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Billable Hours and Law Firm Profitability

10.08.2010

A recurring theme in our meetings with clients and on the conference trail is that hallmark of the legal profession – the much-maligned ‘billable hour’. That this issue is here to stay is shown by its appearance in comment even outside the profession, getting a mention last month in The Economist.

Billable Hours and Law Firm Profitability

It is remarkable how quickly this has surfaced as an issue for lawyers and their clients alike. That is not to say the question hadn’t been raised before, but in a matter of a couple of years it has gone from near irrelevance (request a copy of this Eversheds report here) to the top of many managers’ priority lists.

The trend has certainly been accelerated by the economic climate, with clients increasingly unwilling to agree to hourly rates for an unknown number of hours. To the profession’s credit, many firms have proactively moved towards offering alternative billing arrangements for some types of work.

But there are still practices and work types that are potentially susceptible to value based fixed fee billing, and the forward looking firms will continue to march onwards with alternative arrangements. Moreover, this is clearly part of a broader trend pushing down the cost of legal services to purchasers – and this will have a fundamental impact on law firm profitability.

Proactive Clients – Proactive Law Firms

Given that this trend seems unlikely to reverse itself in the foreseeable future, firms need to consider their approach and take a proactive stance wherever possible. This is not a simple case of deciding to offer fixed fees where cases were previously billed by the hour.

It is important to establish profitability models for each work type, and for different case types where appropriate, based on historical figures for time spent on each case and different potential fee levels. It can then be seen what the firm would achieve if fixed fee cases were billed according to time (which is, after all, how fee earners are usually appraised).

This is vital not just to identify how profitable work currently is, but to establish which areas could potentially be improved by more efficient working, and to consider where fees could perhaps be increased.

A Question of Law Firm Strategy

This all requires considerable thought from law firm management teams. Fees must be set according to the firm’s competitive position, the elasticity of demand, and the potential profitability of the work.
Ultimately, some areas may need to be divested, and others may need investment to achieve a scale that justifies the firm’s presence in a particular market. This is far more than a question of day to day billing practices, and goes right to the core of law firm strategy.

We think it is fair to say that this is an issue we will be hearing a lot more about.
 

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