Discussion of time recording in legal services — and of its progeny, time-based pricing — can be more than a little frustrating.
Critics understandably emphasise the negative effects on clients, lawyers and society more generally. Such criticisms are weighty. But the question always arises: what does ‘better’ really look like?
Failure to answer this convincingly has left time recording solidly in place; indeed, forever being optimised.
Time-based pricing has been challenged up to a point. However, the reality is that, for complex, non-repetitive, non-automated work, ‘alternative fee arrangements’ (AFAs) (i.e. fixed fees, fee caps and other variants) do not often depart significantly from time-based pricing. Indeed, client-driven practices such as ‘shadow invoicing’ (i.e. requiring a record of time spent even where a fee has no time element) tend to reinforce the link.
Recognition of the seriousness of the problem, and ideas for challenging it, are not new. For instance, a report by a commission of the American Bar Association (ABA) almost 20 years ago listed many of the system’s corrosive effects while also articulating why it has remained so entrenched.
As Richard Tromans has recently observed in relation to the widespread wish on the buy side to end the ‘billable hour’ —
The problem is there doesn’t appear to be a clear path to reaching this outcome — and so we are stuck with ‘End of the Billable Hour Groundhog Day’, with the anachronistic approach to legal production always just about to come to an end, but never quite expiring.
This is the first in an intended series of articles in which I propose to explore whether there are systematically better, realistic ways to address the relevant problems with less harmful side-effects.
My tentative answer is ‘yes’. However, to set the scene I think it is useful to recap some history in order to understand how we got here and so that we can, perhaps, avoid implementing a higher tech version of the same old problem.
Reginald Heber Smith’s system: the early years
2020 appears to be the approximate centenary of systematic time recording in legal work.
Its principal early promoter, Reginald Heber Smith, appears to have started work on it in earnest around 1920, shortly after he joined a New York business law firm.
However, Smith did not widely publish his method until 1940 and it seems not to have become dominant until the 1960s in America; later and more patchily elsewhere.
Lawyer time-recording is best known these days as a basis for time-based pricing. However, one of the key talking points of today’s time recording software vendors is that, even as departures from pure time-based billing become more common, more detailed time recording is still worth optimising as a way to better understand how people are spending their time in order to give management the ability to do x, y or z in response.
It seems that Smith’s original aspiration was essentially the same — to use what we would today call ‘big data’ for varied management and process improvement purposes. ‘Taylorism’ in the jargon of those days.
The website of Smith’s old firm has an engaging summary, apparently based largely on a memo he wrote many years later (1966).
It seems that, when Smith started work on time recording around 1920, his motivations were indeed Taylorist and that he was drawing on his experience in the 1910s to improve the organisation of legal services for the poor.
As an indication of the spirit of times, the U.S. Chief Justice was already complaining in the 1930s about the emerging large law firms as ‘a new type of factory, whose legal product is increasingly the result of mass production methods.’ (Galantar and Paley, Tournament of Lawyers, 1991, p17).
There is no indication in those early days that Smith’s motivation was to promote time-based pricing. However, he and his firm appear to have ventured down that path at some point before 1940, perhaps in stages as the business logic of each step impelled the next.
Smith’s 1940 encapsulation
In my beginning is my end.
T.S. Eliot, East Coker, 1940
In seeking to understand how time-based billing became a dominant model, I found it illuminating to read Smith’s four part series ‘Law Office Organization’ published in the American Bar Association Journal of 1940. You can read it for free on JSTOR.
There is much value there, including on the breakdown of tasks and their allocation to appropriate staff. Lessons still not fully learned to this day.
However, for present purposes the important point is the emphasis put by Smith on two specific needs which could be met by time recording and time-based pricing.
The first need was to cover unpredictable costs and still make a profit. Specifically, a law firm’s costs (partners’ drawings, staff salaries, rent) are largely time-based yet, Smith observed, it was often unpredictable how much of the time in question will be spent on a particular matter. In Smith’s own words (from part 2 of his 1940 series):
If you ask an architect how much it will cost to build a house, he cannot give even an estimate until he has seen all the specifications. No client can give to the lawyer comparable specifications. For example, neither can then tell how much of a fight the opposing party intends to put up. If you beat him in the trial court and he accepts the verdict, that is one thing, but if he is determined to appeal, that is another.
The fact that the US litigation system was chosen as an example is perhaps revealing.
The second need emphasised by Smith was to measure relative contribution for the purpose of determining reward within a partnership. Smith expresses this as a ‘quota’ in $ terms but then, crucially, states (part 3):
Now we can take the next step. The lawyer with the $5,000 salary has a quota of $10,000. He has to earn $10,000 and he will try to do so by selling his time. Every man is expected to work a standard number of hours a year.
The series concludes by explaining how three factors (hours spent on client work, the amounts billed and the gross profits generated) can be analysed to ‘arrive at a judgment as to each lawyer’s worth to the firm.’
Smith admits that hours recorded, and the other two metrics, are ‘substantial’ rather than ‘conclusive’ evidence of contribution but suggests them as a simple way of prorating credit between partners while avoiding ‘ad hominem’ argument. The imperative for a managing partner of a growing firm (as Smith was by that time) to figure out an efficient way of minimising disputes is apparent.
Smith certainly should not be regarded as a simple solutionist:
all the qualities and values of a lawyer cannot be caught in a statistical net no matter how finely spun… But the question is, what better method is there? It is impersonal, it is open and above-board, it does yield a vast amount of information….
Nevertheless, as his old law firm observes (in the article already mentioned):
Extrapolated from one firm to an entire industry… and fueled by forces that he could never have foreseen, Smith’s formula for fairness and efficiency was to become something else altogether.
Smith’s system goes viral
The use of time recording data as the basis of a pricing model seems to have been adopted by various leading Manhattan firms in the 1940s. Assisted by promotion in a pamphlet issued by the American Bar Association to its members in 1958, time-based billing evidently became the norm in American firms in the 1960s.
It is revealing to note how little the basic numbers have changed over the years. Three examples make the point —
- Smith’s 1940 article reported billable hour targets in his firm of 1,600 for associates, 1,520 for partners (dropping to 1,200 for the over 50s who are expected to devote more time to charity and public services, while also prudently slowing down).
- There is evidence of billable hour targets rising to 1,800–2,000 hours in leading US firms by the end of the 1960s. (Tournament of Lawyers, pp 34–5).
- Decades later, a new bonus scheme announced in Jan 2020 by a US firm’s London office is based on billable hours of between 1,700 and 2,000.
The last quarter century: Smith 2.0
When I started law firm work in New York in 1994 then London in 1995, time recording was still done via the weekly paper grid invented by Smith, still running on his original decimal unit system (1 unit = 0.1 hours = 6 mins). Time-based billing was also, by that time, the general rule.
Speaking to people with longer memories, it is clear that there was a significant lag, in London at least, between the introduction, first, of time recording, then of time-based billing as the default rule. But, as in Smith’s firm in the 1920s and 30s, it seems that one thing led to another.
More recently, attempts have been made to build on Smith’s system. I would sum these up as having two major strands, with a third possibly emerging.
Strand one may be summed up as ‘capture more qualitative data’ and was emphasised in the 1990s and 2000s.
By the end of the twentieth century most lawyers were expected to record narratives and/or work codes in a computer system. The codes were defined by the firm, the client or some other source of authority (e.g. court rules).
For some lawyers, this was in fact happening earlier (indeed, Smith’s original system made provision for it) but so far as I can figure out it didn’t become almost universal until around twenty years ago.
I imagine that the reason was that such recording imposes significant extra burdens on the individual lawyer and was regarded only as feasible when each individual had their own computer.
This development certainly created some insights, but having examined rather a lot of the resulting data over the years I would sum it up as being of mixed value and hard to digest.
Overall, I would say that strand 1 was not exactly a cost/benefit triumph though certainly some people made good use of it, and law firms have largely embraced it as a defensive mechanism in the event that fees are challenged.
Strand two may be summed up as ‘capture more; and do it more smartly.’
Over the last decade or so, significant efforts have been made by software vendors to
- capture what people are doing by more automated means so as to reduce the burden on individuals and hence the time available for other activities
- report more digestibly on what it all means e.g. by natural language processing of billing narratives and visualisation of the results
There are some useful early results from such products, though adoption is still limited and feedback appears to be mixed. Work in progress.
More tentatively, a third strand may be emerging, related to Silicon Valley notions of the quantified self.
Tellingly, some law firm time entry vendors claim that their tool is helpful to the individual for the same reasons as personal fitness apps and the like.
It remains to be seen how much traction this will gain and what access to data will be offered to the individual user.
The first hundred years of Smith’s experiment illustrate how observer effects and other unintended consequences arise. Time recording is not a neutral act. ‘You get what you measure’ is a cliché for a reason.
The two questions I propose to explore in a follow-up article are
1. What’s the real impact of going ever further down the automated time recording path?
- How is it likely to affect behaviour for better and worse?
- Can granular time recording be uncoupled successfully from time-based billing?
2. Could a law firm which refused to record time in a highly granular fashion succeed in competing on complex, non-repetitive work and growing beyond a handful of individuals?
- What are the real needs which such time recording addresses and can they be better met?
- What would happen if such a firm simply required a rough self-certification of the proportion of time spent on different topics?
- Or is granular time recording now so essential to legal work, so expected by clients, and so much an element of internal accountability that there is no realistic alternative other than for very small firms or those not undertaking genuinely complex work?
I don’t suggest there are easy answers but it seems worth talking about these things rather than just sliding uneasily into a second century.
I’m planning to publish a follow-up piece in the near future looking at these questions. [Edit: follow-up piece here]