By -

With disruptors shaking up the legal market, the end of the billable hour may be in sight.

There has been a lot of talk lately about innovation as law firms rush to modernise, adapt, and transform their systems to meet the changing needs of their 21st century clients. Yet many of these same firms remain tethered to an antiquated billing practice that came to Australia in the 1970s and has changed very little since.

Lawyers’ clocks still mark six-minute intervals under the tyranny of the billable hour.

The practice of hourly billing in law firms has been called “inefficient”, “highly destructive” and “unreasonable” by commentators including LexisNexis.

NSW Chief Justice Tom Bathurst in 2012 said the emphasis “mega-firms” placed on billable hour targets left lawyers and clients open to exploitation and created ethical dilemmas.

Bathurst said billable hours turned bright young graduates into “mindless drones adding six minutes here, six minutes there, to the general dissatisfaction of their clients and to the distress of the court when they bring litigation that shows no discernment to the matters necessary”.

Keypoint Law Chief Executive Warren Kalinko left his role at a top-tier firm where he observed the rigid and inefficient structures the billable hour dictated.

As a solicitor at Mallesons Stephen Jacques (now King & Wood Mallesons), Kalinko had to meet an average billing target of seven hours a day. He would often spend 12 hours in the office to reach the target during his five years there, and felt there was little space in his life for anything outside work.

“Billing targets put enormous pressure on the individual,” says Kalinko.

“They make it very hard to achieve any work-life balance and they put a pressure into the relationship between the lawyer and the client that is undesirable. Every day, every month and every year, as the clocks continuously start from zero, the billable hour targets add a level of pressure that makes it hard to balance other responsibilities. It’s a real obstacle to people engaging in the profession in any way other than by working a 50- to 60-hour week.”

Kalinko points out that such long hours are unsustainable for lawyers with families and
other commitments outside of work.

“The NARS report [Law Council of Australia’s 2014 National Attrition and Re-engagement Study (NARS) report] came out with a lot of research about billable hours being a major reason why women leave the law,” he says.

“Billable hour targets translate into long hours in the office and are often incompatible with people who are the primary care-givers, who often are women.

“The other thing about billable hour targets is they incentivise inefficiency. The slower you work, the closer you get to meeting your targets. The faster and more efficiently you work, the less time you have to put on the clock. That’s not to suggest lawyers are dishonest and adjust how they work, but the structure of the system itself is flawed.”

The mathematics of billable hours

According to the American Bar Association, billable hours were introduced to US law firms in the 1950s in response to client demands for more transparency and to give firms a way to measure revenue generation.

It made sense as an accounting tool for big firms managing hundreds of employees’ salaries.

Partners could determine whether the firm was making money simply by adding up the hours its associates billed, minus overheads. The more hours billed, the more profitable the firm.

In the 1950s, the American Bar Association recommended that lawyers bill 1,300 hours a year – six hours on weekdays and three on Saturdays.

This number has grown so that today’s average billable hour target in US firms is 1,800 hours a year – or 7.5 hours per lawyer per day.

According to The Australian Financial Review’s 2016 Law Partnership Survey, daily targets for Australian lawyers hover around six to seven hours, with promotions and bonuses on offer for those who bill above the target.

The obvious effect of the system, as a Sydney lawyer at a top-tier firm has told LSJ, is an emphasis at every level on billing as many hours as possible.

“What happens is that lawyers know that the target is there and to get a bonus, you need to be hitting those targets every single day,” says the senior year lawyer, who has asked not to be named due to concerns about repercussions from firm management.

“There’s always more work to do and people allow that mentality to take over. When we look at rates of depression and rates of people leaving the law, we’ve got to recognise the copious amounts of work and giant targets that are potentially contributing to that.”

The lawyer says she has to bill seven hours a day to reach her billable hours target, but struggles to bill between five and six hours, on average, to clients.

Although she is in the office from 8am to 8pm most days, any time she spends researching, at team meetings, doing pro bono work or mentoring younger lawyers was classed as “non-billable” and not included in her total.

“It makes it challenging when you have a quieter month, for example,” she says.

“I also think it really impacts junior lawyers who don’t really have control over their own workflow.

While they can meet pro bono targets and contribute widely to the firm, if their team is going through a quiet patch they don’t really have the ability to generate work.

So at performance review time, they are judged on a measure they have no control over.”

National Managing Partner of Baker & McKenzie Chris Freeland says the billable hour helps to maximise utilisation of his firm’s lawyers and ensures staff are occupied with quality work.

“The professional services sector is one dominated by selling one’s time as human services tend mostly to do,” Freeland says.

“I think it is more about utilisation than anything else, and by that I mean lawyers being occupied with quality work for
quality clients.”

Although the billable hour will endure for the foreseeable future at Baker & McKenzie, Freeland says he is wary of the impact it can have on the health and wellbeing of lawyers.

“In relation to the question of stress, that is something that concerns me irrespective of how we cost our time,” Freeland says.

“That is why we are committed to doing the best we can for our people and working on continuous improvement on processes as one of many signatories to the Tristan Jepson Memorial Foundation Guidelines.

“While I don’t see the billable hour disappearing, I do see us adapting to what our clients need and want with a range of options and value-adds,” Freeland says.

Organisational psychologist and director of Psychological Services at Sydney’s Centre for Corporate Health, Rachel Clements says the simple presence of billable targets can put extreme psychological stress on lawyers.

“I’ve spoken to a lot of lawyers about billable targets and the constant pressure to perform,” says Clements. “They’re either anxious if they’ve got too much work on and they’re too busy, or they get anxious because they are under-billing and not making budget.

“Some lawyers can’t switch off. They complain of constant nausea, worry, panic attacks, heart palpitations, fatigue. They can’t get to sleep because they’re so worried.

“I’ve seen people diet excessively, have goals of extreme weight loss, or they might even micromanage their team as a way of getting back in control. It’s not a very mindful way to work, but I think some people are so focused on what they are achieving under the pressure.”

Clements notes that many lawyers are forced to sacrifice time from their personal lives to meet their targets.

An article on the Yale Law School website recently exposed this “truth of the billable hour” by calculating just how many hours a lawyer needed to work to achieve a billing target of 1,800 hours a year.

Factoring in a lunch break, coffee breaks, and just one half-hour meeting, the lawyer would need to come in at 8am and work until 6.20pm Monday to Friday to reach the target.

This best-case scenario did not account for pro bono work, mentoring, presentations, client lunches or unbillable meetings that extended beyond half an hour.

In relation to the question of stress, that is something that concerns me irrespective of how we cost our time … While I don’t see the billable hour disappearing, I do see us adapting to what our clients need and want with a range of options and value-adds.”

CHRIS FREELAND, National Managing Partner of Baker & McKenzie

A better way of billing

After years working in corporate law as a lawyer and a client of top-tier Australian firms, Kalinko found himself asking, “Why does law need to be that way?”

Disruptor firms in the UK were offering fixed fees and upfront payments for legal services, while UK supermarket chain Tesco began selling wills, tenancy agreements and even DIY divorce kits.

Inspired by the apparent success of such alternative law firm structures, Kalinko did away with billable targets and set up Keypoint Law in 2014, based on the model of UK firm Keystone Law.

“In our model, there’s no billable hour target set by the firm at all,” he says.

“Each of our senior lawyers has the ability to decide how to work with a client and no one has to justify to the firm the investment that the lawyer decides to make in a client.

“If the lawyer decides to get to know the client or their business better, to invest time in the relationship and to do work that might be not billable, that is their decision. They can make that decision based on their knowledge of the market they service.”

Keypoint’s idea is to provide lawyers with what they value in bigger firms: back-office services including IT systems, professional indemnity insurance, administrative assistance, colleagues with knowledge in complementary practice areas and the collegiality they bring, and referred work.

He says lawyers stay at top-tier firms for those three reasons, but in return are forced to sacrifice most of their potential earnings.

They also have fewer decision-making rights over their own practice, and often suffer a poor work-life balance.

“In the Keypoint model, lawyers will earn about 70 per cent of what they bill,” says Kalinko.

“In contrast, larger firms’ lawyers typically earn 30 per cent of what they bill. Our lawyers also have full decision-making rights over their particular practice, and they have a better work-life balance because there are no timesheets as a management tool.”

While the firm has no billable targets, Keypoint offers hourly billing if it suits a particular client or job. Kalinko says the firm will often offer fixed fees for defined or known tasks, and hourly billing for more complex tasks where the time and work required is less clear.

“We acknowledge that not everything can have a cookie-cutter approach, and there will always be things that come up that we can’t predict,” he says.

“Firms need to have flexibility to accommodate that.”

One firm that claims to be able to handle most things a client can throw at it is Progressive Legal.

The Sydney/Perth firm, which opened in 2014, offers a mix of fixed-cost pricing and a unique on-demand subscription service for small businesses.

Start-up companies can “subscribe” to Progressive Legal’s “Legal Shield” to gain unlimited access to legal advice on matters such as trademarks, contracts, intellectual property, patents and dispute resolution.

“We are taking the risk of doing the work and then getting paid over the course of 12 months or so,” says Principal and founder of Progressive Legal Ian Aldridge.

“It allows a small business client to budget for legal services, rather than go to a big firm and open a huge legal bill they weren’t expecting.

“It also means that in January or February, when law firms are generally very quiet, we have the same income coming in, or at least a baseline level.

It’s a win-win for the client and the firm.”

For non-subscribers, Progressive Legal offers fixed pricing for common legal services relevant to start-ups. A deed of confidentiality, for example, is listed on the firm’s website at $700 plus GST.

A website privacy policy is $350 plus GST. Aldridge says the idea is to deliver transparency and value to clients at a price they can budget for.

Kalinko says big law firms would do well to offer alternative billing structures if they want to attract and retain clients in the modern legal environment.

“If the question is, ‘Does the profession need more diversity?’ the answer is a resounding yes,” he says.

“A lot of amazing, talented people who love the practice of law no longer want to do it in the confines of the traditional structure.”

Kalinko admits there may always be a place for hourly billing as a fee structure for big corporate teams working on complex legal matters.

However, that sector of the legal market is narrowing, he says. Demand is growing in the small business and mid-tier market where clients want more flexible fee arrangements.

“The billable hour target phenomenon has long been fundamental to the fabric of almost every law firm,” says Kalinko.

“But there’s a rising strength in decentralised decision-making as a concept. It enables agility, speed and tailoring for the client.

“There is a growing place for firms that don’t have billable hour targets and for people who love the practice of law but who may actually just want to work in a different way.”

Photography: Jason McCormack