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Understanding Billable Hours

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To most non-lawyers (law students included), BigLaw is a mysterious black box. What really goes on in those huge, vaguely intimidating office towers? What do so many lawyers possibly spend so much time on?

A question I received recently nicely highlights one perception of BigLaw attorneys:

How much does time/billing padding happen? Do partners/bosses turn a blind eye to the practice or actively discourage it? Also, are associates/partners likely to participate in it if your client expects 10 hours of work and you finish the work in 8 hours and surf the web for the 2 hours but bill 9 hours?

I love this question for several reasons.

First, it hones in on one of the weirdest aspects of BigLaw — the billable hour. What other career rewards people simply for showing up for a long time?

Second, it rather quaintly assumes that BigLaw partners are interested in keeping hours down, while associates are interested in keeping them high. As we’ll discuss, this is partly true, but not quite in the way that the questioner understands it.

Finally, this question makes everything seem so straightforward. Work for eight hours, bill for nine — that’s bad! Unfortunately, in the BigLaw real world, things are more ambiguous, and the pressure created by billable hours is more subtle.

The Basics of Billable Hours

On the face of it, billable hours are pretty simple. An attorney at the firm works for one hour, and the client gets charged for their time at an agreed-upon hourly rate. In a solo practice, the attorney would pay expenses and keep the rest of the money as compensation for the hour of work.

In a large firm, things are more complicated. The clients still (generally) pay by the hour, but the pot of money is divvied up differently.

Image Copyright Freepixels.com, 2011

  • Associates are paid a salary, which isn’t dependent on how many hours they work. Associates don’t get overtime. In most cases, they also get a bonus at the end of the year, which, depending on the firm, might be based on their billable hours. (Generally, there’s a required minimum level of billable hours to qualify for the bonus at all, and many firms include tiers of additional bonus money for additional hours.)
  • Partners, on the other hand, might receive some base compensation, but the bulk of their compensation comes via equity in the firm. (This assumes they’re “equity partners.” Non-equity partners are glorified associates, and receive a salary.) Where does their equity share originate? It’s what’s left over after the firm’s expenses, including salary, have been paid. So, it’s the difference between what clients have paid (hours billed x hourly rate) and the cost of running the business, split between all the partners.

Understanding Partner and Associate Incentives

As should be apparent, partners and associates in a large law firm have very different economic incentives.

What a Partner Wants

If you’re a partner in a law firm, you want each associate to work as many hours as possible. More hours billed = more money for you.

But, critically, you want to ensure that all of the hours billed are chargeable to clients. In other words, you’re looking for quality hours, and as many of them as possible per associate.

What an Associate Wants

If you’re an associate, however, your rational course is to do as little work as you can, while still collecting a paycheck. This guarantees you the highest hourly rate for your labor.

The introduction of bonuses complicates the picture a little, since most associates like to collect at least the basic bonus (and doing less than that would probably get you fired anyway). As a practical matter, associates tend to aim for the billable bonus target, without going over. (One of my happiest law firm memories is the day I reached my target for the year, on the last afternoon of the fiscal year. Bliss!)

Firms try to incentivize associates to work more by offering additional bonus money, but, frankly, the per hour rate in most cases is laughable, so few people actively try to get this money. It ends up being compensation for associates who got stuck on repeated trials or deals, and billed tons of hours as a result.

How This All Plays Out

Now you understand the basic incentives of the main players in the system, so let’s talk about how it all plays out.

First, let me say that I’ve seen very little of the type of hours padding that our questioner brought up. I’m sure it happens, but I think it’s pretty rare for attorneys simply to make up hours and try to bill them. It’s a risky strategy, and one that’s likely to ultimately be detected, when there’s no work product to back up the hours claimed.

No, the pressures are more subtle.

Attorneys Billing By the Hour Have No Incentive to Be Efficient

For both partners and associates, there’s simply no reason to be efficient. As an associate, you rapidly understand that it’s not to your benefit to finish work too quickly. If you do, one of two things happen:

  • You are given more work immediately, which causes you to have to work even harder (when you probably worked really hard to finish whatever it was that you just finished, and kind of wanted a nap).
  • You’re not given more work immediately, which means you’re going to have to do even more work later, to make up for the hours you can’t bill today.

Consequently, your incentive is to drag all assignments out as long as possible, rather than trying to finish them as quickly as you can. This approach is different from simply goofing off. Instead, you might read a related journal article, track down a few additional cases that are roughly on point, or place a call to the law librarian to make sure you haven’t overlooked anything. All of these things, taken individually, could be legitimate uses of your time, but it’s unlikely the client would want you to do all of them, all the time.

Partners Care More About Quality Hours Than Associates Do

The second aspect of the equation, and where the incentives of partners and associates directly collide, is in billed hours versus hours the client will actually pay for.

If an associate spends ten hours on something that a client thinks should have taken two hours, they’re not going to pay that entire bill. Consequently, the partner loses money, because the client won’t pay for eight hours of the associate’s time (and that time can’t be repurposed to a project that would have been paid for). But the associate probably isn’t docked those hours, given that clients consistently complain about their bills, so they’re happy to keep drawing things out and letting the partners deal with the fallout. (In fairness, it’s often the case that an associate is handed an incredibly complicated project that the client thinks is easy, and not given any information about how many hours they’re expected to spend on it.)

The End Result

The end result of this system is a mess:

  • Associates who want to please their bosses by working efficiently quickly burn out. No one can work continuously at maximum capacity. Humans need downtime, which is eliminated when the reward for doing great work is more work. (Lawyer joke alert: Becoming a partner in a law firm is like winning a pie-eating contest where the prize is more pie.)
  • Associates who are slackers by nature, or perhaps just not as talented, are rewarded. When the primary metric of evaluation is hours billed, it’s better to be a bit thick, but diligent, than it is to be brilliant and speedy. If you’re a client, who would you prefer to have working on your case?
  • There’s no incentive for anyone in a law firm to come up with better, more efficient, ways of doing anything. Say you have a fantastic idea for improving the firm’s document management system, which would save everyone in the office half an hour a day. How likely is it that any of the partners are going to be interested? Yep, not very. Who wants people to go home half an hour sooner? That’s thousands of dollars a day in lost revenue!
  • Legal services cost more than they need to. If you build a system that rewards inefficiency, that’s what you’re going to get. BigLaw partners spend inordinate amounts of time arguing about bills with their clients, but, really, who can blame them for complaining?
  • Individual lives get turned into billable hours. If you’re an associate in a law firm, someone else owns your time, and, by extension, your life. Yes, you’re paid a lot, but you can be called at any moment, for any reason, and be told to get to work. Even partners have pressure to keep billing, or they risk losing their jobs. For me, and for other people I’ve talked to, it’s this aspect of law firm life that’s most unbearable. It’s one thing to work 80-hour weeks if you know you get two days off at the end. It’s quite another to be unable to make plans for a weekend away, because you have to be ready to return to the office at a moment’s notice.

So, to return to our original questioner, padding time, in the sense of using time inefficiently, is commonplace in law firms, for completely rational reasons.

Blatantly making up hours? Probably not so much.

 

Alison Monahan is the founder and author of The Girl’s Guide to Law School follow her on twitter @GirlsGuidetoLS.

 
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