As Christmas approached, lawyers at US firms across the City of London and Wall Street rushed to hit tough end-of-year targets for the number of hours billed to clients in 2024.
One mid-level litigation associate at a US law firm in London said he had billed more than 2,000 hours, spending at least 10 hours in the office every day and working some weekends, as he helped a client prepare for a big trial. This year looks set to be just as busy.
Many have predicted the demise of the billable hour as the legal profession’s main charging method. But the recent bumper payday for junior lawyers — many top US firms have handed out six-figure bonuses to associates for hitting 2,000-plus billable hour targets — is the latest sign of the staying power of the industry’s hallmark currency.
For years the metric, through which lawyers keep a precise log of the work they do and bill accordingly, has been a source of debate and tension between law firms and their clients. Companies have pushed back at perceived overcharging, with some arguing for the greater certainty of a fixed-fee model. Lawyers and clients have raised concerns over the wellbeing of the armies of junior associates competing to hit high billing targets. Now, the advancement of generative artificial intelligence is fuelling fresh criticism that billing by the hour is an outdated model that encourages inefficiency.
“While some might have expected, and some predicted [the billable hour’s] use as an external measure would have fallen faster, it remains the main billing method used by law firms,” says Jeremy Black, a partner at Deloitte.
In the UK, the top 10 law firms are charging clients almost 40 per cent more per hour than they were five years ago and notched up more billable hours last year than the 12 months before, according to PwC.
Hourly rates for partners at top UK-headquartered firms have reached £1,500, with US firms’ rates as high as $2,000. Rates in the top American firms last year were up more than 8 per cent, according to the Thomson Reuters Institute.
Such growth means there is little incentive for law firms to move away from the metric towards more flat-fee or subscription-type models that industries from media to consumer goods have adopted.
The billable hour took off as a linchpin for the legal industry in the 1980s, according to academic and legal publications on its history. With the rise of trade magazines such as The American Lawyer and a greater emphasis on the business of law, such metrics, along with partner profits, became important benchmarks by which firms could measure their success.
The metric survives in part because of its “great symbolic value”, says Laura Empson, a professor at Bayes Business School. “It’s sending a signal to the client that professionals are dedicated to serving them.”
But the new threats — chiefly AI — are set to increasingly call into question the viability of the model. In recent years, experts have anticipated a profound impact from generative AI on law firms, particularly on junior jobs. As more mundane legal tasks become automated, there would be fewer working hours for lawyers to bill.
So far, efficiencies gained by AI assisting routine tasks, such as research and drafting documents, appear to have made little headway in displacing the billable metric. But lawyers surveyed by Thomson Reuters last year predicted AI would result in a reduction in the use of the billable hour over the next five years, saving each 12 hours of work a week.
A study by Deloitte last year found that “only 6 per cent of respondents report direct benefits, such as cost savings, from law firm use of the technology” — but 73 per cent anticipated AI would reduce costs in law firms in the future.
“We are seeing more experimentation of fixed-price models, and the increasing adoption of technology will lead to change of the billing model; we’re simply not there yet,” says Raghu Ramanathan, president of Legal Professionals at Thomson Reuters.
Fiona Muir, product manager at OneAdvanced, a software provider to law firms, anticipates technology will enhance the billable hour, increasing the speed and detail of billing, for example by automatically documenting a phone call. “The narrative that you create around the task [is] easier to do. The billing is less contentious if there’s more detail.”
The legal sector’s commitment to billable hours appears stronger than for other professional services firms. “Go back 20-30 years, [consultants] were like lawyers,” says Fiona Czerniawska, chief executive of Source Global Research, a consulting sector analyst, which moved away from charging by the hour after client pressure.
“A lot of the buyers of [legal services are] in-house lawyers,” says Ben Kent, founder of Meridian West, a consultancy. “They make a noise about it but put up with it. Part of the same club.”
One reason for its endurance is the inexact science of legal advice. While parts of a deal may be predictable and amenable to a fixed fee, areas such as big-ticket litigation can be harder to forecast and lawyers do not want to find themselves spending extra hours on a matter they are not getting paid for. Lawyers say clients largely accept its value even if they would like more flexibility and scrutiny of what is being billed.
Among the informal guidance given to young lawyers on billing clients is to keep the timer running if you pop to the kitchen to make a cup of tea but not if you stop to chat with a colleague. Mulling a client issue in the bath or on the train may also be billable, as long as you can properly justify it. Software enables lawyers to track their time, usually in six- or 15-minute increments.
Terra Potter, general counsel at aerospace company Hexcel Corporation until last year, describes the model as a “complex beast — it’s hard to abandon entirely . . . It shows the return on investment, helps monitor work and budgets . . . Some matters suit the billable hour, particularly smaller ones or those with high uncertainty. Others — litigation tranches, transactions, or document packages — lend themselves better to flat fees.”
Beyond its use for charging clients, the billable hour has become a key internal metric for law firms to measure and reward performance.
Despite greater discussion of staff wellbeing, junior lawyers are expected to put in long hours to justify their increasingly high salaries. In the UK’s top firms, newly qualified lawyers’ base pay rose to £150,000 last year. At many US firms, it is even higher, reaching almost £180,000.
Hitting 2,000 hours a year equates to eight billable hours a day across the working week — but this does not include the many non-billable hours worked or holidays. Some US firms pay associates extra bonuses for racking up billable hours beyond the 2,000 target. Many top UK firms deny having targets but will often only pay bonuses if certain hours are met, usually closer to 1,700 a year.
But as a measure of performance, the metric is flawed. Fulfilling targets is, in many ways, outside of a junior lawyer’s control. Associates compete for work from partners to fill their quota and for every quiet week or month there is an awareness they will have to work twice as hard when business picks up. This can lead to “huge peaks and troughs” in working hours, according to one litigation associate at a UK firm.
“If there’s not enough work coming in or teams are over-resourced then it creates a degree of anxiety because if you have a quiet month then you know you’re going to need to have some crazy months to make up for it,” the associate says.
This feast or famine approach has led to some lawyers leaving private practice. One former associate at a UK firm says they moved to an in-house role in part because of the billable hour and its use as “an outdated method of measuring value to a law firm”. The impact the high targets could have on family life was another factor.
It incentivises inefficiency, says Richard Martin, a former employment partner and now principal consultant of Byrne Dean, a wellbeing consultancy. “When people are tired and stressed, they work less effectively and take longer. It’s a vicious circle.” It also encourages “hoarding work”.
Rewards are given to those with the physical stamina to endure such working habits, according to Empson at Bayes.
“People who are capable of billing enormous amounts of hours become heroes in firms,” she says. “For all that is said about the intellect of professionals, big rewards go to people with phenomenal reserves of stamina and good health.”
Even if firms shift to a different fee model for clients, the billable hour will probably survive internally, according to Deloitte’s Black, as it is the simplest way of measuring output. “It is likely that it will be combined with other data to provide information on the value created related to the time spent,” Black suggests. “Over time it does seem the internal use may be of more relative importance.”
Read the full article here
