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Valuing lawyers' work

The problem with the billable hour is that it's a proxy for revenue and profit and, as such, a poor way to measure value.

Time as money concept

The billable hour has been held up as the source for many ills in the legal industry. Critics primarily blame it for encouraging a culture of excessive work that does not reflect actual value delivered. These criticisms are valid, but they are symptoms rather than the underlying source of the problem. The source of the problem is that hours worked is a poor way to measure the value provided. Some work delivers extremely high value, while other work may be completely ineffectual. However, individual units of work are difficult to value, and the ineffectual work may be unavoidable within a larger project and the people doing it still need to be paid.

In situations like this, where it is difficult or impossible to directly measure the thing to be considered, it makes sense to find something that is correlated with what is desired to track and measure that instead. This is called a proxy, and finding a proxy can be a sophisticated thing to do when something to be tracked is not directly measurable. This is what is happening with billable hours. The problem with this approach is that these metrics are often subject to distortion, because individuals are encouraged to optimize for the proxy. This makes it a less reliable measure of the underlying value to be measured.

This comes back to the classic question of correlation and causation. It is generally easy to measure correlation: simply compare data sets and see how they vary against each over different values. They are correlated if they move in tandem. However, it is generally difficult to assess whether there is a causal relationship. A simple example is to consider to what extent umbrella sales are affected by rainy weather. And how do either of those factors vary against the sales of raincoats?

In valuing the work of lawyers, qualities of work like insight and expertise are subjective and difficult to quantify. But time is readily measurable and interchangeable. The value delivered to clients is frequently only tangentially linked to the hours worked. Where advice or information avoids significant problems or finds significant opportunities, the value of the service can be extraordinarily high. The same amount of time may also not give any significant value to clients.

However, employees tend to be paid primarily based on time, so the costs of providing the service usually don't vary that much. And clients want some certainty on how much they will pay, so billing some time worked at a low rate and then $100k for half an hour would likely not be appealing to them. It is also difficult to quantify the value of information, advice, and services, instead of outcomes. Lawyers aren’t selling wins; they work to optimize outcomes based on particular situations. A perfect course of action often involves settling, and after careful consideration, the status quo may be the best option in a situation. Neither of these courses of action feel as good as litigation wins or successful changes in course. Even if it were possible to consistently value services, clients are likely to value some outcomes over others due to cognitive biases.

However, though lawyers and clients may agree that billable hours are their preferred way to do business, this can still distort the work within firms. In law firms, it's common for lawyers to have their performance evaluated based on how many hours they bill, but even then, billable hours are only a proxy for revenue, which is in turn a proxy for profitability. They are not causative: many worked hours are not billed to clients at the discretion of the lead on a file. Or perhaps the client refuses to pay.

If lawyers don’t know where lies the real value of what they do is for clients, they may think that billing more hours demonstrates their contributions to profitability, which is secondary. As with any proxy, it's just easy to measure.

In business theory, it is generally not recommended to price products based on inputs like the costs associated with making them and then marking them up to make a certain profit margin. The reason is that it doesn’t capture all the value that customers ascribe to the products. It’s more optimal to charge what the market will bear. Conversely, if customers value products lower than the cost of inputs suggests they should, it's logical to try to convey their value in another way. This is where strategies like quantifying the amount of time required to produce them or the cost of raw materials can justify a specific price point to customers.

Given that lawyers prefer to have some certainty about much they will be paid, and clients prefer to have some certainty on how much services will cost, the billable hour is likely to continue to be the most common way to charge for legal services (here I give a demonstration of how recommending that things stay the same isn't as satisfying as recommending change). That said, as in any situation where a choice is made to use a proxy it is important to consider what can legitimately be derived from the results.

It's essential to consider if incentives are attached to a proxy that may reward distortionary behaviour, and the billable hour's distortionary effects are well discussed elsewhere. This diminishes a proxy's value as a way to measure the underlying values. Hopefully, a nuanced understanding of why billable hours create problematic data will help firms manage their businesses better.

Sarah Sutherland's is the author of the recently released "Legal Data and Information in Practice: How Data and the Law Interact".