Monday, August 14, 2006

The Dirty Little Secret About Hourly Billing and Low Professional Satisfaction!

What most people don't realize is that the modern complaints about corporate law practice can actually be attributed to the billable hour model. In this post, I will specifically address how the billable hour model causes low professional satisfaction, low morale, minimizes communication and mentoring, and produces high rates of attrition in firms. The purpose of this blog to to explain why, after decades of increasing problems in all of these categories, firms have failed to address the problem:

HISTORY: Billing by the hour did not even start as a widespread practice in the US until the 50's, before which lawyers used to give a fixed-price for their services. Average billable hours in the 1960's were about 1600 hrs. Every decade since and in an effort to make more money, law firms have increased their billable hours to a present day average of well over 2000 hrs per year. Also note that since the 1960's we have not managed to find a way to shove more than 24 hrs into a day. People still have to balance work with family life, health, and everything else. (In fact, in the past 20 years the need for a more flexible workplace has increased significantly as women entering the workforce has increased to 50%)

FACTS: Let's take a look at the billable hour revenue model and see if we can make a connection to the problems listed in the first paragraph. If partners of a big firm sat around a table and said "How can we make more money here" what would the answers be? Here are the obvious answers:

Idea 1: Let's raise the billable hour quotas. Then, our people will work harder and make us more money.

Idea 2: Let's raise our hourly rates. Then, we get more money for doing the same thing.

NOW, here is the answer that most people do not think of and that explains why firms have not addressed the problems above:

Idea 3: Let's keep work at the top. If we convince clients they need an expert at our highest rates then we can have out top partners bill work instead of delegating to our cheaper, younger associates. Even better, if we do that we will save millions by not having to take non-billable time to mentor our people!!! (Note that mentoring takes a unit of non-billable time for both the mentor and the mentee if done ethically)

THE LINK: You see, systemic underdelegation is said by legal market experts to be an enormous problem. Underdelegation makes firms money when partners do legal work that is below their competence level in order to bill higher rates to the client. When this operates as an economic system within a firm, you end up with a workforce that is entirely underchallenged. This also means that firms do not have to invest in mentoring their people, which minimizes communication and relationship development in the firm and is responsible for the low professional satisfaction and high attrition rates in our industry. The funny thing is that our whole business is about people. People are the product and most firms have a system that creates financial disincentives to invest in its people. With that said, does this better explain why law firms are unable to change? For the attorneys reading this post who work in firms that promised you "work-life balance" and "mentoring" in their marketing materials, do you think they actually delivered on their promises? (Please write me and let me know).

THE SOLUTION: A Fixed-Price model. We already know how it is better for the client. Let's talk about how it is better for people. In a fixed price model the revenue for a project is fixed. Therefore, profitability depends on the efficient delivery of legal services. Now the incentives are completely flipped from the billable hour model. In a fixed price model, profitability requires us to delegate down to the lowest competent level and mentor the heck out of our people. Here, with higher profitability comes a great product at a fixed price, along with a attorneys who are challenged, always learning, building relationships through mentoring and communication, low attrition and high professional satisfaction. (Note that there is a high correlation between happy people and happy customers). There is no better model than one that puts its people at the heart of its business. The billable hour model puts people last. All of the marketing materials in the world cannot create a people-centered law firm if the business model is wrong. This systemic problem explains why firms are structured out of providing the kind of lifestyle that most attorneys entering the workforce today are seeking. Exemplar has found a system that works; one which recognizes that the most successful businesses in the world put their people first. We have put our money where our mouth is. Would you want to work with a firm that won't?

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