Beyond billable hours: the new ways to measure lawyer performance

As the billable hour erodes, how can law firms measure lawyers' performance?

Billable hour targets have long been the default way to measure lawyer performance.

But as law firms move way from the billable hour – with alternative fee arrangements, such as flat or fixed rates, growing in popularity – many are questioning the ongoing relevance of this performance metric.

In a new LexisNexis report investigating the billable hour, experts argue that billable hours encourage the wrong incentives for lawyers, with some saying annual targets have taken precedence over client value.

Here's an overview of the main findings.

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Law firms pivot from the billable hour

Cons of the billable hour

Alternative metrics to hours billed

Switching the focus to client value

Calling time on the billable hour

Download the new investigative report

Law firms pivot towards alternative fee arrangements

43%

of UK law firms said they are offering alternative fees like fixed or capped fees to clients (BigHand)

46%

of general counsel said alternative fee arrangements were more commonly used than a specific hourly rate (The Lawyer)

+28%

increase in popularity of alternative fee arrangements by in-house lawyers in the last 12 months (The Lawyer)

What's driving law firms to shift away from the billable hour?

Law firms large and small have been reliant on the billable hour for decades, and while the billing method is still in place at most firms, its popularity is dwindling.

According to a 2021 survey by tech firm BigHand of law firms with 100 or more fee-earners, 43% of UK law firms said they are offering alternative fees like fixed or capped fees to clients (up 28% from 2020). This roughly aligns with findings from The Lawyer’s most recent In-house Legal Sentiment Survey. Having interviewed 259 general counsel and in-house lawyers, the survey found alternative fee arrangements were more commonly used than a specific hourly rate (46% versus 40% respectively). While there are a wide range of alternative billing methods in use, the most commonly used include flat fees that are agreed for a project in advance, contingency fees that are dependent on the outcome of a case, and capped fees, where costs can’t go above a certain level.

“The billable hour has been a foundational aspect of the way professional services firms have structured themselves for such a long period of time that any pivot away from that is naturally going to take time,” said Georgia Dawson, senior partner at global law firm Freshfields Bruckhaus Deringer, the UK’s sixth-largest firm by revenue. “That said, over the last 10 years there’s definitely been more of a pivot towards alternative fee arrangements and other structures, where clients are looking for more certainty of cost.”

Clients, it seems, are the main drivers behind this shift in billing preferences. According to a Bloomberg survey, some 85% of law firms said their use of alternative billing methods is driven by client demand – and 81% of in-house teams said they prefer using alternative fees to reduce costs.

In fact, some critics suggest the billable hour is no longer fit for purpose as it encourages behaviours that can run counter to a client’s best interests.

But another commonly cited reason why in-house legal teams are pushing for alternative payment plans comes from an issue of perceived value.

“The billable hour model is out of date and creates negative incentives,” said a senior lawyer in the UK who has worked in both private practice and in-house. “People who work more efficiently are unduly penalised, because they bill less than someone who maybe took twice as long to do the same piece of work. We should be rewarding people for efficiency, not penalising them.”

Alex Hamilton, the founder and CEO of commercial contracts firm Radiant Law, said the legal market currently has a massive value gap.

"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.”

Shifting away from the billable hour – at least to some extent – may help firms to further their appeal to clients (especially during today's economically turbulent times). The adoption of alternative billing methods could also improve job satisfaction rates in a sector synonymous with burnout.

“It would be ideal for the industry if we can start to move towards more of a focus on outputs and the value that is being delivered by lawyers,” said Dawson. “That supports a drive towards efficiency, a drive towards the use of technology and it can help to support a better focus on mental health, well-being and diversity in the profession as well.”

“It would be ideal for the industry if we can start to move towards more of a focus on outputs and the value that is being delivered by lawyers."

Georgia Dawson, senior partner at Freshfields Bruckhaus Deringer

Basing performance on hours billed does more harm than good

While firms are shifting away from charging by the billable hour, many are sticking to pre-existing pattern of measuring performance based on hours spent.

“Law firms tend to focus on money in – more specifically revenue per lawyer – a very blunt instrument, and consequently measure hours billed,” said Isabel Parker, legal management consulting partner at Deloitte Legal and executive director of the Digital Legal Exchange, an independent forum for general counsel designed to accelerate digital transformation in the legal industry.

The typical range varies from as low as 800 to as high as 2,000 hours a year, though at some firms it can be even higher. According to PwC's Annual Law Firms' Survey 2022, the average recorded hours per lawyer at the top 10 firms currently sits at 1,373. This number drops down to 1,272 chargeable hours for the top 11 to 25 firms, and to 1,167 hours for the top 26 to 50 firms. Although these numbers are thought to have risen in response to recent economic events. The newly-published BigHand 2022 survey found 98% of UK law firms surveyed said they had increased target hours for lawyers, with nearly half (47%) doing so by over 10%.

The average working day for a junior lawyer sits at just over 10 hours, according to Legal Cheek, which measured the average start and finish times for lawyers across a wide range of UK law firms. However, this jumps to around 14 hours per day for those working at US firms.

Firms should look at other ways to measure law firm performance beyond simply counting hours.

“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,” said Hamilton. “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,” he added.

Nicole Nehama Auerbach, vice president and founding partner of ElevateNext, a law firm that predominately offers alternative fee arrangements, uttered a similar message.

“Sometimes the things that matter a lot are intangibles — not necessarily bringing in the business, but running the business in such a way that the client is happy and satisfied and wants to bring in more business. Even if they’re not billing the most hours, that’s super important.”

Measuring lawyer performance based on the number hours spent on billable work can also negatively impact employee mental health, diversity and inclusion, and overall job satisfaction levels.

More than two-thirds of lawyers in the UK and Ireland have recently suffered some form of mental ill health, with only 56% of those saying they had talked about it at work, according to Law Care’s Life in the Law report.

“The billable hour is horrible from a mental well-being perspective because you always have this general level of anxiety and stress,” said a senior lawyer in the UK who has worked in both private practice and in-house. “I felt that very acutely when I went in-house — it just felt like this huge weight of stress lifted off my shoulders. 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.”

Source: Gapsquare Closing the gender pay gap in the UK legal profession report

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 senior lawyer who has worked in both private practice and in-house

Some law firm leaders believe that reducing the emphasis on billable hours could support greater diversity in the legal profession. Only 35% of law firm partners in England and Wales are women, while Law Society data shows women at the largest UK firms earn around a fifth less than their male peers.

“If you focus on outputs rather than the inputs, then people are able to manage their work in a way where they’re completely focused on the quality and the value of the output for the client,” said Dawson. “That means hopefully the profession is more attractive to a broader set of people than it might seem at the moment, where the public perception is about a slavish hours-driven culture, which for many people, myself included, is not attractive.”

Lawyers from underrepresented backgrounds are also more likely to be asked to contribute to their firm’s diversity initiatives, which can be time-consuming and therefore creates additional pressure on those cohorts when trying to meet their billable hour targets. Lawyers from diverse backgrounds are often tapped to participate in non-billable activities at the firm, said Krista Larson, director of well-being at top 150 US firm Stinson. This could include activities aimed at supporting diversity efforts, such as informal mentoring.

“While the billable hour might be applicable to every attorney, the disparate part is the impact of non-billable work that tends to disproportionately fall on underrepresented lawyers and that’s the piece that really needs to be taken into consideration.”

Alternative metrics to hours billed

Even without the billable hour, most firms will still be recording time spent on work to monitor the cost as opposed to the price, as well as utilisation rates. Law firms are human capital businesses, after all, and the partners or management teams will want to ensure the most expensive assets are well-used.

"Fee earners should still record their hours for performance management purposes. This allows firms to monitor workload and compare the efficiency of different fee earners," said Stephen Denyer, director of strategic relationships at The Law Society of England and Wales.

Besides measuring hours billed, Parker suggested law firms could focus on team or matter operational profitability by comparing the charge out rate over the fully loaded cost to deliver for each team member, which would incentivise efficient delivery and thoughtful resourcing. She also suggested tracking different metrics that encourage teamwork, such as measuring contributions to knowledge sharing, for example.

"Most mature organisations outside law focus on the client and measure customer satisfaction. Law firms should do this. Ultimately law is a service business.”

Hamilton said the priority for lawyers at his firm is collaboration rather than competition.

"Although we measure, we are careful with relying too much on measurements. Having said that, we have an array of metrics, such as number of deals worked on, skill levels, continuous improvement projects completed, etc. We have a pretty good idea of who is doing what and relative contribution.”

10 alternative performance metrics to consider

1) Client interview scoring on individual performance

2) Profit margins, success rates and adherence to budgets for client work

3) Percentage of new work given to the to lawyer from existing clients

4) New business generating or realisation rates

5) Peer reviews on work matters (including paralegals/staff/associates) to validate non-billable activity

6) Cross-selling opportunities generated for other departments

7) Innovation scoring - measuring the willingness to engage in efforts to become more efficient or innovative

8) Involvement in additional activities such as mentoring or committees

9) Involvement in diversity and inclusion specific initiatives

10) Pro bono work

Learn how law firms and clients are responding to alternative fee arrangements

Download our new investigative report

Switching the focus to client value

Technology plays a crucial role in enabling law firms to deliver better value to clients.

Machine learning and artificial intelligence tools are now able to replace manual and often time-consuming tasks.

As a result, there's been widespread adoption by the top 100 firms of everything from document management and drafting solutions, to research and legal guidance tools, to e-signature and e-billing software – all with the aim of increasing productivity.

For instance, new research by the University of Manchester and commissioned by LexisNexis found legal research and guidance tool Lexis+ saves lawyers an average of 8 minutes and 41 seconds per task, which equates to 1 hour and 41 minutes over the course of a 10 hour and 15 minute day (the national average for lawyers), or 8 hours and 28 minutes over the course of a week.

These time savings means your lawyers can spend less time scanning the internet or flicking through the law books in search of legal information, and more time working on the strategic work that adds the most value to your clients.