Review on the billable hour

Article written by Laetitia Ponde Nkot

Billable time has for generations been the means by which law firms bill clients, and measure lawyers’ performance. However, buyers of legal services are increasingly demanding alternatives such as fixed fees. On the other hand, billable hours are also criticised as ineffective and bad enticements for lawyers. In a recent report named Calling time on the billable hour, LexisNexis explores whether billable hours will disappear.

Georgia Dawson, senior partner at global law firm Freshfields Bruckhaus Deringer, the UK’s sixth largest firm by revenue, said: ‘The billable hour has been a fundamental aspect of how businesses of professional services have been structured for such a long period that any pivot that deviates from it will naturally take time’. She further added: ‘Having said that, over the last 10 years there has certainly been more of a pivot towards alternative fee arrangements (AFAs) and  other structures, where clients seek greater certainty of cost.’

Some 85% of law firms audited for the LexisNexis report declared they use alternative fee arrangements (AFAs) by reason of client demand. Flat-fees were the most in demand, a Bloomberg survey manifest, ensued by flat fees per matter, volume discounts and mixed rates. In general, Bloomberg’s 2022 Legal Operations Survey showed that external legal spending through AFAs raised 25% from the prior year. Yet 73% of lawyers stated  they still functioned with billable hours.

Why are clients demanding AFAs?

• 81% of in-house legal teams said they request AFAs to save costs;
• 65% said they ask for AFAs for cost certainty;
• 49% gave general efficiency as a reason to request AFAs.

Other reasons given by law firms for using AFAs include:  

• Offering AFAs is positive for marketing, it places a law firm in a much better position when competing for new work. Bob Mignanelli, chief operating officer for legal at FTSE 100 consumer healthcare business Haleon, said, ’I would be hesitant to move forward with a firm that wouldn’t at least engage in the conversation to see if a fixed fee is appropriate for a matter.’
• AFAs provide revenue certainty. Legal tech can help law firms provide more accurate estimates of how much a matter will cost and determine accurate AFAs. Fixed rates offer certainty.
• AFAs can improve efficiency. Alex Hamilton, CEO and founder of Radiant Law said, ‘You’ve got to kick the habit of the timesheet as well as the billable hour, because as long as you keep telling people that more hours is a good thing, you’re going to get more hours, and that’s not good for the client, the lawyer, or the firm if they are trying to figure out how to add more value more efficiently.’
• In some instances, AFAs can save costs. Sometimes a solution can be achieved quickly, and the client is happy to pay a fixed fee based on value to the client. In such cases, there is no need to clock up the billable hours. The solution is quick and the client is happy to pay a fixed fee; the lawyer can move on to a different matter, and the cost to the law firm is reduced.

Research reveals that clients have three principal critiques of lawyers: lawyers do not explain clearly, they do not empathise, and they are too expensive. These three problems are originated by a law firm culture of billable timesheets and hours.

‘There is a massive value gap’, said Alex Hamilton, the firm’s founder and CEO. ‘Legal services are way too expensive, and if you have worked in the sausage factory like I have as a partner at a big law firm, there are a huge amount of activities that are not really adding value that are being charged to clients at huge rates.’

What are billable hours ?

Hourly billing is the usual way for service-related businesses, such as lawyers, to bill for their work. To assist  the process of determining how much time a client pays for work furnished, many companies prefer to charge by the hour. This signifies they charge clients based on how many hours they put into their projects during one billing period or month, rather than using other common billing methods, such as an annual retainer or flat fee. These companies usually have clear policies on how to bill a customer on time.

What work counts as a billable activity?

The hours billed reflect the duration of work a professional has provided for a client. Here are some  ordinary tasks generally considered as billable activities:

• working towards completing a task
• planning processes
• conducting any research
• communicating with clients
• amending any completed work
• holding meetings with clients
• drafting, reviewing and filing documents

The billable hour system is when a lawyer notes how they spend every minute of their working day to assess how they bill the client. It is the most habitual method of invoicing a client for the work of a lawyer. Different groups of lawyers at different firms charge different amounts. Clients pay by the hour for a lawyer’s advice and additional work on their deal or case. 

What doesn’t count as a billable activity?

While it varies from one company to another, there are some classes of work that aren’t normally billable. Companies little contemplate  time spent on administrative tasks like sending out invoices, and tasks that don’t directly profit clients or team members as billable activities. Here are some more examples of frequent company activities that aren’t ordinarily billable:

• travel time commuting to work or to a meeting
• lunch breaks
• internal meetings unrelated to a client
• phone calls that don’t contribute to the completion of a task or project
• professional training

Why will the billable hour never die?

Even if consumers of legal services are more and more requesting alternative fee structures and a greater number of law firms are providing them. The LexisNexis report delivered that the volume of law firm assignments is still invoiced on time.

Here are some of the arguments in favour of billable hours:

• Some legal work is not suitable for AFAs. There is no way of knowing in advance how much it will cost. Stephen Denyer, chief financial officer  strategic relationships at the Law Society of England and Wales said, ‘If you’re a large company trading in debt capital markets, you’re probably doing thousands of them, so you have a pretty good idea of ​​what your fixed charge should be … On the other hand, if you have a large multiparty Mergers and Acquisitions (M&A) deal or a restructuring or a bit of litigation that could go in a lot of different directions, you have no realistic way of knowing what elements there are going to be and therefore what you should charge for them.’ Sometimes, billing by the hour is faster and more convenient. ‘There are times where you really just need the ability to get a quick piece of advice based on an hourly rate’, said Mignanelli.
• Billable hours can be the smallest cost. Alan Guy, managing director of underwriting and value optimisation at top 200 US law firm Kobre & Kim, and who is responsible for negotiating AFAs on litigation matters said, ‘In some ways, the billable hour is the smallest possible fixed fee, and so often that’s what people revert back to just because it’s simple … A lot of the time, if you’ve started reaching for the lawyers, it’s usually because you have a problem that’s got some time sensitivity to it.’
• Certain courts use billable hours to assess costs. If you use an alternative fee arrangement, and there is a costs award in favour of one or other party, the English court’s costs assessment process still evaluates the fairness of that fee by reference to a billable hours metric.

Do billable hours offer value for money?

Some clients beat back on hourly billing as they look for more price reliability when hiring external counsel. Law firms pointed to client demand for alternative billing methods has grown by 26% in the UK since the pandemic, as per a 2021 BigHand survey.

An experience that most in-house lawyers encounter: external counsel send through a bill that is much significant than anticipated. That is why corporate legal departments try to obtain alternative fee arrangements like flat fees when hiring external counsel.

However, nowadays, clients don’t want billable hours, they want value. Doesn’t matter how long a lawyer spend on an issue as long as they obtain a solution; and they are inclined to pay for a solution if they are satisfied with. 

‘A lot of lawyers are  that this is a high-touch profession and that what the client wants make contact with,’ said Andrew Cooke, general counsel at TravelPerk. But clients are seeking for value, not cost. Alan Guy, managing director of underwriting and value optimisation at top 200 US law firm Kobre & Kim and responsible for negotiating AFAs on litigation matters, said, ‘Clients are often focused on how to get the same services for less money … The conversations come when, rather than thinking of it as a discussion about price, you think of it as a discussion about risk and value. Because for a client, they may think it’s worth 100,000 $ or 1 million $  to have a problem solved, and they are happy to pay that, even if it worked out more expensive than paying by the hour.’

Is your billing structure causing your lawyers to leave?

Diversity and gender parity

Some law firm leaders think that changing the foundation from billable hours can also assisted greater diversity and gender parity in the profession. Lawyers from underrepresented backgrounds are frequently demanded to engage in the firm’s diversity initiatives. 

These actions are non-billable activities, meaning the pressure is considerable on these lawyers to reach billable targets. Regularly, the impact of non-billable work disproportionately falls on underrepresented lawyers.

According to Dana Denis-Smith, CEO of Obelisk Support and creator of the First 100 Years (a national campaign supported by the Law Society, Bar Council and CILEX, charting the journey of women in law since 1919), the billable hours’ target, amid further elements, stack up against women in the profession. This comment came as they discussed why only 35% of law firm partners in 2021 were women, whilst women accounted for 61% of solicitors and 52% of lawyers in law firms.

Women would regularly carry out the soft, non-chargeable work such as pro bono or organising events. ‘This then repercusses in smaller billing hours which are utilised when dealing with promotions’.

Billable hours lead the way to stress and mental health problems, affect underrepresented lawyers excessively and can play against women regarding promotions, it appears a just conclusion that billable hours are, partially, precipitating lawyers to leave the profession.

Some lawyers perform absolutely on a flat-fee basis. For instance, commercial contracts firm Radiant Law was founded in 2011 on a flat fee model having in view to heal the spur deep-rooted in law firms that bill by the hour.

By working on a flat-fee basis, Radiant’s lawyers are roused to work quicker, delivering better value for clients.

Billable hours engender stress and burnout

LexisNexis reported 24% of lawyers said they are leaving their jobs for work-life balance, whilst 35% said they are leaving for better salaries.

According to Law Care’s Life in the Law report, more than two-thirds of UK lawyers have lately went through some form of mental ill health. ‘For firms with rigorous hourly targets, the constraint to meet those targets can be harmful to mental health and well-being. No matter how much amazing work you’re doing, if you’re not putting in those long hours, you’re not seen as being committed, and you’re not going to progress in the law firm, and I think that’s why many people end up leaving private practice to go in-house.’

A LawCare study found that the billable hours system donated to lawyers feeling demotivated, dissatisfied and stressed. Especially junior lawyers. Lawyers no longer want to work in a traditional firm where efficiency, performance, skills development and collaboration with clients are punished in a time-selling structure. They require a milieu that permits them to exploit  the skills and knowledge they have spent years during their legal studies, making use of technology to do so. 

Firms are in business with a newer generation of lawyers. ‘One of the problems that characterise this new generation of lawyers is that they focalised on their own mental health and wellness. That means we need to make sure that we’re not burning people out and we need to make sure that we’re providing associates with the tools that they need to manage the stress that comes with this job’, said Brad Wine, global co-chair of litigation at top 50 US firm Morrison & Foerster.

In the UK, Slaughter & May and Linklaters have shifted from the rigidity of the billable hourly model to more supple pricing arrangements such as fixed fees, flat-fee billing and relative value models to meet customer demands, but also to support their staff.

Firms must also satisfy younger generations of lawyers who are more socially and environmentally conscious. Some bring into play these values by making diversity and sustainability-related activities calculate to billable hour targets. 

Morrison & Foerster gives lawyers unlimited billable hour credit for any pro bono work they do and provides 50 billable hour credits for fee earners supporting the firm’s diversity and inclusion initiatives, such as mentoring.

Bird & Bird told it makes its billable hour targets more flexible by taking account of people’s individual circumstances, for instance, if they need to take time off for family leave.

Consequences of new technology

Besides the billable hour, the Solicitors Regulation Authority’s Technology and Innovation in Legal Services report, which was carried out by the University of Oxford, identified three new business models in the legal market as a direct consequence of new technology:

• Legal operations to improve the efficiency of workflows;
• Legaltech solutions to automate certain tasks that human lawyers used to do;
• Transactional platforms which are portals to automate transactions, including matching the demand and supply of lawyers.

Legal tech tools have the capacity of saving lawyers considerable time. It’s not just law firms that are directing the adoption of AI. Clients are coming to the tools that are available and request for proposal (RFPs)  ask firms to prove how technology is employed to enhance their effectiveness. Clients no longer want to pay for an extensive manual review of documents that can be done by an AI tool in seconds. As a result, firms that use an hourly rate will bill less, potentially lessen profits. However, law firms are investing more in technology, with overall legal tech spend growing 48% over the past 12 months.

The rising adoption of tech is likely to trigger the passage to fixed fee or blended-rate work. Nevertheless, the discussion over the future of the billable hour is unlikely to cease before long.

What do students need to know about billable hours

What 1,800 Hours Looks Like

For aiding law school students comprehend the time commitment of Big Law, Yale Law School’s Career Development Office depicted the day-to-day work lives of attorneys billing 1,800 hours, 2,000 hours, and 2,200 hours annually:

‘Lawyers selecting 1,800 hours may work 10 hours per day, with one hour off for lunch and a total of 90 minutes for bathroom breaks, reading legal news, making non-billable correspondence, attending meetings and continuing legal education. A lawyer billing clients 7.5 hours per day, five days per week, and taking three weeks off for vacation bills 1,838 hours annually. That equates to a 50-hour work week, which could go up to 55 or 60 hours with the addition of a 30- to 60-minute commute each way.

To strike 2,000 hours a year, a lawyer who wants to avoid working weekends may work 11.5 to 12 hours daily, with two hours off for lunch and dinner, an hour off for coffee and bathroom breaks, and 30 minutes off for administrative duties. Billing clients 8.5 hours per day, the lawyer would hit 2,082 hours with three weeks off. 

To beat 2,200 hours, lawyers would need to work the same schedule plus three Saturdays each month for 10 months of the year.

For notably profitable firms that push associates hard on hours, coming down to 1,800 would represent a 10% to 20% drop in profit margin. At Paul, Weiss, Rifkind, Wharton & Garrison, for instance, the median amount of hours billed last year by associates who responded to a recent survey of mid-levels was 2,138. If all of Paul Weiss’ revenue came from billable hours, and if mid-levels worked roughly as much as fellow associates and partners, then getting hours down to a median of 1,800 would reduce gross revenue around 16%. That would bring profit margins from 55% to 47%, a 14.5% total decrease in profitability.

‘Cut the profit margin a little, hire more associates and focus more on balance and we will all still get by very very well!’, one Paul Weiss associate exclaimed.

Law firms with smaller profit margins would get hit harder in the bottom line, however. At Benesch, Friedlander, Coplan & Aronoff, where the median 2022 associate hours figure was 2,070 and profit margins were 32% last year, a move to 1,800 hours would reduce profitability by 34%.’

Fewer the better

‘If a lawyer annualising 1,800 hours has a 30-minute commute each day, they’re already on the upper limit of what researchers define as a healthy amount of work. After 55 hours per week, risk of stroke increases 33% and risk of heart attack goes up 13% compared to people who work 35 to 40 hours weekly, according to a University of College London study.

Most adults need at least seven hours of sleep each night or they risk losing alertness, impaired memory, stressful relationships and worse quality of life. And according to research from the National Institute of Occupational Safety and Health, workers’ mental health declines when they feel they cannot separate themselves from their work. Even the difference between 1,800 hours and 2,000 hours is significant. To bill 2,000 hours is all-consuming. There’s no way you’re going to be able to have a balanced life, and that’s where the lip service comes in’, Mike Lubofsky, a psychotherapist for lawyers, told The American Lawyer in May.’