoat.

Time is valuable. However, it cannot be the sole measure of value.

Legal Project Management and Billable Hours

Legal project management teaches us that clients trust the time spent on their behalf which has been planned and approved before it is billed. When the time/money value of a legal project is negotiated between client and attorney, trust is enhanced. When the performance of a legal project is reported in real time before its scope is exceeded or its budget is busted, reasonable expectations are satisfied. Billable hours are the means by which such planning and performance are achieved.

Most attorneys also don't understand that fixed fees can be more profitable than after the fact billable hour pricing when the hours spent are managed to maximize efficiency. An attorney that prices a project for a fixed fee can realize 110% or more in profits by simply performing the project in less time than projected. That outcome significantly outperforms a billable hour project which only returns 72% of time/money value. (The difference between $72,000 and $110,000.) Only by knowing and managing the billable hour component of the project can profitability be enhanced through process improvement.

Legal project management is a means by which clients can be provided price certainty, negotiate scope change in advance to their satisfaction and improve the outside lawyer's profit margins. That's a proverbial "win-win", with a consequential return to trusting lawyer/client relationships.

Billable hour scapegoats are an excuse. It's time to expose the real culprit.

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