Diluting the Billable Hour

Dilute: To make less concentrated by adding something else to the mixture.

The billable hour isn’t going away any time soon, but it certainly is being diluted.  “A recent survey of 2,000 lawyers in the UK found that 69 percent of managing partners and senior partners – and 60 percent of 12 rank-and-file partners – believe that the current economic turmoil will force law firms to make radical changes to their business models”  [Citi Private Bank / Hildebrandt Client Advisory – January 2009].  In addition, a US based survey found that “67% of large law firm leaders are expecting significant pricing model changes over the next 5 years” [LEB survey conducted in September 2009; n=33].  So, a large number of firms are going to change, but is it going to be a large or small change in their billing model? 

To answer that, we can look at a Citi Private Bank Law Watch report that states “Experts are forecasting approximately a 1.5% increase per year in Alternate Billing Models from 2008 through 2010 (from 6.5% to 9.8%)” [Citi Private Bank Law Watch – September 2009].

Why are billing model changes needed?   The current economic downturn is forcing clients to push back which leads to reduced billing realization numbers as well as falling collection realization numbers.  For example, there has been a “20 hour per month (14%) drop in the average number of hours billed between 1Q07 and 1Q09”  [Hildebrandt Peer Monitor 2009].  Compound that with new collection realization numbers like we see here “Realization has dropped 3% from 95.5 % in 4Q2006 to 92.5% 1Q2009” [Hildebrandt Peer Monitor, 2009] and you can begin to see why more firms are using alternate billing models.

Which billing methods are being employed by firms?  This data from [September 2009 Survey of 2009 LEB conference participants] shows us that more than half the firms surveyed in September 2009 plan to increase the use of the following variations on the hourly rate model: Discounted hourly rates (100%), Fixed fees (88%), Fee caps (76%), Portfolio pricing (70%), Menu pricing (67%), Blended billing rates (58%), and Retainers (55%).   The percentage represents the percentage of firms that plan to increase that particular model.

With so many firms employing so many models there is no question that the billable hour is being diluted. However, the numbers show this a relatively small dilution that will take place over years.
My recommendation is to use the current economic recession to influence more accurate and timely time tracking.  Not only will this help with Billable Hour tracking, but it will provide the metrics needed to successfully assess and implement additional billing models.

- Matt McInerny APS CTO and Product Evangelist