Measuring productivity with a tape measure on a chalkboard.

The traditional definition of “productivity” in law firms is seriously messed up. A few days before I sat down to write this piece, Joshua Lenon of Clio made the case much better than I could in a brief tweet storm on Twitter.

The [2018 Report on the State of the Legal Market by Georgetown Law School and Thomson Reuters Peer Monitor] defines “law firm productivity” as “the number of billable hours worked by lawyers divided by the total number of lawyers.” Productivity in business is units of output divided by unit of inputs. Peer Monitor seems to think that lawyers’ hours are outputs, and the number of people working are the inputs.

Ask any client what they purchased from a law firm. I would be shocked if any client responded that they purchased the production of lawyers churning time. Clients purchase value, certainty, and guidance. That may be a merger agreement, securities documentation, litigation labor. Clients purchase outcomes, not hours.

This definition of productivity…wrongly assumes law firm partners are the end customers in the legal profession, and not our clients. Lawyers, your value to clients is not what you bill. Your productivity should not be measured in hours, but in outcomes.

I have some additional thoughts about how we got to this point—and why we probably won’t, unfortunately, be leaving it anytime soon.

The Peer Monitor-style definition of “productivity” in law firms is clearly inane. Suppose I take ten hours to complete a task as a first-year lawyer. By the time I reach my second year, I’ve gotten better at my job, and I can do the task in five hours. By any traditional measure, I’ve doubled my productivity. By a law firm’s measure, I’ve reduced it by half. That can’t be right. So what’s going on here?

The problem is that in traditional definitions of productivity—units of output divided by units of input—the units of output are the same for both seller and buyer. The seller produces planks of lumber, and the customer buys planks of lumber and takes them home. Same with heads of lettuce, iPhones, whatever. The seller’s output and the customer’s outcome are pretty much identical.

Clients, as Joshua Lenon says, consider the outcomes they achieve to be the “output” of the law firms they hire. The firms, however, consider their “output” to be not client outcomes, but the effort produced to generate those outcomes. A law firm doesn’t charge clients for accomplishing a task, it charges them for the number of hours it took their lawyers to do that task.

Law firms aren’t doing this to be evil or obtuse. They’re doing it because they’re using lawyer hours as a proxy for client outcomes. And clients have felt obliged to accept that state of affairs because clients and law firms can’t work together if they believe that “output” means two different things. They would then be working towards two different goals. So what has traditionally occurred in the legal market is that clients have accepted the law firm’s proxy substitution of lawyer hours for client outcome: They’ve effectively agreed, by signing a check, that the law firm’s output is its effort.

The client might feel like saying, “I’m not paying you for your time, I’m paying you to create a shareholders’ agreement.” The law firm (implicitly) says, “We don’t know how much to charge you for a shareholders’ agreement because we don’t know its value, and, frankly, neither do you. So we’re going to use the hours our lawyers spent to produce that agreement as a substitute measure of its value. Our effort generated your outcome; for business purposes, we deem that our effort is your outcome.”

Many clients, reasonably enough, want to change that. They want to be charged on the basis of the value of the task that the law firm has performed for them, not the law firm’s hourly proxy. They believe that if law firms did this, the firms would no longer consider a reduction in hours to be a reduction in productivity; firms would welcome increased efficiency and fewer hours because lawyers would be making money based on client outcome, not lawyer effort. It’s a win-win, right?

Here’s the problem: The law firm doesn’t know what its services are worth to its clients. In most cases, neither does the client. I don’t want to rehash the whole debate over value pricing versus market pricing, but unless client and law firm can agree on the value of the firm’s service to the client and set a fixed price, then law firms will continue to use hours as a proxy for value, and they will not adopt the business world’s definition of productivity.

Law firms sell hours. That’s what they track, record, and place on their bills, and that’s what clients pay them for, even if they’d rather not. Law firms use hours as a proxy measure for client outcomes, and clients accept this because they implicitly recognize that they need a shared understanding of outcomes and most of them don’t have a better one to offer.

Using billable hours as a proxy for client value is stupid. But it’s also quicker, more understandable, and more convenient than any other system yet proposed, and that’s why we’re still using it.

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6 Comments

  1. Charles Watkins says:

    I am reminded of Sir Winston Churchill’s comment, in a 1947 speech to the House of Commons, “. . . it has been said that democracy is the worst form of Government except all those other forms that have been tried from time to time.”

    Flat-fee billing works when the law firm knows the average time to complete a task for a client, and that there are unlikely to be any significant, unanticipated problems. Of course, this method is still rooted in time spent.

    Value billing works for plaintiffs’ lawyers, but in other contexts, e.g., tax avoidance opinions or refund suits, may be considered unethical.

    • Sam Glover says:

      Flat-fee billing works when the law firm knows the average time to complete a task …

      This is not the way to do flat fees. If all you’re doing is trying to do is average the same fee you’d otherwise get by billing hourly, what’s the point?

      Value billing works for plaintiffs’ lawyers …

      I’m confused by this. Plaintiffs often use contingent fees, but when it comes to fee awards the court usually insists on using hourly rates. Neither is value billing in any sense I’ve heard that term used. Value billing works whenever there is a clear value to the work to be done. You can use the value of business deals, estate plans, civil damages, and many other legal matters to arrive at a fair fee.

  2. Paul Spitz says:

    This was an excellent post. I try to apply the value approach to most of my fixed fee work, but the market actually forces me to undervalue the work. Take a stock purchase agreement with transfer restrictions and vesting provisions for a startup. I may charge a fixed fee of $800 to $1000 for this, but it’s easily worth ten times that to the client. Maybe not when everything is going smoothly, but nothing goes smoothly forever, right? When a founder leaves the company after 8 months with 40% of the company’s stock, and there’s no written vesting terms, that’s when the agreement is worth $80,000, or even $80 million.

    But I’ve made peace with this, because I can churn out many of these fixed fee documents in a matter of minutes, and I do a fair volume of them.

    The bigger problem is more open-ended projects, like when you have to negotiate a commercial lease or a company purchase. The hours may vary widely. I’ve had leases that required 3 hours of my time, and others that took 10-15 hours because the landlord and his attorney are jerks. So how do I address this situation? Maybe I should charge a percentage of the dollar amount of the transaction, like 1% of the total lease payments over the term. If the lease payments are $250,000, then my fee is $2,500. Anyone doing something like that? Thoughts?

    • Sam Glover says:

      A percentage might be a good option. (I assume you’d set a threshold below which you won’t take the case.) It would seem to go right to the heart of the value of the deal.

      • Paul Spitz says:

        Exactly. What clients often don’t realize is that the documentation and work for a $10000 purchase of a company is pretty much the same as for a $10,000,000 purchase. I would have to have a fixed minimum, or the job simply isn’t worth taking.

        • Sam Glover says:

          In which case the the deal may not be worth if for the client, either. They might be fooled into thinking they can afford it by a reasonable-sounding hourly rate, but that just hides the true transaction costs. Giving the client an up-front fixed fee lets them accurately assess the business opportunity.

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