You May Not Bill by the Hour, but you Measure by it.
The billable hour is a fact of life, not just in determining pricing but in managing matters, people, law firms and legal spend. Why? Simple. The billable hour is almost always the only method to determine the internal cost of a matter. In the same way a winery would look at the cost of making a bottle of wine (labor, grapes, bottle, opportunity cost of time in a barrel/bottle, etc.), the primary input into the cost of providing legal services is time.
We spend so much of our time at Planning Blox speaking with lawyers, Legal Project Managers, heads of pricing, CFO’s and corporate legal departments, and I can’t think of any recent conversations where someone wants to talk about “the death of the billable hour.” They’re tired of this topic, and the topic itself is indeed tired. This post is intended to put a little healthy perspective on the issue.
When determining a price or budget for a single matter, it’s obvious to take a look at how much time will be required to complete the work. Of course, you can factor in leveraging lower cost resources, advanced technologies, and you should. But at the end of the day you’ve determined a price (hourly or otherwise) based primarily on time, as typically measured by hours (even if secondments come into play). At a law firm or professional service firm, the total capacity is the sum of all timekeepers’ available time to work on billable work, i.e., available billablehours, or available working hours. In other words, whether each hour is billed as hourly or not, it’s the billable hour that is the measurement of cost.
For example, let’s assume you have terrific technologies enabling your lawyers to prepare a document in 10 hours, and a few years ago this may have been 20 hours. Perhaps you are pricing that piece of work as a fixed price; perhaps not. Either way, factoring in the costs of the technology and the time, you arrive at a fee. You can share the news with your client that you can now do in 10 hours what used to take 20, and everyone benefits. At the end of the day you are stating the benefit as a measurement of time, and specifically, billable hours.
Obviously it’s important to know the internal cost of each hour when initially determining price and developing a project plan, and it’s equally important to measure the actual costs spent performing the work once the work begins. Such profitability metrics are essential, but must be combined with managing the matter’s service delivery, scope, and timeline. For example, what if a fixed price matter goes outside of scope? How will you know, and how will you adjust the price and plan? By looking at the additional time/work it will take to handle the additional scope, of course.
When measuring the success of a timekeeper, practice, or firm, it is again the billable hour that factors into virtually every metric. Even if not compensating based on billable hours, the fact is that the capacity of the timekeeper/firm (as measured by billable hour availability) is the determinant of internal costs. Revenues can be derived from non-billable fee structures, but the billable hour is the ultimate determination of most pricing approaches and profitability metrics.
Let’s remove the negative stigma of “billable hours” by focusing on the value provided by those hours.
Planning Blox helps maximize the benefit of every worked hour for both law firms and their clients, and at the end of the day that is what everyone should be talking about.