Law firms have measured lawyers' performance based on billable hours for decades. The typical range varies from as low as 800 to as high as 2,000 hours a year, though at some firms it can be even higher.
Critics of the billable hours model are increasingly questioning the suitability of this model as a measure of performance. Some law firm leaders are advocating for change, and in-house teams are under pressure to cut costs and are asking for greater transparency around billings.
½Û×ÓÊÓƵ recently interviewed law firms, lawyers, and clients about the pros and cons of the billable hour. The report provides valuable insights into the ongoing suitability of the billable hour model both from a law firm and a client perspective.
One of the problems highlighted with measuring a lawyer's performance based on billable hours is that not all hours worked are billable. According to PwC's Annual Law Firms' Survey 2022, the average recorded hours per lawyer at the top 10 firms currently sits at 1,373. This number drops down to 1,272 chargeable hours for the top 11 to 25 firms, and to 1,167 hours for the top 26 to 50 firms. Although these numbers are thought to have risen in response to recent economic events. The newly-published BigHand 2022 survey found 98% of UK law firms surveyed said they had increased target hours for lawyers, with nearly half (47%) doing so by over 10%.
A senior lawyer in the UK who has worked in both private practice and in-house points out the most significant problem with the billable hours model. "People who work more efficiently are unduly penalised because they bill less than someone who maybe took twice as long to do the same piece of work. We should be rewarding people for efficiency, not penalising them."
According to the most common reason for in-house teams to request alternative billing structures such as flat fees is to save costs (81%), followed by cost certainty (65%) and general efficiency (49%).
When interviewed by ½Û×ÓÊÓƵ, Andrew Cooke, general counsel at TravelPerk, a business travel provider, said: "We're looking for value, not cost".
Cooke added that he has noticed that working on a fixed-fee model tends to sharpen the mind and reduces the number of unnecessary phone calls and interactions.
The message is clear. Law firms should consider how they can better prioritise employee satisfaction and client value for money. Fixed fees, for example, are one way to maintain profits whilst reducing the hours required to complete work.
However, fixed fees may not always be the answer.
"If you're a big firm doing debt capital markets transactions, you're probably doing thousands of those, and so you've got a very good idea of what your fixed charge ought to be," said Stephen Denyer, director of strategic relationships at The Law Society of England and Wales. "On the other hand, if you've got a major, multi-party M&A transaction or a restructuring or a bit of litigation that could go in lots of different directions, you've got no realistic way of knowing what elements there are going to be and therefore what you ought to charge for them."
Georgia Dawson, a senior partner at global law firm Freshfields Bruckhaus Deringer, says: "It would be ideal for the industry if we can start to move towards more of a focus on outputs and the value that is being delivered by lawyers. That supports a drive towards efficiency, a drive towards the use of technology, and it can help to support a better focus on mental health, wellbeing and diversity in the profession as well."
"If you focus on outputs rather than the inputs, then people are able to manage their work in a way where they're completely focused on the quality and the value of the output for the client," she added.
In addition, switching the focus from hours billed to value delivered can improve client relationships and result in more work, according to several in-house lawyers interviewed.
Many firms are still deciding how they feel about investing in legal technology that increases productivity. There's concern that it will reduce the number of hours billed and reduce profits. Yet, according to the ½Û×ÓÊÓƵ report, many law firms are investing more in technology, with tech spend this year accelerating at an unprecedented pace.
Legal technology could be advantageous for firms charging a flat or alternative rate, as they could charge the same or a similar rate but reduce the time spent by their lawyers. In some cases, incorporating new technology could allow firms to charge more by improving the value of their offering. Technology can also help law firms provide more accurate estimates of how much a matter will cost, reducing some of the risks of offering fixed-fee work.
"One of the basic aims of law tech is to speed up tasks, which doesn't really help your profitability if you're still sticking to billable hours, so firms are still coming to terms with how to feed in the law tech element," said Denyer. "That is probably going to depend on how special or unique the law tech component is—if you've got something that is really unusual or unique, then obviously you can potentially pitch that to a client as something that will cost more."
To that end, some firms are developing a tech-as-a-service where clients can access specific tech tools and products that can deliver legal services faster and more efficiently. Freshfields, for example, has an in-house Lab and Innovation team using data sciences and machine learning to create products that combine tech and data analytics to enhance client service delivery.
Denyer added, "Part of adopting technology is deepening and broadening relationships with clients and getting the client more dependent on you. Technology can potentially give you real insight into the client's issues, which gives you a chance to pitch for a lot more of their work and also makes the client more wedded to you, which means it's not going to be so easy for them to move away."
By thinking differently about legal technology (and the billable hour), you can achieve the opposite of what some law firms fear. You can improve efficiency, reduce hours, find ways to generate more client work and ultimately increase profits.
For more insight on the future of the billable hour, read the full report here.
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