billable hour

‘4,200’ – why it’s a prize not worth winning

Overnight, Australian time, the annual AM Law 100 report for 2019 was published by the American Lawyer.

A fascinating, if not relatively meaningless (with a caveat to follow), look at how the other half live, one insight from this year’s publication worth taking a closer look at is the ever egotistical champion of the industry – the lawyer with the highest number of billable hours.

And this year’s winner comes from the firm of Fox Rothschild (moment of honesty, never heard of them before today) with, wait for it,

bh

While the individual lawyer is not named, nor their rank, let’s put this under the microscope for a second. That’s:

…4,200 (billable hours) in a year / 365 days in a year (2018 wasn’t a leap year) = 11.5 hours of billable time a day (no write offs or, in parlance, ‘time leakage’)…

…every day…

…without a break – for holiday or for sickness…

…billable

…for 365 consecutive days…

…including Christmas Day.

So what does this really mean?

Whenever I’m asked what this really means I always refer people to the excellent Yale school publication – ‘The Truth About the Billable Hour‘.

In that publication a number of different variations are set out, but in order to ‘bill’ 2201 hours, you need to have been “at work” 3058 hours. By their own admission, this doesn’t account for “personal calls at work, training/observing, talking with coworkers, a longer lunch (to exercise or shop perhaps), a family funeral, pro bono work (if not treated as billable hours), serving on a Bar committee, writing an article for the bar journal, or interviewing an applicant.”

– and yet here we are talking about 4,200 billable hours!

So why does this even matter?

Why asking someone to work 2,000 billable hours a year will kill their spirit‘ is by a long way the most read post on my blog. And yet here we are talking more than double this amount.

So I have a few questions:

  • if you are the supervising partner of a lawyer that has billed 4,200 hours a year, do you have a duty of care to ensure that lawyer is mentally okay?
  • if you are the managing partner of a fee earner that has billed 4,200 hours a year, do you have a fiduciary duty to ensure the mental wellbeing of that lawyer?
  • and, most importantly, as a client: do you really want someone who is working 11.5 hours a day, every day, without a break, working on your file (because I know my answer this question)?

As always though, interested in your thoughts/views/feedback.

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Has your law firm considered subscription-based pricing?

Like many lawyers who have worked under billable hours or fixed fees, for most of my career I have pondered the question: “How can I make money while I’m asleep?”, or better yet, awake but not working!

Early in my career I thought I had the answer – subscription-based pricing.

At the time I was working with Linklaters on their Blue Flag program (see this article for an overview of what Blue Flag was all about) which essentially provided compliance related information to subscribers who paid a monthly fee. This was then extended to basic loan documentation that was created using automated software (an early version of HotDocs if I am not mistaken).

As I was to find out though, the problem with this business model is that there is always someone willing to undercut you on price, with little attention to the value you were providing.

And so I never really took it much further.

But I remained interested in the dilemma of how I, as a knowledge provider working on hourly or fixed fee arrangements, could make money while I slept (outside of writing a book and get loads of royalties).

A couple of things recently changed my view on this whole issue though.

First, I listened to Episode #217 of Ed Kless and Ron Baker’s the soulofenterprise.com podcast in which they discuss ‘The Automatic Customer: Creating a Subscription Business in Any Industry’ a book by John Warrillow.

Ed and Ron continue this discussion in Episode #221 (Part II).

One of the big take-outs for me from the podcast was the fact that Porsche has introduced subscription pricing (see here for a story on this).

That’s worth repeating – you can subscribe to drive a Porsche!

And get this, Klaus Zellmer, CEO of Porsche North America, says of subscription-based pricing that:

“We engage people with a brand that they usually wouldn’t,”

As a law firm, imagine…

Second, I recently read that ‘Apple will lean more on subscriptions as iPhone sales drop

That’s right, Apple – as of the date of writing this post – the world’s second biggest business by stock market value is moving towards a subscription-based business.

Which made me think – what’s the biggest doing?

Answer: ever heard of Amazon prime?

So if subscription-based pricing works for these big players, why not your law firm?

As always though, would be interested in your thoughts, views, feedback.

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The pointlessness of the ‘billable hour’ set out in two charts

Overnight, Australia-time, the Center for the Study of the Legal Profession at Georgetown University Law Center and Thomson Reuters Legal Executive Institute, relying on data from Thomson Reuters Peer Monitor, published the findings of its ‘2018 Report on the State of the Legal Market‘. Reviewing the performance of U.S. law firms in 2017, as well as looking at the trends expected in 2018, this annual report is typically the “first” big report publication of the year and so a trendsetter of where we may be going as an industry over the next 12 months.

As has been the case in other years, the first chart I typically like to see in this annual report is the one setting out ‘Collection Realization against Standard Rates by Law Firm Segment‘ – Chart 9 in this year’s publication – to hopefully give me an indication of how an industry that largely relies on increases in hourly rates each year to boost top-line revenue is fairing.

As you can see, yet again the results here can best be described as ‘disappointing’:

Chart 9

AM Law 100 firms are tracking an ever declining realised recoveries of circa 80 cents in the dollar. All others aren’t doing all that much better at circa 85 cents in the dollar.

Either way, those levels of realisation would have most bank managers in a panic. And the reason they don’t comes down to one small issue: in law firms this collection rate – other than telling you that the market doesn’t see your hourly value as highly as you do – is absolutely meaningless.

What it is, is pie in the sky internal budgetary metrics against market reality cash in the bank.

So we turn to my second “go-to” chart: ‘Collection Realization against Worked (Agreed) Rates‘. This year this is represented in Chart 10:

Chart 10

As the name suggests, what this chart is showing us is “Collected v Worked (Agreed)”. I’m   assuming the “agreed” here is upfront, and I’m accepting that the picture is far from perfect, but there is a far better flatline realisation rate here of 90-ish per cent, or 90 cents in the dollar.

So, what’s my take-out from the two charts?

If you want to try and get a better handle on your projected cashflow, no doubt better to have an upfront conversation with your client about how much you are going to be charging them – however that is (fixed fee, hourly rates, etc) – than having an arbitrary, and less and less meaningful, ‘billable hourly rate’.

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Why asking someone to work 2,000 billable hours a year will kill their spirit

Business Development image

According to a post by Casey Sullivan of Bloomberg, earlier this week US law firm Crowell & Moring announced that it would increase its billable hour requirement for associates, from 1,900 hours per year to 2,000 per year. This new target will take effect 1 September 2016, but on the plus side 50 pro bono hours will count as billable.

15 Years ago I would have cried out “all kudos to you”. Back then my yearly billable target for an English ‘Magic Circle’ firm was 1,400 hours and I flogged my guts out to achieve that. So if you can effectively put 50% of billables on top of what I was doing (and trust me when I say I wasn’t going home at least one day a week), then you’re a better person than I (or so I would have said then).

But if you really need validation of what asking someone to work 2,000 billable hours a year means, then I would like to recommend you read “The Truth about the Billable Hour” by no less an institution than Yale University. In that publication, Yale caution aspiring lawyers that if you are being asked to “bill” 2201 hour, you need to be “at work” (includes travel time and lunch, etc.) 3058.

Taking that further, from an Australian law perspective, if you are being asked to bill 2,000 hours a year then you need to bill 8.3 hours a day (assuming a 48 week year and you never get sick; which, if you are being asked to do this, you most likely will be). That means you are very likely going to need to be “in the office” around 12 hours a day – and that assumes no write-off by your partner or leakage.

But here’s the question: “What difference does this make?

I ask this because I wholly agree with the following comment my friend Kirsten Hodgson made when I posted a link to this article on LinkedIn:

“why would you reward the number of hours someone spends working? Surely it would be better to focus on how to deliver value smarter and more quickly. This doesn’t incentivize innovation or any type of process improvement.”

Exactly right, you’re measuring all the wrong things!

Leaving aside the Balance Scorecard argument, asking someone to do 2,000 billable hours a year doesn’t take into account:

  • client satisfaction
  • realisation (it’s a utilisation metric)
  • working smarter
  • innovation

or many other metrics.

And for those who may point out the benefits of this including 50 hours pro bono I say this: the Australian Pro Bono Centre National Pro Bono ‘Aspirational Target’ (ie, where we would like to get to), is 35 hours per lawyer per year.

But probably more importantly than all of this is this:

–  if you ask someone to do this, then you really leave them very little time to do anything else.

This really should be a concern, on the business front because you leave almost no time whatsoever to train them in the business of law – ie, you kill any entrepreneurial spirit they may have. And, crucially, the only metric that really counts to them is that all important 2,000 billable hours (keep in mind that like I was, they’re very young). Which for a profession that has the mental health issues we do, is not good.

For all of these reasons, I’m hoping no other law firm follows this. But sadly I think they will.

Oh, and if you are a law firm client reading this post you might just want to look up whether your local jurisdiction has a “Lemon Law” rule that applies to provision of a service.

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Independence Day & The Billable Hour

Two things got my attention on Friday. The first was the decision by the UK to exit the EU (so-called “independence Day” by some of the more fanciful politicians and “Brexit” to most of the rest of us). On a much smaller scale, the second was an article in The Australia Financial Review that “Ditching the billable hours case a struggle“. (print edition – NB: online the article title is “Billable hours to always hold a place in law firms“).

With the first of these two items, I have very little to no control over and am left at the mercy of others.

The second on the other hand is absolute rubbish!

To be clear, mention of the billable hour in the opening four (4) paragraphs of this article are all to internal metrics; specifically how many hours fee earners need to bill each day to make budget (and a side note here, anyone else note how this changed from an annual figure of 1,400 hours to a daily figure of between 6 and 7.5 hours depending on which firm you work for? Is this because a daily figure is much easier to live with than an annual figure that daunts you by its task? If so, kind of simplistic thinking towards people who are supposed to be in the top 1%).

Anyhow I digress as this has nothing to do whatsoever with how clients are charged, much less how they want to be charged, and whether or not the billable hour needs to remain the “go to” fee arrangement of choice by firms and paragraph five (5) of the article tackles this issue head on when it says:

“However, the majority of firms said they worked with clients and offered alternative fee arrangements if suitable.”

You’re kidding right?

For those of you who have not seen it lately, here is the Thomson Reuters Peer Monitor ‘Chart of Billed and Collected Realization Against Standard‘ for the period 2005 to 2015:

realise

That squiggly little line in free-fall tells you realization rates have fallen from roughly 93 cents in the dollar in 2005 to just over 83 cents in the dollar in late 2015. It also tells me that you are not doing a very good job if you are working with your clients vis-a-vis how you charge them for the work you do and it puts to rest any attempt to suggest that billable hours are the preferred method of clients to be billed (unless, that is, you’re suggesting that clients know they can get discounts, or just not pay, bills that accrue on an hourly basis).

So over the weekend I got to think: like the article says, pretty much all of the reasons why the billable hour continues to be a struggle to ditch are down to internal measurement metrics. So, maybe, just maybe, like the UK did on Friday, it’s time for Australian law firms to opt out of the known and disruptive itself – and maybe the rest of the world with it!

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