Challenges For Law Firm KM: The Billable Hour Model?

17 Feb
Post By ILTA Steering Committee Member Chris Boyd

In recent decades, the prevailing revenue model for large law firms has been the billable hour.  Many people think this model hinders law firm KM programs in two ways: first, because under it the connection between KM-driven efficiencies and profit is less clear, and second, because time spent by attorneys on KM is not billable and thus usually not recognized or rewarded. This observation is of course not new; Ron Friedmann, John Gillies, Ted Tjaden, and others have discussed the challenges to KM posed by the billable hour model.  So while KM done well is absolutely the right thing to do — because it increases the value provided to clients, hopefully leading to increased client satisfaction and client retention, and it also improves the practice of law for a firm’s attorneys – it may nonetheless suffer from underinvestment.

One long-standing explanation for the perceived lack of monetary returns to a firm from KM is that lawyers who charge by the hour want to make each task last as long as possible, so as to pad the bill and collect more money.  Anything that cuts the time per task, such as well-done KM, thus reduces revenue and won’t be valued. While this view may have some cynical appeal, my experience has been markedly different.  Lawyers generally want to get their work done well and quickly, to please clients and move on to the next assignment. Any attorney who frequently works late and yearns for a more balanced life has a strong reason to work efficiently.  And any partner who regularly writes time off prebills has an equally strong incentive to see that service is delivered efficiently, to cut down on write-offs and increase realization.

Even in the absence of this cynical view, however, the billable hour model does still handicap KM as a potential firm investment, because it is difficult to prove that KM delivers bottom-line returns under such a model.  Increased efficiency and value to clients?  Sure.  Better work-life balance?  Sometimes.  But clear, quantifiable, profitability increases driven by either increased revenues or decreased costs?  Not so much.  In fact, showing true KM-driven ROI has for years been an elusive quest for law firm KM leaders because under the billable hour model, it is very difficult to show a directly profitability increase by implementing KM.  Without that hard numerical business case, KM will usually get short shrift when it comes time to allocate precious headcount and program budget dollars.

But change a matter’s billing structure from hours-based to a fixed fee, and suddenly the benefits of KM resources become more visible in the firm’s bottom line.  Delivering the same (or better) results with fewer hours both delights clients and increases a firm’s profit margin on the matter, and may increase the firm’s overall profit margin as well, depending on how the “saved” hours are allocated.  For firms that measure per-matter profitability, KM-driven time savings on fixed-fee deals or cases can be quite compelling.

How, then, can CKOs use fixed fees and other AFAs to overcome the billable barrier to increased investment in KM capabilities?  One way is to work with firm management, practice group leaders or even individual partners to develop packaged service offerings with fixed fees that appeal to clients and lend themselves to KM-driven efficiencies such as precedent databases, automated documents, and expertise locators.  CKOs can support such packaged services by making sure their KM teams deliver the resources, processes, and training to enable efficient service delivery.  CKOs can also work with marketing and finance departments to develop client-facing materials promoting the benefits to clients of the service offerings and measure the resulting uptake by clients along with the associated revenues and profits.

Another way is to design and deploy tools that partners or the finance department can use to estimate one-off fixed fees based on matter parameters.  The underlying algorithms will likely rely on past matter fee data and associated variables from KM matter tracking systems.  And done well, these tools will help partners quote competitive yet achievable fees, and thus increase the number of such fees the firm quotes.  Growing usage of fixed fees will in turn create demand for the KM resources required to deliver efficiently on the promised fee.
The second way that the billable hour revenue model can hinder firms’ KM efforts is that while client-facing attorneys absolutely need to participate in KM initiatives, they can be reluctant to do so because the time spent will be non-billable and thus not count towards billable hour totals that are so frequently used by firms to assess performance and allocate bonuses and other compensation.  Attorneys rightfully spend most of their time on work for which they will receive credit and for which the business will obtain revenue.
To address this challenge, many larger firms have hired full-time professional support lawyers or subscribed to services such as Practical Law Company.  While doing so can provide excellent results, for firms not willing or able to make this level of investment, there are other ways to address this challenge:

  1. Make KM time equivalent to billable hours, perhaps capped at some reasonable annual total given that firm leaders are unlikely to approve unlimited amounts of KM time that doesn’t bring in revenue.  Our firm has done this, and our experience is that the capped credit does motivate associates to spend time on KM projects.  KM leaders do need to check time recorded to KM matter numbers to make sure the work is legitimately KM, and not mis-coded client or administrative work, but that’s a small price to pay for the benefits that the capped credit brings.
  1. Clearly and tangibly reward associate work on KM projects, through performance review plaudits, public recognition, or other methods. This may work where firm or practice group leadership visibly champions KM but may not be able or willing to make KM time fully or partially billable.
  1. Sidestep the reluctance of billable attorneys to participate in KM projects by pursuing a “windmill” strategy to power KM projects via existing firm processes.  Ron Friedmann and I wrote about this for the June 2006 ILTA KM whitepaper, and the ideas set forth in the article continue to work..

Other suggestions?  Feel free to contribute in the Comments.

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2 Responses to “Challenges For Law Firm KM: The Billable Hour Model?”

  1. Dan Keldsen (@dankeldsen) February 17, 2012 at 5:27 pm #

    Thanks, appreciate the mention to the interview I’d posted on “IAM Talking: Death to the Billable Hour, Long Live Knowledge!” – moving to value and away from other completely irrelevant units (of time, # of people, etc.) is inevitable.

    Painful to get to, for many who are accustomed to the simpler metrics of time = money, it’s coming across every industry and every job, sooner or later.

    Valuing the invisible, like knowledge, or innovation, without really defining it up front, is a serious challenge. But once you dive into it and come out the other side of that mindset, it’s extremely useful, and helps focus everyone on things that matter, rather than the illusion of value-adding work.

    Cheers,
    Dan Keldsen
    Partner at Human 1.0 (human1.com)

Trackbacks/Pingbacks

  1. KM vs. Billable Hour | Jones LawTech - February 22, 2012

    […] good rehash of the issues is found here and is worth a […]

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