Technologists seem mystified that lawyers don’t embrace efficiency-enhancing innovations. Despite our reluctance to face it, as lawyers, we need look no further than our rewards structure to see why. Billable hours reward inefficiency. And that rewards structure has remained in place with the help of ethical fading. We think that we’re simply using the existing business model for our benefit. We use our history and familiarity with the billable hour framework to ignore that our goals and our clients’ goals are at cross-purposes.
Most analysis of the stymying effects and unintended consequences of the billable hour leads to the conclusion that we should eventually extinguish it and move on to alternative fee arrangements. Still, the billable hour model is ingrained in our culture and our business. What if we didn’t have to change everything? What if we only shifted something?
Consider shifting our focus to realization rates—a metric that most firms already calculate—instead. I posit that tying realization rates to compensation would align lawyer goals with client goals. Ultimately, it would encourage efficiency. This suggestion seems indirect and attenuated, but it’s non-threatening, and it just might work. It’s certainly worth investigating. And this change would open the door to a culture that values change.
Realization Rates and the Downward Trend
Realization rates are a key performance indicator for firms. They matter because, unlike billable hours, which reflect hours of effort regardless of value, realization rates reflect actual income to the firm. Currently, realization rates are falling.
According to the Dynamic Law Firms Study, some dynamic firms are bucking the downward trend in realization rates. These firms are doing two things differently: they’re embracing technology to improve workflows and they’re investing in improving client relationships.
Realization Rates Can Create an Efficiency-Driven Culture
The connection between embracing technology, improving client relationships, and increasing income is not an obvious one and should be explored. It’s easy to simply assume that using technology would reduce billable hours, and therefore reduce the pool of possible hours that could be paid by the client. However, the reason people think that way is the nature of compensation.
Compensation that rewards billable hours discourages efficiency. And so long as hours realized are seen as merely a subset of hours billed, change will be thwarted. Realigning our rewards system to link compensation to realization rates—not just billable hours—would facilitate change.
Here’s how it’s all connected:
- For firms, it makes sense to set compensation based on realization rates. Thus, lawyers would be rewarded based on income that the firm actually receives.
- For lawyers, it makes sense to work more efficiently, if you’re rewarded for it. If compensation is tied to realization, then it’s in a lawyer’s interest to stop trying to make low-value and administrative work qualify as billable and start trying to minimize and automate that work.
- For a cultural shift to occur, individuals must embrace the shift. With this realignment, we create a culture that rewards efficient work. We incentivize individual lawyers to seek and actually adopt efficiency-enhancing innovations. Now it pays to change.
- It turns out that when firms embrace technology, their realization rates rise. More of the work that lawyers do is paid for by the client.
It’s an all-around win. A win derived from innovation and efficiency sets up a culture of change and reinforces decisions to continue making changes. Now, we’ve got a cycle and momentum.
Nine Areas to Align Rewards and Realization Rates
Tying compensation to realization rates is not radical or impossible. There are many potential areas to change to varying degrees. In 2015, Altman Weil outlined changes that would better align firm compensation and workflows for a focus on realization rates and efficiency. No individual change will solve everything. Not all changes must occur at once (or ever), but the more areas that change, the more cohesive and effective the cultural shift will be.
- Create a more complete and realistic picture of how timekeepers work by encouraging full-day time capture and using new timekeeping tools to make that possible.
- Demonstrate value to clients by standardizing billing descriptions and training timekeepers to write them with clients in mind.
- Determine how much time a matter should take with the use of analytics (Clocktimizer). Use that data for setting expectations through accurate quotes, benchmarking, AFAs, and rewards.
- Send clients faster and more accurate bills by rewarding timekeepers who keep contemporaneous time records (Time Miner or Ping or Zero).
- Encourage delegation by rewarding partners for delegating. Use realization rates and profit-per-partner hour to minimize the negative effects of delegation on partner billable hour targets.
- Reward associates for working smart. Adopt technology tools that train associates (HotShot) and reduce the time spent spinning wheels on research out of fear (CARA by CaseText and EVA by ROSS Intelligence). Clients may be willing to pay for associates if they develop better judgment and spend less time on matters.
- Improve payment rates by using practice management and CRM tools to improve billing speed and communication with clients about bills.
- Reduce write-offs by getting associates involved in the pre-bill process. Help associates to understand how long matters should take and the impact of how time is spent.
- Minimize non-billable tasks by adopting technology tools for low-value work such as proofreading (PerfectIt) and document creation (InfoWare).
These aren’t big, controversial, or difficult changes. There’s a good chance your firm already uses one or more of these techniques to create incentives. But check your realization rates. If they’re stagnant or falling, then ask yourself whether you’ve created a strong enough link to realization rates to create a cultural shift. Have you put in place enough incentives to break the habits of a lawyer’s working life so they really do embrace new technology?
Remember that these changes can be incremental. They should be palatable to everyone. None of the ideas above ask firms to go too far or to immediately move on from the billable hour. There are doubtless drawbacks—firms will need to adjust to protect lawyers who work hard but have difficult clients who demand write-offs. And people will learn to game these systems, too. But these incremental steps offer the chance for progress, and we may create a new culture in the process.
Embracing Change and Evolving the Practice of Law
The short-term gains from focusing on realization rates are high, but the long-term gains are actually more substantial. That’s because by targeting realization rates, firms can incentivize innovation, workflow optimization, technology adoption, and change. This helps lawyers focus their efforts on doing more substantive and valuable work more efficiently; and it should improve client relationships and renew trust.
The legal industry is poised for transformation and another round of consolidation, and for those who don’t learn to adapt, it will be painful. But for firms who learn to embrace change and put clients first, it can be an opportunity. Targeting the culture of your firm now could be the best way to become one of the dynamic firms of the future.
This article was originally published February 1, 2018 on Above the Law during Ivy’s time with PerfectIt, which is a consistency checker that works well with WordRake.
About the Author
Ivy B. Grey is the Chief Strategy & Growth Officer for WordRake. Prior to joining the team, she practiced bankruptcy law for ten years. In 2020, Ivy was recognized as an Influential Woman in Legal Tech by ILTA. She has also been recognized as a Fastcase 50 Honoree and included in the Women of Legal Tech list by the ABA Legal Technology Resource Center. Follow Ivy on Twitter @IvyBGrey or connect with her on LinkedIn.