When is a billable hour not a billable hour? – and other billable hour issues!

realisation

When it’s about 48 minutes.

The ‘billable hour’ issue has reared its ugly head once again on LinkedIn in the past few days following [re-]publication of a post by Sue-Ella Prodonovich ‘Don’t Abandon The Hourly Rate Just Yet‘.

I’ll start this post by saying there’s a fair amount that Sue-Ella and I will never see eye to eye on about pricing and the billable hour, but core to my objection with this particular article of hers is the assumption that all ‘billable hours’ equal an ‘hour’, when all the data shows us, including the chart above, that it clearly does not.

Which brings me to the point of this post: what exactly is a ‘billable hour’?

My experience has been that the answer to this question is far more complicated than the question would at first blush suggest. That’s because, in reality, most firms don’t have a ‘billable hour’, they have several.

What do I mean by this?

This: fact, not only do most firms have several billable hour rates within the firm for different practice groups, but they also have several billable hour rates within the same practice group, to be used as the circumstances warrant.

Which is to say, a lawyer in a bog standard average corporate practice in Australia may well have a ‘rack rate’, a ‘discount rate’ (between 5 and 10 per cent, but possibly more) and a ‘do not go below rate’ – unless, that is, management has approved this as a loss leader so the firm can win other work, in which case we gave another rate: a win the work at any cost rate.

All of which is to say, not only is the term ‘billable hour’ rather meaningless; but, cruically, it is anything but fair and transparent.

So far as fairness goes, as I have advocated in the past, the billable hour is typically unfair to loyal paying customers because, more often than not, discounts on the billable hour are given to new clients while loyal clients pay a premium (if not full rack rate).

Don’t believe me, have a look at the 80/20 breakdown of your firm’s client base. I’ll bet you that the majority of your higher earning clients have a higher average billing rate – which, remember, under the billable hour system has little to do with complexity or value.

As I hope you will agree then, the ‘billable hour’ is a fairly meaningless metric, especially of comparison.

Importantly for clients, here are some of the things the billable hour  doesn’t do:

  • denote expertise – you are more likely to have a higher charge-out rate based on the number of years you have been alive on this planet than the number of relevant deals you have worked on;
  • denote value – unless what you are selling is your time;
  • promote speed and efficiencies – unless, that is, you have a penalty clause if you don’t complete within a certain time or a bonus clause if you do;
  • assist with transparency – because in order for transparency to exist you need to know upfront what you are getting and you don’t typically get to know what you have got until after the fact with the billable hour.

But I’ll wrap this post up by letting you in on a little secret: the real reason why, under current performance metrics used in Australian law firms, we will never get rid of the billable hour – and that is utilisation.

rws_01

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2 comments

  1. Surprise surprise. Measure time you will get time. Great post Richard. https://www.thesoulofenterprise.com/deleterious https://www.liv.asn.au/Staying-Informed/LIJ/LIJ/March-2017/Value–Pricing–Costs

    John

    JOHN CHISHOLM B.Juris LLB.

    john@chisconsult.com

    http://www.chisconsult.com/ http://verasage.com/ https://www.timelesslegalnetwork.com/ http://www.affinityprivate.com.au/

    (+61) 419763391 @ChisConsult

    Influencing motivated professionals to make a difference

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