The Fall of the Billable Hour and What it Means

It's been an institution for decades - but times are changing...

While much has changed in the legal industry over the years, there's been one institutional mainstay - the billable hour.

The idea of charging by the hour has its origins in the early parts of the 20th century. By the 1960s, it had quickly become the de facto standard for charging legal clients, ostensibly as a way to maximise law firm profitability.

It didn't really matter that it blurred the lines between 'doing client work' and 'doing client work that justifies the expense.' An hour spent, was an hour spent; regardless of output. That hour of work was paid for, whether it consisted of meaningful advisory work or menial paperwork.

'Hours billed' became the almighty; not only as a barometer of business health, but as a measure of individual employee performance. Legal professionals were measured almost solely by the number of hours they billed rather than any qualitative performance metrics.

In today's increasingly innovative world -- where clients demand efficiency and value more vigorously than ever - it's easy to identify fundamental problems with the billable hour. Problems like:

The misalignment it creates between what's good for the company and what's good for the client. What's the incentive for law firms to solve problems quickly and efficiently, if their profit margin suffers because of it?
Discouraging innovation among legal professionals. Again, why improvise and utilise creative solutions to problems, if this means less billable time?
The fact that focus is placed on efforts and hours rather than output and results, which are ultimately what the client values.
The budgetary uncertainty it creates for the client, who can really be given no accurate pricing estimate in advance, and remains in the dark regarding costs until presentation of the final bill.

As a result, we're seeing a steady decline in the billable hour. Flat fees, contingent fees, staged fees, blended rates, milestones and combinations thereof have all 'stepped forward' into the vacuum left behind.

How this affects legal professionals...

There's little doubt that this is likely to be a positive thing for legal employees. For a start, it means they're likely to be liberated from the pressures of achieving billable targets. The challenge of the legal professional has traditionally been simply to bill enough hours to cover their salary and overheads, and then generate profit. Now the focus is turning towards using their extensive skill set to solve legal problems.

The relief from logging every single movement, every single day, often in painfully small 6 or 10 minute increments - can only be good news for job satisfaction. It can be incredibly demoralising and frustrating to keep a minute by minute account of time spent on work. It could well be that a focus on work done rather than time spent working could lead to a greatly improved work-life balance for these individuals.

And then there's the issue of gender. In an industry where 'hours billed' has been the only metric for success - combined with societal expectations which dictate that women take on the role of primary homemaker and caregiver - women's career paths have all too often been held back. Women are entering the profession at record numbers, but they also tend to leave at a much greater rate than their male counterparts. A welcome part of this attitudinal shift towards quality of work, instead of hours on the job, could be that female employees are no longer forced to choose between legal careers and their home lives. Instead, they will be able to actively pursue, and thrive, in both.

So, it seems that the billable hour is soon to be yesterday's news.

And that means that firms can secure themselves a competitive advantage by embracing this change early. Many industry experts suggest that it's just a matter of time before the billable hour's time runs out altogether but in an industry that's traditionally been slow to change, firms have a great opportunity to steal a march on their competition.

Some law firms still cling to the system because it's so deeply entrenched in the legal psyche and, as mentioned earlier, has no doubt been incredibly success over the years in terms of driving and optimising revenue.

But in today's world of increased technology, big data and disruptive, forward-thinking firms, the future often belongs to those who are willing to do things differently. Are you?

Contact our Legal Expertise team if you'd like to discuss your business growth and how we can support your firm.