Managing 70%

Where Time Goes

What makes up the difference? Marketing, firm management, practice management, mentoring associates, CLE, hiring, etc. ' somehow all these things must be done, and done well, for the firm to be successful.

Yet what does the typical law firm actively manage? Billable hours and nothing else. So the firm effectively manages only 70% (1750 billable hours / 2500 total hours) of the partners' total work commitments. A slightly higher percentage is managed for associates, who as a matter of common practice work more billable hours than partners ' though typically fewer total hours.

Now I can hear the arguments already. 'Of course we manage those things, just look at our compensation criteria that say all of them will be factored into our compensation decisions.' Or, 'No, you are wrong, because we talk about all those non-billable activities in our practice group meetings.' True, true. And admittedly most firms, at least those with subjective compensation systems, do at least consider non-billable activities in setting compensation.

'And pretty much everyone rewards marketing efforts, right?' Well no, they don't. They reward fees generated, which may or may not relate directly to marketing efforts.

'And don't many firms also provide billable hours credit to the managing partner and the practice group leaders?' But consider: why should these partners need to be given credit in billable-hour equivalents if their non-billable roles add intrinsic value to the firm?

All those arguments miss the point, however. Rewarding activities is not the same as managing them. Relatively few firms actually manage their non-billable time.

Let's consider how non-billable time is treated in some firm examples drawn from real life:

Firm A simply has no categories to record non-billable time.

Firm B has such categories, but no one uses them because they are not considered important. A variant of Firm B is where people 'dump' time into non-billable categories as a way to cover up their relative lack of productivity.

Firm C rotates its Managing Partner position every year, well before anyone could actually learn the job. Why? It turns out that there is no reward for any non-billable activities ' it is taboo to record a non-billable hour ' so, to spread the burden fairly, the firm makes each partner take a turn.

In Firm D, an associate was asked to take on some important non-billable tasks. He did a good job with them, recording his time faithfully and accurately. Then, in his review at the end of the year he was told his billable hours were too low, so he would not receive a bonus.

In Firms E though Z, all partners are expected to have the same number of billable hours as a minimum, no matter what other contributions they make to the firm.

In short, while most firms recognize in theory that critical 'investment' activities take place in non-billable hours, few firm managers could even produce a reasonable statement of what was actually done in non-billable hours, let alone provide a meaningful report on the quality and productivity of those activities. How then can firm management attempt to ensure that this 30% of the firm's productive capacity is put to best use?

Manage Non-Billables

We need to begin with recognition that non-billable hours are an important asset that should be actively managed on behalf of the firm. To accomplish this the firm should adopt a statement and philosophy describing the overall professional commitment expected of its lawyers, and expressing the firm's determination to manage that overall commitment rather than just billable hours.

Putting this determination into practice will entail additional steps, including:

Assuring that the firm has a sound time-recording system with a reasonable number of meaningful non-billable time categories.

• Convincing timekeepers that non-billable time is important and must be accurately and completely recorded.
• Creating reports that provide practice leaders with a clear understanding of the non-billable activities of lawyers in their groups.
• Building recognition of investment activities into the annual planning cycle for each lawyer, with credible accountability for the non-billable efforts lawyers undertake.
• Shifting a greater portion of non-billable activities to group activities at the practice level, which are likely to be more productive and more easily managed.
• Allocating associate time for non-billable projects (eg, articles, speech preparation and partner 'pet projects') with the same level of care used in allocating client assignments.
• Rebalancing billable-hour expectations to better reflect individual lawyers' non-billable capabilities and commitments. If the firm needs to average 1750 billable hours from its partners, there is no good reason why one partner cannot put in 1500 billable hours and a second 2000, so long as both partners measurably meet their expected total of billable plus non-billable hours. This is not an excuse for under-productivity; rather it recognizes that lawyers can make different contributions with comparable professional commitments.

Once the firm has taken these steps, management will be in a better position to actively manage the firm's investment-activity decisions, channeling non-billable efforts in directions likely to produce the greatest returns to the firm. The likely results will include fewer repetitious projects, less wasted professional time ' and ultimately stronger economic performance.

Joseph B. Altonji is a Director in Hildebrandt International's Strategy Group and Strategic Implementation Group. Based in Chicago, Joe works with law firms nationally to improve their strategic focus, planning, business management and competitiveness. He also assists in mergers and acquisitions, helps clients modernize their compensation systems for improved productivity and strategic compatibility, and assists firms seeking to improve their economic performance. He holds Masters degrees from the University of Chicago and Northwestern University, and also brings to his consulting work extensive prior experience as an economic and financial consultant for litigation matters.

Imagine the CEO of a major international corporation saying to her Board of Directors, 'We are doing a great job of managing 70% of our productive capacity.' And the Board responding, 'Great job, here's your bonus.' Or another CEO who says, 'We don't need to hire managers for our regional plants, because 70% of our capacity is in the main plant anyway. Let the others do what they want.' Hard to imagine, isn't it? Of course it is, because the concept of ignoring 30% of your business' productive capacity ' leaving it to 'manage itself' or, worse, considering it unimportant ' would get you fired in any business in the world.

Except in a law firm. There, managing 70% of capacity is the norm!

Let's back up a moment and consider what really happens in most law firms. Most partnership agreements say something like this: 'The partner is expected to devote his or her full professional energies to the practice of law on behalf of Smith & Jones LLP.' But what does 'full professional energies' mean? Well, it certainly includes doing productive client work for which the firm will get paid. In the typical U.S. law firm, partners bill 1700 to 1800 hours (call it 1750) to active client matters. But the actual commitment required of a successful partner in a U.S. law firm today is more like 2500 hours.

Where Time Goes

What makes up the difference? Marketing, firm management, practice management, mentoring associates, CLE, hiring, etc. ' somehow all these things must be done, and done well, for the firm to be successful.

Yet what does the typical law firm actively manage? Billable hours and nothing else. So the firm effectively manages only 70% (1750 billable hours / 2500 total hours) of the partners' total work commitments. A slightly higher percentage is managed for associates, who as a matter of common practice work more billable hours than partners ' though typically fewer total hours.

Now I can hear the arguments already. 'Of course we manage those things, just look at our compensation criteria that say all of them will be factored into our compensation decisions.' Or, 'No, you are wrong, because we talk about all those non-billable activities in our practice group meetings.' True, true. And admittedly most firms, at least those with subjective compensation systems, do at least consider non-billable activities in setting compensation.

'And pretty much everyone rewards marketing efforts, right?' Well no, they don't. They reward fees generated, which may or may not relate directly to marketing efforts.

'And don't many firms also provide billable hours credit to the managing partner and the practice group leaders?' But consider: why should these partners need to be given credit in billable-hour equivalents if their non-billable roles add intrinsic value to the firm?

All those arguments miss the point, however. Rewarding activities is not the same as managing them. Relatively few firms actually manage their non-billable time.

Let's consider how non-billable time is treated in some firm examples drawn from real life:

Firm A simply has no categories to record non-billable time.

Firm B has such categories, but no one uses them because they are not considered important. A variant of Firm B is where people 'dump' time into non-billable categories as a way to cover up their relative lack of productivity.

Firm C rotates its Managing Partner position every year, well before anyone could actually learn the job. Why? It turns out that there is no reward for any non-billable activities ' it is taboo to record a non-billable hour ' so, to spread the burden fairly, the firm makes each partner take a turn.

In Firm D, an associate was asked to take on some important non-billable tasks. He did a good job with them, recording his time faithfully and accurately. Then, in his review at the end of the year he was told his billable hours were too low, so he would not receive a bonus.

In Firms E though Z, all partners are expected to have the same number of billable hours as a minimum, no matter what other contributions they make to the firm.

In short, while most firms recognize in theory that critical 'investment' activities take place in non-billable hours, few firm managers could even produce a reasonable statement of what was actually done in non-billable hours, let alone provide a meaningful report on the quality and productivity of those activities. How then can firm management attempt to ensure that this 30% of the firm's productive capacity is put to best use?

Manage Non-Billables

We need to begin with recognition that non-billable hours are an important asset that should be actively managed on behalf of the firm. To accomplish this the firm should adopt a statement and philosophy describing the overall professional commitment expected of its lawyers, and expressing the firm's determination to manage that overall commitment rather than just billable hours.

Putting this determination into practice will entail additional steps, including:

Assuring that the firm has a sound time-recording system with a reasonable number of meaningful non-billable time categories.

• Convincing timekeepers that non-billable time is important and must be accurately and completely recorded.
• Creating reports that provide practice leaders with a clear understanding of the non-billable activities of lawyers in their groups.
• Building recognition of investment activities into the annual planning cycle for each lawyer, with credible accountability for the non-billable efforts lawyers undertake.
• Shifting a greater portion of non-billable activities to group activities at the practice level, which are likely to be more productive and more easily managed.
• Allocating associate time for non-billable projects (eg, articles, speech preparation and partner 'pet projects') with the same level of care used in allocating client assignments.
• Rebalancing billable-hour expectations to better reflect individual lawyers' non-billable capabilities and commitments. If the firm needs to average 1750 billable hours from its partners, there is no good reason why one partner cannot put in 1500 billable hours and a second 2000, so long as both partners measurably meet their expected total of billable plus non-billable hours. This is not an excuse for under-productivity; rather it recognizes that lawyers can make different contributions with comparable professional commitments.

Once the firm has taken these steps, management will be in a better position to actively manage the firm's investment-activity decisions, channeling non-billable efforts in directions likely to produce the greatest returns to the firm. The likely results will include fewer repetitious projects, less wasted professional time ' and ultimately stronger economic performance.

Joseph B. Altonji is a Director in Hildebrandt International's Strategy Group and Strategic Implementation Group. Based in Chicago, Joe works with law firms nationally to improve their strategic focus, planning, business management and competitiveness. He also assists in mergers and acquisitions, helps clients modernize their compensation systems for improved productivity and strategic compatibility, and assists firms seeking to improve their economic performance. He holds Masters degrees from the University of Chicago and Northwestern University, and also brings to his consulting work extensive prior experience as an economic and financial consultant for litigation matters.