Calling Time on the Chargeable Hour
The idea of the billable hour is deeply ingrained in law firm culture, but it has also become a leading cause of client dissatisfaction.
James Dakin, co-founder of Newmanor Law, explores the origins of the chargeable hour and some alternatives that firms could adopt.
When we set up Newmanor Law, we had a plan to shake up the commercial real estate market by embracing a new business model that puts the client at the centre of everything we do. And the best step any law firm can take to align with its clients is to abandon the billable hour.
Research shows that clients have three main criticism of lawyers: we don’t explain ourselves clearly, we don’t show empathy, and we are too expensive. All three of these problems are caused by a law firm culture steeped in timesheets and billable hours, and that culture is the villain of this tale.
The chargeable hour began as a tool for measuring a firm’s costs and was never intended to dictate pricing. Today it underpins a cost-plus charging model that drives legal bills relentlessly higher.
Management consultancy was born in the Victorian era. One of its first exponents was Frederick Wilmslow Taylor, a mechanical engineer from Philadelphia who developed efficiency techniques in manufacturing by bringing scientific principles to the factory floor to improve productivity. By 1920, Boston attorney Reginald Heber Smith was applying Taylorism to legal practice, popularising the timesheet and dividing the lawyer’s day into six-minute units. By the 1970s, time-based billing was ubiquitous, and in 2021 the legal profession is still in thrall to this century-old system.
Chargeable hours impact more than just time
At this point you may well be thinking: so what? Lawyers often agree capped and fixed fees, so that surely solves the high-cost problem? Sadly not.
The chargeable hour began as a tool for measuring a firm’s costs and was never intended to dictate pricing.
The effects of the chargeable hour run deep because firms use it to evaluate individuals’ performance. As an associate, the more hours you record, the bigger your bonus, the quicker you get promoted, the happier your bosses are. As a partner, the more time you write off, the more severe the beating you get from management and the less likely you are to move up the equity. Contrary to popular belief, lawyers are real people, intelligent ones, and they respond to the hours culture they find themselves in.
From a client’s perspective, the biggest issue with the hours system is that it penalises lawyers for being efficient. Instead of investing in technology to improve service delivery, as we do, hours culture encourages lawyers to take their time over things. Time and time again, at the end of a transaction, the lawyers ask for more money, the justification being that they had to spend more time than anticipated. Occasionally you may run over your estimate, but if you always do, you’re just lowballing.
In our business, we have turned this on its head. We judge our people on client satisfaction, not hours, and that drives an alignment with clients’ interests that is lacking in the traditional model.
Experience creates allows accurate costing
We never come back to the client on the eve of completion asking for more money. Instead we are thinking of the next transaction, and the one after that, because high profitability comes from high utilisation, not from the profit on any particular transaction. If that sounds counter-intuitive, consider the benefits of efficiency. The classic project management triangle balances time, cost and scope, the idea being that you can only improve one to the detriment of the others.
But our competitors are encouraged to take their time, so there is plenty of room for Newmanor Law to work faster and save costs within the standard scope, whilst also providing a better service.
I have one final thought for you. The billable hour started with Taylorism, a way of making industry more efficient that was abandoned by industry in the 1930s. The biggest criticism of scientific management is that it ignores human nature and assumes we are all robots following orders to the letter.
Firms still following Taylorism today should ponder whether its inhumanity is also the cause of the other two issues clients have with their lawyers – poor communication and lack of empathy. A culture that treats its people like robots is likely to make them behave like robots.