Hourly Billing Reduces Firm Profits

Christopher Marston over at the inside the firm of the future blog just happened to post about an issue I’ve been talking about a lot recently. In an article titled "Time-Based Accounting is Behavior Modifying to the Detriment of Profits," he analyzes the economics behind the billable hour.

What I have been referring to as capitalism, Christopher explains as behavior modification. Behavior modification is nothing more than the human outcome of the incentives that are put in place by a law firm.

Chris notes that the traditional hourly billing firm has as its core the premise that billable time is valued above all else in the firm. Reacting to that firm mission, attorneys are trained to bill as many hours as possible and reduce any non-billable time. There is incentive to pad bills and ignore the fundamental issue of whether an hour spent on a client matter actually provided value to the client. When revenues are down, law firms spring into action pressuring their attorneys to find and bill more hours to clients.

Here is the money quote:

"The quest to meet billing requirements is inherently a short-sighted. For instance, there are severe pressures on attorneys to pad bills and over-lawyer legal matters with no regard for the risk-return relationship on which businesspeople make decisions. These concerns are not only ethical ones, but also foster a relationship of distrust between the client and the attorney. In addition, the efforts to raise short-term revenue are clearly at the expense of clients (who know they are being taken for a long walk) and end up leaving or simply never become loyal to the firm. So, say for example that an attorney (who really needs to put in some hours to make quota) gives into temptation and decides to put in 20% more hours on a case than is necessary. Do you think that the 20% extra revenue this year is greater than the Net Present Value of future cash flows NOT EARNED by virtue of one attorney’s self-interested behavior? Of course not!"

Chris notes several problems with the near thoughtless obsession with billable hours by most firms. Blind obsession with the billable hour not only destroys the relationship amongst attorneys and staff at a firm but inevitably between the firm and its clients.

Chris’s post is a must-read for anyone interested in creating a law firm built on incentives rewarding teamwork and relationships, both internal and external. At Traverse Legal, we are one step short of Chris’s value-billing law firm model. While Chris’s firm, Exemplar Law Partners, doesn’t keep any timesheets and bills exclusively on the value model, my firm, Traverse Legal, works within budgets set by the client, defines and documents deliverables and charges a maximum fee or hourly rate, whichever is less. Some of the work we do purely on a flat fee is essentially the value-billing approach used by Exemplar.