Billable Hours Targets & Bonuses: A Greater Misalignment of Interests is Difficult to Conceive

by Richard Burcher

Validatum has written and lectured extensively on previous occasions about law firms misaligned meritocracy structures and the capacity for that misalignment to encourage pricing behaviour that is sub-optimal for both the client and the firm. So, kudos to someone of the standing of Annette Kimmitt, the CEO of Minter Ellison, Australia’s largest law firm, who recently called out the billable hour as a poor measure of ‘client impact’ as a result of which the firm proposes to revisit the way it acts as a ‘gateway’ to bonus payments in the Australian Financial Review.

A former partner at EY, Ms Kimmitt questioned whether the billable hour was promoting the right behaviour. Despite complaints that it rewards inefficiency, it remains the dominant measure in the legal services industry – both for billing clients and calculating remuneration.

“There are things we do that are incongruent with our ambition for what we want to be renowned for,” Ms Kimmitt said. “I’ll give you an example. The gateway into the lawyer bonus scheme at Minter Ellison is billable hours. Billable hours are an input; it doesn’t tell you anything about the extent to which you’re creating impact with clients …

“We need to revisit the bonus structure…Are billable hours – as a gateway to a bonus – really driving the sort of behaviours that are congruent with what we want to be renowned for by the external market?”

Most of us are familiar with Pavlov’s classical conditioned response experiments. It is therefore obvious to most that the best way to get the behaviour you want is to provide reward for doing so, or at least refrain from punishing people for it. The flip side is that you must actively disincentivise the behaviour you don’t want.

We were recently asked to provide one of our large law firm clients with assistance on a panel renewal for a FTSE 100 client. It was the first time we had seen an explicit articulation in the RFP of the client’s belief that misalignment of the firms’ internal meritocracy structures, were at best hindering the opportunity for cost reduction and at worst, overtly incentivising fee earners at the client’s expense.

The RFP included the following statement…

“…you should consider how you incentivise your own employees and whether this runs counter-intuitive to what you are proposing in this model. For example, if [our] objective is to reduce overall … cost… and the law firm incentivises its employees by giving them billed hours targets, then the two are mismatched from the start. You may need to consider introducing different performance objectives for fee earners who work on [our matters].”

Subtext – and we want to see evidence of those recalibrated internal incentives! If not, you won’t survive the first cut.

In short, it is patently obvious to all clients that you get the behaviour that you are measuring, reporting and appraising people on. And yet most law firms still just don’t get it.

To properly align incentives to support its mission and objectives, the firm must determine what fee earners believe they are being encouraged to do and not do, and why.

Some people will do what you want anyway, for personal reasons, but most effective law firm leaders understand the need to use a ‘carrot and stick’ approach to get the behaviour they want. They create cultures that educate, inspire and motivate people to do the right things and they provide incentives but also accountability and consequences.

They don’t sit idly by while hoping their people will behave the way they want them to. And they most certainly do not create or permit the existence of a dissonant meritocracy structure that advocates certain pricing behaviour and service delivery, but measures, reports and rewards something completely different.

When the interests of the firm and those of individuals within the firm collide, most people will do what is in their personal best interests, not the firms. You can tell me until you are blue in the face that the client wants to see evidence of efficiency gains but if my bonus hinges on billable hours then I’m going to thrash my time sheet to within an inch of its life.

And what of the argument that if we don’t hold people to billable hours targets, we can’t hope to be as profitable as we might otherwise be. Well, we won’t deny that it does require a complete rethink of what value looks like through the clients eyes and how we monetise that value, but more and more firms are attempting that transition and it’s worth nothing that two of the most profitable firms in the UK top 50 do record time, but don’t have billable hours targets.

This article was first published by Validatum, which you can read by clicking here.

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by Richard Burcher

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