I Want to Murder the Billable Hour (Pt. 1)

“If all you have is a hammer, everything looks like a nail.”

When I started my career at a big law firm, something about the billable hour always felt off to me.  It’s almost as though it ran counter to every basic principle of economics and human psychology.   One late night after a week of filling up a timesheet with 80+ billable hours and being fueled almost exclusively by espresso and Chinese takeout, it hit me.

We weren’t really selling legal advice or effectiveness or talent or even expertise.  We were manufacturing and selling billable hours.  When viewed in the most favorable light, the billable hour is an arbitrary and illogical unit of production and performance with only a loose correlation to results or value.

The typical law firm only makes money by billing hours.  The 5 minutes of perfectly nuanced advice that saves a billion-dollar deal gets valued exactly the same as the 10 minutes that a first-year associate spends formatting font size on an internal checklist.  To borrow a legal turn of phrase, that seems pretty f!@%ed up.

Let’s consider two fictional (albeit common) scenarios that illustrate the vast disconnect between billable hours and actual value:

Scenario 1:  Lawyer spends 50 hours solving a $10,000 problem.  Lawyer gets paid way too much for way too little value.

Scenario 2:  Lawyer spends a single hour giving timely, important and nuanced advice that takes her entire work experience and distills it into a vital decision that saves a deal worth $10,000,000 to the client.  Client gets way too much for way too little.

The misalignment in incentives is obvious.  In Scenario 1, client is penalized for proactively engaging legal counsel.  In Scenario 2, the lawyer is penalized for being great at her job.   Expertise, efficiency and effectiveness are undervalued when those are the 3 things that actually created value for the client.  Play out this scenario a few thousand times in every firm every year and it’s easy to see why the industry generally lags behind the market when it comes to innovation.  In turn, inefficiency, and not maximizing internal resources, gets rewarded in Scenario 1.

In no world does that combination of mismatched incentives lead to a great result for either side.  Everyone loses.  The work product and client relationship suffer across the board.

Clients lose the desire to proactively engage legal counsel when they should.  Law firms lose the desire to innovate or become more efficient.  The net result is that the vast majority of legal matters get over-lawyered or under-lawyered.

Companies like LegalZoom don’t exist because LegalZoom does amazing legal work (spoiler alert:  they don’t). They exist because law firms have no incentive to evolve their business practices to keep pace with the modern age.    The war cries to commoditize legal services only exist because there are basic market needs that are not being met by the current system.

Clients are rightfully attacking the billable hour out of a growing frustration with rising legal costs. “Put most bluntly, the most fundamental misalignment of interests is between clients who are driven to manage expenses, and law firms which are compensated by the hour,” said Cisco’s general counsel, Mark Chandler. In a speech at Northwestern University’s law school last January, he called the billable hour, “the last vestige of the medieval guild system to survive into the 21st century.”

There is no perfect solution, but there is a better way.

In future installments, we’ll dive deeper into the problem and our proposed solution.   Stay tuned…

Ryan Wertman