When a law firm faces severe challenges to its profitability, sooner or later someone will say, “We just need more billable hours.” This often results in the promulgation of minimum billable-hours requirements for lawyers and other fee earners, often accompanies by exhortations to fee earners to comply or face dire consequences.
In most cases, there might be a brief increase in recorded billable hours, but it usually has little if any impact on profitability. There are several reasons why these “zombie hours” produce few benefits and might actually make things worse.
A frequent phenomenon during these campaigns is that while recorded billable hours increase, realization — the percentage of hours for which a fee is actually collected — drops. This is especially the case if associates are pressured to produce more hours. Instead of doing more billable work, they frequently just take longer to do it. Most reasonably sophisticated clients spot this right away and refuse to pay.
Moreover, my colleagues and I have observed that these “zombie hours” are often the result of partners and associates taking on work that is marginally profitable, or actually loses money for the firm, simply in order to satisfy the requirements for more billable hours.
In other words, they might be working harder, but they are not working harder on the right things.
A demand for more billable hours is irrelevant in the “alternate universe” of non-hourly fees, in which many practice groups must operate.
In the traditional economic environment of a law firm, more billable hours usually meant more revenue, provided the additional hours represented legitimate work for which a client would pay. The shift to fixed fees and non-hourly rates has changed all that. In the traditional “universe,” more billable hours was a good thing. In the new “alternate universe” of fixed fees, many of the tradition assumptions and “best practices” are turned upside down; and more billable hours can be very bad. If a practice group is attempting to transition from hourly rates to non-hourly fee structures, an unrealistically high demand for a minimum number of billable hours could undermine profitability.
Minimum billable hours standards for partners can weaken leverage.
Leverage — the ability to delegate work from partners to associates, who can do the work at lower cost to the firm — is a critical method for managing profitability in practice areas that have become increasingly price-sensitive, are dominated by non-hourly fee structures, or involve high-volume low-margin legal work. When partners are required to record a minimum number of billable hours, we usually observe a sharp increase in hoarding of work by partners, and a dramatic weakening in the workflow leverage in practice. This also can result in partners having sharply reduced availability to invest their time in activities, such as marketing and business development, that produce higher sustainable value for the firm than merely grinding out billable legal work.
Billable hours are still important.
Although it can sometimes take on zombie-like characteristics, the billable hour is not dead.
The billable hour is no longer a reliable indicator of financial performance or profitability
“The reports of my death have been greatly exaggerated.”
Samuel L. Clemens (1835-1910)
in most law firms, and I question whether it ever was. However, it remains a very useful short-hand tool to gauge the general short-term productivity of a practice group and to make rough forecasts for the balance of a fiscal year. (I qualify this with the words short-term, because in practice groups that have undergone a shift from hourly rates to non-hourly fees, billable hour comparisons over periods of more than two years usually are not reliable. The impact of an additional billable hour today might be less important to profitability than it was two years ago, and might even be counterproductive.)
To ensure that, when additional billable hours are recorded, they do not become “zombie hours,” law firms and practice groups should:
- Emphasize that the goal is not to “work harder,” but to focus attention on working on the right things. What are “the right things” will vary among practice groups.
- Do not attempt to impose minimum billable hours requirements on practice groups or in practice areas in which the billable hour is no longer a relevant measurement of fee production or profitability.
- Set partner-specific and group-specific goals, not a single, inflexible standard for the entire firm.
- Monitor all of the other drivers of law firm profitability — price, realization, cost management, fee earner compensation, and leverage — not just productivity. They can be more important in understanding and improving profitability.
The economic forces and dynamics of law firm profitability are more complex than ever before. A modern approach to profitability problems therefore requires a holistic, multi-faceted approach. This will usually produce better, sustainable results.