Is the billable hours model fit for purpose?

Friday 6 October, 2023

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Should law firms abandon the billable hour?

Some might find that unthinkable, but there are important questions we need to ask about chargeable hours and whether they’re best for the firm and the client.

What’s more, the more data becomes available in so many areas of life and work, the more people expect transparency, certainty, and clarity. That includes in the services they receive and the way they’re charged for them. There’s an argument that the billable hour is a relic of a bygone era.

So, is that fair?

Are billable hours uncommercial?

Some firms certainly think so, and are considering abandoning them.

When charging by the hour, you have an obvious incentive to spend more time on something. Doing it in three hours instead of four means you’ve sacrificed a billable hour, and if you’re specifically targeted on billable hours, then you’ll find ways to do more of them.

From an immediate commercial perspective, that’s perfectly acceptable — those four hours generate revenue, so there’s no cause for concern. However, long-term it might do more harm than good.

You don’t need to ask clients to know whether they would prefer an efficient or an inefficient service. Their case is likely a source of stress, and the idea that the solicitors have an interest in dragging it out could cause a lot of resentment.

Clients aren’t only buying legal expertise and outcomes, but also reassurance and support — the client will feel much less reassured and supported if they’re worrying about how much each conversation is costing them.

On the other hand, a firm that was efficient and effective, concluding the matter swiftly, would leave a far better impression, and most likely enjoy better client satisfaction, more referrals, and more repeat business.

Finally, if you look at the top 100 firms, you see a lot of inefficiency in the billing process. At the end of 2021, the average number of debtor days was 64.5. In 2022 it was 66.25. The average Work in Progress (WIP) days were 50.5 in 2021 and 57.75 in 2022.

That probably wasn’t all the result of an hourly billing model. However, could the incentive to spend more hours on a matter contribute to the number of WIP days? Could the debtor days be partly due to disputes over the hours charged?

Are billable hours unhealthy?

Billable hours don’t necessarily create an unhealthy work environment, but there may be risks.

To start, there’s the stress of meeting the target. In addition to worrying about the quality of their work, fee-earners need to think about the quantity of it. They may find themselves working very long hours specifically to meet a billing target or to rank better in a table of chargeable work.

There’s also the risk that fee earners are discouraged from doing useful, important, but non-billable work. Mentoring, support, and training are all vital, but to a solicitor who has to worry about meeting a billing target, they could be ‘dead’ hours that don’t contribute to their total. The firm then sacrifices camaraderie, collaboration, and the development of juniors, ultimately becoming a less cohesive team and a less desirable place to work.

An alternative view: do billable hours benefit the client?

If chargeable hours mean a fee-earner might drag out a case, a flat fee could cause them to rush it. When the firm bills by the hour, there’s no reason for them to hurry the work or do the bare minimum — they can do it well rather than quickly. A fixed fee creates commercial pressure to complete the matter as soon as possible, whereas billable hours free a fee earner or partner to be thorough without sacrificing profit margin.

If your law firm abandons billable hours, does it need to adapt how it works?

Yes and no.

A diligent and ethical firm will work to obtain the best outcome for their client, regardless of the billing model. However, when not billing by the hour, efficiency is imperative — extra hours on a project cost the firm rather than benefitting it. All emphasis should be on delivering the highest quality work in the shortest possible time.

A ‘normal’ time recording system is still important. Even if you’re working to a flat fee or a contingency model where figures on a timesheet don’t affect the final bill, logging the hours worked still helps to track profitability. That data will be a crucial feature of an efficiency template, which will be an invaluable tool in measuring success.

An efficiency template could take one of many forms, from a simple scheduling tool with hours allocated and recorded for each task, to a comprehensive, dynamic, real-time project and KPI-tracker with defined focus areas and objectives. While especially useful for protecting the profitability of fixed-fee work, an efficiency template could benefit any firm that wishes to improve the client experience, grow their client base, and streamline their productivity.

Are you considering abandoning the billable hour? Have you always had a fixed fee model? Where do you stand on the merits of each? Join the conversation with other Practice Managers on the Insight Legal LinkedIn page.