What must die for the legal industry to evolve?

There is a key question on the lips of law firms worldwide. “With technological change and fast-paced disruption all around us, what must we do to maintain our influence and relevance in the years to come?”

This has been a question for some time, and has never been more relevant than now.

There are several usual answers. One focuses on developing new proprietary technology: that way, firms compete faster and better against peers. Another centres on investing profits in start-ups: if their technology displaces law firm work, investing law firms would offset losses against start-up gains. A third believes the solution lies with 21st century marketing and branding strategy.

But do any of these suggestions truly answer the question, or are they just superficially painting over holes exposed by it?

One thing is sure. No matter what the future holds, law firms will need young talent in future. Talent that is familiar with technology, and open to applying creative solutions to a changing business world. With this in mind, the typical responses to the question above can be put aside. The true answer is right in front of us. Law firms must retain their young talent if they want to solve the above question. But young talent is increasingly despondent with the current law firm model. To retain this talent, law firms must abolish the billable hour.

The billable hour is a stalwart of the traditional law firm. It is the direct link between law firm input, output, and revenue. But it is holding firms back. It is well-known to stop efficiency growth and prevent upgrading of law firm resources. Now, it is isolating the generation of lawyers that law firms require to answer modern technological questions. In short, the billable hour no longer works.

The billable hour fails law firms, it fails their clients and it fails their staff.

Firstly, it fails the law firm. Clients are billed in six minute increments rather than on a half-day, day or fixed fee basis. Current minute watching prevents firms charging for value. The quality of their output does not directly correlate to the fees they receive. If we retire the billable hour, client bills could be a value judgment made by an experienced practitioner, based on a fixed quote for their work and adjusted in tailored ways depending on the client relationship. For transactional firms, success fees are proven to earn greater absolute returns than the billable hour, while benefitting the client in the event of a worst case scenario – the death of a deal.

Secondly, the billable hour fails the client. Clients cannot ring up to ask short ad-hoc questions without receiving bills for various six minute increments charged. This method of billing is either inconvenient for a client – dealing with petty bills – or inconvenient for the matter partner writing off billable time. The rigid structure doesn’t provide certainty of cost to clients. It throws salt in client’s wounds when deals do not come to fruition. It prevents law firm incentives being aligned to client interests. It creates a facade that penalises clients who have miscellaneous queries, where value-based billing would not.

Crucially, however, the billable hour damages the retention of young lawyers and, consequently, the modern partnership pipeline. Young lawyers who will prepare law firms for the future need to be retained. To ensure we keep that young talent, the billable hour must die.

The billable hour prevents wider skill development. In the pursuit of billable targets, younger lawyers are only able to complete skills training around their allotted hours. They cannot just manage workload to have someone cover their work. They must make their targets. This means skill development is tacitly discouraged – the more you train, the longer your day. The 21st century commercial lawyer requires skills aside from those purely found in conventional legal work. He/she requires – depending on practice area – an understanding of valuation, debt financing, market dynamics and the wider socio-political landscape. The billable hour is the invisible barrier, penalising those who seek wider skill development. The solution is not less training. The solution is to banish the billable hour. As Richard Branson said, “Train people well enough so they can leave, treat them well enough so they don’t want to.”

The billable hour prevents business development. In a similar way, the billable hour discourages junior level business development. A client lunch encroaches on the billable day. An evening dinner can only take place if hours are being met. In many firms, where bonuses are linked to billable hours, reducing your billable hours to undertake business development will financially penalise you. The billable hour incentivises younger lawyers not to practice their business development skills at an age when they are highly adaptable. By removing the link between hours worked and firm revenue, younger lawyers would be given more latitude for development.

The billable hour penalises efficiency and prevents capital investment. If a task can be done in 30 minutes instead of an hour because of new technology, the investment should not be delayed because it affects revenue. If a piece of work can be neatly and accurately drafted by a talented associate in 75 per cent the usual time, that associate should not be penalised for his or her efficiency by having to take on further work to meet billable targets. Fundamentally, the billable hour penalises what most businesses prize – efficiency and productivity – two measures of key importance in the 21st century. Law firms can experience productivity gains by abolishing the billable hour. It will also free up talented associates to think about the problems facing law firms today.

The billable hour runs contrary to the autonomy younger lawyers seek. Younger lawyers want to contribute to their firms, but they want a level of autonomy when doing so. As business academic Daniel Pink argued in his 2011 book Drive, the billable hour reduces the quality of lawyers’ output by damaging their sense of autonomy. The billable hour focuses revenue on input, to the exclusion of all else. It therefore erodes autonomy – young lawyers know they are being assessed by their bosses on hours alone, not on quality of work, ability to manage deals, thinking laterally or contributing more widely to their teams.

It may seem revolutionary to imagine, but to ensure retention of talented young lawyers, the billable hour must end. Fixed fees, complimented by success fees, are the prime candidates to replace the billable hour. Revenue need not suffer. Some lawyers may think, ‘I’ve done well from the billable hour, and I got used to it’. But that does not mean the industry should continue to use the billable hour, or stop looking for better ways to service staff and clients in future.

Young lawyers are the future problem-solvers for law firms and their clients. It is incumbent on law firms to ensure they modernise to retain those lawyers. Part of this must include breaking the link between hours worked and firm revenue. As Richard Branson also once said, “If you look after your staff, they’ll look after your customers. It’s that simple.” If law firms follow that mantra, their staff may just look after their firms, too.

Sebastian Wallace is an associate at a magic circle firm. He is writing in a personal capacity.

What are billable hours and what do students need to know about them?