Calling time on the billable hour
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The billable hour has persisted for decades as the default way for law firms to charge clients and measure lawyer performance. Yet the billing model has attracted criticism for encouraging inefficiency and creating the wrong incentives for lawyers. As a result, more and more work is taking place through alternative billing methods.
In this report, we speak to law firms, lawyers and their clients to discuss the pros and cons of the billable hour model, the challenges of pricing matters when using alternative billing structures – and how these trends are likely to develop in the future.
Is the clock ticking on the billable hour?
From fixed fees to a range of emerging alternatives, clients have more choice than ever in how they pay for legal services
For decades, the billable hour has been the default way that law firms charge clients and measure lawyer performance. But while buyers of legal services are increasingly calling for alternatives like fixed fees, law firms had been slow to respond...until recently.
“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.”
The number of law firms offering alternative fee arrangements has risen drastically since the pandemic. According to a 2021 survey of law firms with 100 or more fee-earners by tech firm , 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 . 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). Alternative billing methods can 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.
Flat-fees were the most popular, a showed, followed by flat fees per matter, volume discounts and blended rates. Some 85% of law firms said their use of alternative billing methods is driven by client demand, with 81% of in-house teams saying they use alternative fees to reduce costs. This compares with just 18% of law firms that use them to reduce their own costs, according to Bloomberg. This creates a potential tension between firms and clients when they move away from hourly rates.
Find out how AI is already altering pricing structures
Alan Guy is managing director of underwriting and value optimisation at top 200 US law firm Kobre & Kim and negotiates alternative fee arrangements on litigation matters. He said law firms typically see flat or fixed fees as a way to do as well or better than hourly rates, though clients are often focused on getting the same services for less money. The productive conversations centre on risk and value, rather than price, he noted.
“For a client, they may think it’s worth $100,000 or $1 million to have a problem solved and they are happy to pay that, even if it worked out more expensive than paying by the hour.”
Some lawyers work entirely on a flat-fee basis. For example, commercial contracts firm Radiant Law was launched in 2011 on a flat fee model, intending to fix the incentive problem inherent in law firms that bill by the hour.
“There is a massive value gap,” said Alex Hamilton, the firm’s founder and CEO. “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.”
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By working on a flat-fee basis, Radiant’s lawyers are incentivised to work faster, delivering better value for clients.
However, not all work is suited to alternative billing arrangements. Firms generally agree to flat fees only in more predictable matters; otherwise, they risk committing to a fee that could underestimate the work involved.
“If you’re a big firm doing debt capital markets transactions, you’re probably doing thousands of those and so you’ve got a very good idea of what your fixed charge ought to be,” said Stephen Denyer, director of strategic relationships at The Law Society of England and Wales, a professional association for solicitors. “On the other hand, if you’ve got a major, multi-party M&A transaction or a restructuring or a bit of litigation that could go in lots of different directions, you’ve got no realistic way of knowing what elements there are going to be and therefore what you ought to charge for them.”
Billable hours are also used by certain courts to assess costs and ensure the side that picks up the tab pays a reasonable rate.
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“If you use an alternative fee arrangement and there is a costs award in favour of one or other party, the English courts' costs assessment process still evaluates the fairness of that fee by reference to a billable hours metric,” said Dawson. “So there will be some areas where change will naturally be slower because the incentives aren’t there to drive change.”
The billable hour is also sometimes the easiest way to pay for urgent legal advice or to address a matter that must be quickly resolved.
“In some ways the billable hour is the smallest possible fixed fee and so often that’s what people revert back to just because it’s simple,” said Guy. “A lot of the time if you’ve started reaching for the lawyers, it’s usually because you have a problem that’s got some time sensitivity to it.”
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Despite the enduring prevalence of the billable hour, there’s some evidence that the model can work against law firms. A found almost two thirds of UK law firms (64%) said billing write-offs were on the rise. According to the research, much of this leakage comes down to firms being unable to “prove the work done on each matter”, with nearly a quarter of UK law firms (24%) admitting to missing time or entering time late, and just over a fifth (21%) confessing to missing or late disbursement entry.
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.
“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.”
Even some law firm leaders are advocating for change. “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.”
Firms should look at other ways to measure law firm performance beyond simply counting hours.
“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,” said Nicole Nehama Auerbach, vice president and founding partner of ElevateNext, a law firm that predominately offers alternative fee arrangements. “Even if they’re not billing the most hours, that’s super important.”
Staff who mentor and train young lawyers and build team morale can save the firm a lot of money if they prevent lawyers from leaving, something that isn’t usually quantified, said Auerbach.
Radiant Law has disposed of timesheets. Its priority is team performance over individual performance, according to the company.
“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.
One of the biggest barriers for firms considering a shift from the billable hour is pricing. To accurately price future work, firms need to thoroughly analyse time spent on similar types of work and how much profit they made. This might require investing in pricing tools and skilled individuals.
“You need a more sophisticated internal resource to work on your pricing,” said Denyer. “You can’t just conjure up prices off the top of your head — there’s got to be some real science where you can demonstrate to your managing partner or finance director how you’ve calculated the fee.”
Firms that resist change may ultimately be strong-armed into offering alternative billing arrangements if they want to secure a spot on lucrative legal panels.
“All firms respond to competition,” said Denyer. “Being on a panel for a major client can be worth many millions of pounds, so if you find that a number of your major clients are opting for competitors who are largely not doing billable hours, obviously you’re going to feel you need to respond to that.”
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A culture of billable hours can stifle innovation and disincentivise change, particularly when it comes to adopting legal technology. Machine learning and artificial intelligence tools can replace manual jobs such as M&A-related document review, so firms that use an hourly rate will bill less, potentially denting profits. However, law firms are investing more in technology, with overall legal tech spend .
“One of the basic aims of law tech is to speed up tasks, which doesn’t really help your profitability if you’re still sticking to billable hours, so firms are still coming to terms with how to feed in the law tech element,” said Denyer. “That is probably going to depend on how special or unique the law tech component is — if you’ve got something that is really unusual or unique, then obviously you can potentially pitch that to a client as something that will cost more.”
Besides the billable hour, the , which was carried out by the University of Oxford, identified three new business models in the legal market as a direct consequence of new technology.
- Legal operations to improve the efficiency of workflows
- Legaltech solutions to automate certain tasks that human lawyers used to do
- Transactional platforms which are portals to automate transactions, including matching the demand and supply of lawyers.
Legal tech tools have the capability of saving lawyers significant time. For example, new research from the University of Manchester found lawyers with access to legal research and guidance tool Lexis+ save an average of 8 minutes and 41 seconds per task compared to lawyers without access to a legal research and guidance platform.
A growing number of firms are developing a tech-as-a-service offering, too, where clients can access certain tech tools and products that can deliver legal services faster and more efficiently. Freshfields, for example, has an in-house Lab and Innovation team that uses data science and machine learning to create products that combine tech and data analytics to enhance client service delivery.
One tough decision law firms face when investing in tech-as-a-service is whether to build the solution internally or to purchase it through a third-party vendor.
“Being a law firm, there are things that we can do ourselves and we feel that we’re able to do them at the right scale and at the right quality to give the client support and continuous development that they will expect,” said David Halliwell, partner at Pinsent Masons' Vario Group.
But the build vs. buy decision can have a short and long-term impact on company performance and profitability, said Halliwell.
"Scale and competitiveness can also be achieved efficiently and effectively through outsourcing some technology development, as well as buying existing best-of-breed technology for enterprise capabilities."
All of this means firms must think differently about technology and find ways it can generate more client work.
“Part of adopting technology is deepening and broadening relationships with clients and getting the client more dependent on you,” said Denyer. “Technology can potentially give you real insight into the client's issues, which gives you a chance to pitch for a lot more of their work and also makes the client more wedded to you, which means it’s not going to be so easy for them to move away.”
Technology can also help law firms provide more accurate cost estimates, reducing some of the risk of fixed fees.
“Better use of data will be really, really critical for disrupting this billable hour model,” 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. “Law firms bill their time in six-minute increments, so they’re sitting on a lot of time recording data, so if that data can be mined and used for insight about what’s really involved in delivering a matter, law firms would have much more confidence in the way they price.”
The increased adoption of tech is likely to fuel the transition to fixed fee or blended-rate work. However, the debate over the future of the billable hour is unlikely to fizzle out anytime soon.
“I’ve been practising for nearly 30 years and we’ve been talking about the death of the billable hour since I started and I suspect we’ll be talking about the death of the billable hour long after I’ve retired,” said Brad Wine, global co-chair of litigation at top 50 US firm Morrison & Foerster.
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Are billable hours bad for you?
Chasing down billable hour targets is a stressful experience for lawyers and could damage mental health and the diversity of the legal profession
Targets around billable hours have long been the default way to monitor lawyer performance. 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 , 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 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 , 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.
Even without the billable hour, firms should still record time spent on work, says Denyer.
"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," he said.
However, there's more to measuring performance than the obvious metrics, pointed out Parker. “Law firms tend to focus on money in – more specifically revenue per lawyer – a very blunt instrument, and consequently measure hours billed,” she said.
Besides measuring hours billed, she 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.”
For firms with strict hourly targets in place, the pressure to meet those targets can be detrimental to mental health and well-being. 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 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.”
However, not everybody thinks the billable hour alone is responsible for lawyer stress.
“While it’s certainly true that months and years on end billing tonnes and tonnes of hours is typically a recipe for burnout and other well-being challenges, it’s not accurate to put all of the blame on the billable hour,” said Krista Larson, director of well-being at top 150 US firm Stinson. “It’s often more of a quality than a quantity issue and not being able to have more autonomy and flexibility over one’s time.”
Larson’s role reflects a broader trend among law firms to hire wellness professionals who oversee well-being programmes and create an environment where people recognise the need to look after their mental health.
There is sometimes a lack of awareness around the toll that nonstop working can have on someone’s health, said Wine. “I have no desire to burn out my associates. I want them to be working with us for a very long time and so it’s a matter of making sure that folks know their own limitations. It’s also about making sure that folks understand that they’re not confronting the challenges that come with this profession alone — a lot of us have struggled with the challenges posed by a billable hour environment.”
Some law firm leaders believe that reducing the emphasis on billable hours could support greater diversity in the legal profession. , while shows women at the largest UK firms earn around a fifth less than their male peers.
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“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 Larson. 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.”
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Do billable hours offer value
for money?
Some clients are pushing back on hourly billing as they seek more price certainty when hiring external counsel
It’s an experience that most in-house lawyers face at some point in their careers: external counsel send through an invoice that is much bigger than expected.
“We’ve all gotten to the end of a matter where you get the final bill and it’s one of those bug-eyed moments of ‘how did we get here?’” said Bob Mignanelli, chief operating officer for legal at FTSE 100 consumer healthcare business Haleon.
There’s always a risk of nasty financial surprises when law firms bill by the hour. This means corporate legal departments are increasingly seeking alternative fee arrangements like flat fees when engaging external counsel. Law firms say client demand for alternative billing methods has grown by 26% in the UK since the pandemic, according to a .
With external legal spend a top priority for general counsel, law firms are under pressure to demonstrate cost transparency and value for money. Yet in a of 150,000 law firm clients in the UK, cost transparency around lawyer fees is something that’s causing clients grief. In-house legal teams ranked the service they’d received based on 10 different criteria, and transparency around billing was the second lowest (value for work done was the lowest). And interestingly, billing transparency is only getting worse, with satisfaction levels dropping 1% from the previous year.
“Our starting point is always an alternative fee arrangement, because it gives us price certainty,” said Mignanelli. “We would expect that all our law firms, whether a panel firm or someone we’re engaging on a one-off basis, would at least have the conversation with us around some type of alternative fee arrangement, whether it’s fixed fee, milestone-based or success-based. I would be hesitant to move forward with a firm that wouldn’t at least engage in the conversation to see if a fixed fee is appropriate for a matter.”
However, in-house teams might still agree to hourly billing if it is faster and more convenient than hashing out a deal.
“There are times when you really just need the ability to get a quick piece of advice based on an hourly rate,” Mignanelli said. “So for us it is really about identifying the right type of rate or fee structure for a particular engagement and that really depends on the complexity, the projected length and the speed at which we need to get the advice.”
Larger organisations are likely to have greater clout when agreeing alternative fee structures with their panel firms, which won’t want to lose their panel seats.
“Vodafone does most of its work on fixed rates since that gives budget certainty and allows a comparison of costs from firms when responding to an RFP,” said Kerry Phillip, legal director at the telecommunications giant. “The firms on our panel expect to provide fixed fees or alternative arrangements.”
While the billable hour can increase cost uncertainty, there are ways to lower the danger of prices spiralling out of control.
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“First and foremost is to sit down with your firm at the outset and irrespective of rate structure set the appropriate assumptions to establish the scope of the matter and be clear about what’s in scope and what’s out of scope, establish a project budget and also establish the timekeepers who are going to be working on the matter,” said Mignanelli. “If you do these things, then you mitigate the risk of surprises at the end.”
Fixed fees aren’t without risks of their own, particularly if a matter starts to drift outside the original scope or unexpected events significantly increase the work that law firms have to complete.
“We all have a crystal ball, but sometimes that crystal ball is a little blurry,” said Mignanelli. “If it’s a litigation matter, discovery could mushroom on us where we didn’t expect or we could get additional parties that wind up joining a litigation.” This means sitting down with the law firm and analysing whether the change is material enough to modify the economic arrangement, he said.
Law firms trying to win work in a competitive bidding environment should use a data-led approach with costs for fixed-fee matters. Otherwise, they risk underestimating the level of work involved. “We’ve been in situations where we felt like we’ve screwed down fees almost a little bit too much,” said Andrew Cooke, general counsel at TravelPerk, a business travel provider. “Sometimes, even in competitive tendering processes, we’ve had to go to firms and say the price is coming in at a fifth of what you bid for this. And so we’re concerned that they’re going to under-deliver when they realise how long it’s actually going to take to get this work done.”
Cooke hasn’t seen a significant difference in the level of service provided when work is being carried out on a fixed-fee basis compared to hourly billing. However, he has noticed that working on a fixed-fee model tends to sharpen the mind and reduces the number of unnecessary phone calls and interactions.
Many lawyers are stuck in a mindset that sees the job as a high-touch profession where the client wants face time, Cooke said.
“I don’t want high-touch outreach, I want a solution. We’re looking for value, not cost,” he said. “Fundamentally the questions around the billable hour come down to a failure to express value. It’s almost like you end up taking it back to a cost question, simply because there can't be a value conversation. So that ends up with the billable hour being a proxy for lots of other problems that ultimately relate back to the problem of expressing value.”
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Money isn’t everything: alternatives to the salary arms race
Law firms now realise that hiking salaries is not enough to attract the best talent, with many focusing on workplace culture and lawyer well-being
The legal industry is experiencing one of its most competitive recruitment markets. In the wake of the Covid-19 pandemic, many existing and would-be lawyers have been rethinking their career and the long hours and billing pressures that come with it, narrowing the potential talent pool. Law firm leaders see lawyer recruitment and retention as a major risk to profitability. According to PwC’s Annual Law Firms’ Survey, 88% of the top 100 UK firms are concerned the shortage of talent will stop them meeting their ambitions.
To reduce that risk, firms have boosted pay rates to attract and hold on to talent. The PwC survey revealed 84% of Top 100 firms have reviewed or refined their salaries over the past 12 months, with 76% of firms stating the same with bonuses and 57% with benefits. Salaries for newly qualified (NQ) lawyers are also on the rise. Clifford Chance recently hiked annual pay for junior lawyers in the UK to £125,000, matching magic circle peer Freshfields Bruckhaus Deringer, which bumped up NQ pay to the same level. US firms are paying UK juniors even more — Davis Polk & Wardwell, for example, pays new lawyers £160,000. Higher salaries mean billable hour expectations are unlikely to be relaxed.
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“The arrangement has historically been that in exchange for compensation people are expected to work hard, and that continues to be the case,” said Wine.
While the war for talent has mainly focused on salaries and which firms can write the largest cheques, lawyers are also increasingly seeking to work for firms where they feel valued beyond monetary reward.
“Compensation is but one of several components that we see associates really focusing on and making decisions about where to go to work or where to stay,” said Wine. “Principally those components centre around the investment that we make in those associates, whether it’s training, mentoring or ensuring we are meaningfully engaging with everyone at our firm. My goal as a law firm leader is if one of my high-achieving associates gets a phone call from a recruiter, they say they are happy where they are.”
Firms must also win over younger generations of lawyers who are more socially and environmentally conscious. Some appeal to those values by making diversity and sustainability-related activities count towards billable hour targets.
Wine said Morrison & Foerster takes a more holistic approach to billable hours. For instance, the firm gives lawyers unlimited billable hour credit for any pro bono work they do and provides 50 billable hour credits for fee earners supporting the firm’s diversity and inclusion initiatives, such as mentoring.
Lawyers at US firm Reed Smith can count up to 25 hours spent on sustainability initiatives towards their billing targets as part of the 140 hours of billable credit lawyers can claim for non-billable work. Reed Smith lawyers in London have an annual billing target of 1,700 hours, according to Legal Cheek.
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Bird & Bird said it makes its billable hour targets more flexible by taking account of people’s individual circumstances, for instance if they need to take time off for family leave.
Some firms offer lawyers different salary tracks based on billable hour targets. In the US, Crowell & Moring offers associates a base salary scale of $205,000-$365,000 if they hit at least 2,000 hours a year, reduced to $185,000-$340,000 for 1,900 hours. The firm also enables associates on the 2,000-hour track to write off up to 100 hours for pro bono or diversity work.
Younger lawyers are likelier to prioritise work-life balance. That means firms have to take steps to ensure juniors aren’t overstretched if they want to hang on to the best talent.
“One of the issues that really defines this new generation of lawyers is that they are really focused on their own mental health and wellness,” said Wine. “That means we need to make sure that we’re not burning people out and we need to make sure that we’re providing associates with the tools that they need to manage the stress that comes with this job.”
However, given the shift to remote working during the pandemic, some associates are clamouring to get back in the office so they can learn from senior lawyers, said Auerbach.
“How firms navigate that is going to be very important for attracting talent,” she said. “This generation is not afraid to just pick up and move. If they decide something isn’t working, they really are very happy to get out of the door and try something different. That is going to make a big difference in the talent wars.”
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Ultimately, money will likely remain the main incentive to a law career.
“Provided law students come into it with their eyes open and they’re aware of the bargain to be struck, there may be circumstances in which they are fully prepared to work extremely long hours in return for a large amount of money,” said Parker. “That said, we do read that Gen Z are much less willing to accept 90-hour weeks on the distant carrot of partnership and law firms need to be aware of that and alert to it and start to think about their employee proposition and really be sensitive to what future lawyers are going to want out of their life and their work.”
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