Market-aware law firms realize that clients can globally analyze billing data and draw statistical conclusions about the appropriateness of lawyer billing. For example, it would not be hard to determine the number of hours charged to a client's matters and perform competitive comparisons and reasonableness tests. Imagine the potential consequences of a poor showing in the testing process.
In the firms we support, litigation practices tend to generate more billable hours than transactional practices, although not always. Within these litigation practices, the ability to produce billable hours also differs. Firms that impose caps on billable hours are usually trying to mute the temptation of billing clients for low value work.
The usual disincentive for exceeding the production cap is to not count toward bonus consideration any billable hours over the annual limit. I understand the point of a cap, but it does seem unfair not to reward someone who, for example, worked on an extensive trial or is a highly sought after specialist.
As most caps are arbitrary (i.e. not dictated by a client), how then are they set? Are they market based? Are they created based on subjective norms and beliefs about reasonableness? Should the type of work dictate the cap? Are short-term waivers a good idea? What about specialists who work in select practice areas? What if clients demand particular a lawyer or group of lawyers? Creating a workable policy requires answering these questions.
Apart from addressing the billing concerns, a typically overlooked by-product of a policy that sets an upper limit on billable hours is that it can force a long term approach to staffing. If hours incentives are too robust, partners and other timekeepers can be reluctant to add staff or delegate. Not adding staff can lead a firm to an unsustainable economic model and a stagnant workforce.
Some of the consequences may include one or more of the following:
- Partners and senior lawyers performing lower level work, which can result in diminished value to clients;
- A lack of time for developing better client relationships and more profitable work;
- Reduced opportunities for individual and team lawyer development;
- Burnout and frustration related to heavy workloads and limited compensation;
- Diminished profitability as timekeeper pay increases faster than billing rate; and
- Too much reliance on one or a few individuals.
Alternatively, a firm can institute a planning process that provides incentives and capital for growth when actual billable hours approach a targeted range for a sustained period. A good planning process can work in concert with a collar on billable hours. Firms can also temporarily relax a cap during periods of sudden increased demand or unanticipated turnover.
Having a firm-wide cap may prove difficult to enforce, but the idea has merit.