A NEW METRIC: THE MISERY INDEX

Let’s call it what it is.

Large law firms and their management consultants have redefined a word — productivity — to contradict its true meaning. Recent reports from Hildebrandt and Citi measure it as everyone does: average billable hours per attorney.

No one questions this perversion because the prevailing business model’s primary goal is maximizing partner profits. Billables times hourly rates produce gross revenues. More is better and the misnomer — productivity — persists.

The Business Dictionary defines productivity as the “relative measure of the efficiency of a person [or] system…in converting inputs into useful outputs.” But the relevant output for an attorney shouldn’t be total hours spent on tasks; it’s useful work product that meets client needs. Total elapsed time without regard to the quality of the result reveals nothing about a worker’s value. More hours often mean the opposite of true productivity.

Common sense says that effort on the fourteenth hour of a day can’t be as valuable as that exerted during hour six. Fatigue compromises effectiveness. That’s why the Department of Transportation imposes rest periods after interstate truckers’ prolonged stints behind the wheel. Logically, absurdly high billables should result in compensation penalties, but prevailing big law economics dictate otherwise.

Here’s a partial cure. Rather than mislabel attorney billables as measures of productivity, an index should permit excessive hours to convey their true meaning: attorney misery. The Misery Index would be a natural corollary to NALP’s survey of minimum billable hour requirements. Attorneys now accept as given the 2,000 hour threshold that most firms maintain, even though current big law leaders faced no mandatory minimum levels when they were associates. As Yale Law School describes in a useful memo, 2,000 is a lot. But even if the 2,000-hour bell can’t be unrung, the Misery Index could reveal a firm’s culture.

To construct this metric for a given firm, start with attorneys billing fewer than 2,000 hours annually (including pro bono and genuine firm-related activities such as recruiting, training, mentoring, client development, and management); those lawyers wouldn’t count toward their firm’s Misery Index. However, at each 100-hour increment above 2,000, the percentage of attorneys reaching each higher numerical category would be added. To reflect the increasing lifestyle costs of marginal billables, attorneys with the most hours would count at every 100-hour interval preceding their own. Separate indices should exist for associates (AMI) and partners (PMI).

The Misery Index would reveal distinctions that firmwide averages blur. For example, Firm A has an Associate Misery Index of 125, calculated as follows:

50% of associates bill fewer than 2,000 hours = 0 AMI points

50% > 2,000 = 50  AMI points

40% > 2,100 = 40

25% > 2,200 = 25

10% > 2,300 = 10

None > 2,400

AMI: 125

Firm B’s AMI of 315 describes a much different place:

10% of associates bill fewer than 2,000 hours = 0 AMI points

90% > 2,000 = 90 points

75% > 2,100 = 75

60% > 2,200 = 60

45% > 2,300 = 45

30% > 2,400 = 30

15% > 2,500 = 15

None > 2,600

AMI: 315

A Misery Index would aid decision-making, especially for new graduates. Some would prefer firms with a high one; most wouldn’t. A Misery Index above 300 might prompt questions about the physical health of a firm’s attorneys; a Misery Index of zero — no one working more than 2,000 hours — might prompt questions about the health of the firm itself. Big disparities between partners (PMI) and associates (AMI) would be revealing, too.

Data collection is problematic. NALP won’t ask for the information and most firms won’t supply it — unless clients demand it. (In an earlier article, I explained why they should.) Alternatively, individual attorneys could provide the information anonymously, similar to The American Lawyer’s annual mid-level associate surveys.

Complementing the Misery Index would be firm-specific Attrition Rates by class year from starting associate to first year equity partner. NALP’s last report — before the 2008 financial crisis — showed big law’s five-year associate attrition rates skyrocketing to more than eighty percent, but significant differences existed among firms.

The Misery Index and Attrition Rates would be interesting additions to Am Law‘s “A-List” criteria that many big firms heed. Imagine an equity partner meeting that included this agenda item: “Reducing Our Misery Index and Attrition Rates.” It would certainly be a departure from scenes and themes in my best-selling legal thriller, The Partnership.

Big law is filled with free market disciples who urge better information as a panacea, as well as metrics to communicate it. Here’s their chance.

7 thoughts on “A NEW METRIC: THE MISERY INDEX

  1. I am equally troubled by the pressure inherent at big firms to pad bills. I am trying to remember if I was ever admonished about not overstating my hours, but I sure was admonished about making sure I was billing my time. I recall being a legal assistant at a major New York firm before law school and being told to bill a minimum of 7 hours a day to clients; with the implication that I should do so even if I hadn’t done 7 hours of billable work. Luckily for me, I had this interaction 2 months before I left for law school and didn’t comply. But especially when work is scarce, I suspect the pressures to pad bills at big firms is immense.

  2. Your interesting and provocative proposal adds new insight to the hourly billing citadel, which has been very much under attack during the last two years.

    The issue is, of course, the lamentable hourly billing system, a system which breeds and promotes inefficiency and, as you previously noted, sometimes worse. Lamentations seem to be wearing off as alternative fee arrangements and similar value billing arrangements proliferate. Recent surveys show that 46% of large corporations require some form of AFA’s from law firms and 95% of surveyed law firms offer AFA’s.

    Perhaps, instead of a “misery index,” we could develop a “value index” under which lawyers would be rated on the basis of the efficiency in which they deliver a quality product.

    Let’s suggest that each assignment is rated on a scale of 1 to 5 based on the complexity of the assignment, with 5 being the most complex. Complexity Level 1 might be one in which, based on historical data might take up to 25 hours to complete; Complexity Level 2 might be one that might require 26 to 100 hours to complete and so on up the scale.

    In our Value Index, a lawyer completing a Complexity Level 1 assignment in 15 hours would be graded as +10; if he or she completed the assignment in 30 hours, he or she would be graded at -5. In addition, as part of the process, supervising lawyers (or perhaps even clients) would value the quality of the work using a similar 1 to 5 system, with 1 being unacceptable, level 3 being acceptable and 5 being superlative. A quality review of five would result in a doubling of the individual Value Score, a quality level of 3 would be neutral, a quality review of 1 would be a reduction equivalent to the total initial Value Index score. Thus, in the latter instance, if the initial Value Index score was 10, it would be reduced to 0.

    To keep the playing field level, each firm’s Value Index scoring system would be peer reviewed by a competing firm randomly assigned, similar to the fashion in which accounting firms are peer reviewed.

    Scores would be collated for each lawyer at year end. Work assignments would be monitored so that to the fullest extent possible, lawyers would be assigned a combination of work at different Complexity Levels, which at the upward end of the grid, would add up to a total of 2,000 hours annually (computers could help monitor the assignment process keeping tabs on the Complexity Levels). Annual reviews would include aggregate Value Index scores for each lawyer. Those lawyers scoring highest would of course be the most highly compensated.

    Law firms could then post their Value Index scoring on their web sites and utilize the data for recruiting purposes. Lawyers moving laterally would include their individual Value Index scores on their resumes.

    This is very much a concept which is a work in progress and certainly requires refinement, but once refined and implemented, lawyers could properly boast of the value of the services they deliver to clients, instead of the number of hours they sold to their clients.

    For more about alternative fee arrangements and value billing, see http://kowalskiandassociatesblog.com/2010/03/31/alternative-fee-arrangements-a-primer/

    Jerry Kowalski

  3. Steve & Jerry:
    I love your thinking, and commend any form of challenge to hourly billing, which I’ve always regarded as the dumbest economic system ever invented. It perpetuates what I call “expert’s penalty,” i.e., the wizard with an almost visceral grasp of a subject who resolves the problem in an hour bills $700, while the lower-priced (say $500/hr) plodder who spends the whole day arriving at the same point bills $4000.

    Your attempts to rationalize an irrational system creates something so complicated that it can never be implemented. Apart from the data-collection problem you noted, in the time-based system we now endure, who is going to spend the time to create and manage such a reporting system?

    Right now, who’s feeling more insecure than BigLaw associates? I doubt that many will choose to embrace the risk of clandestine reporting. No matter how you redact data, it always leaves subtle fingerprints, particularly to an embarrassed partnership motivated to analyze what’s reported so they can spot identifying anomalies or patterns and kill the messenger.

    Setting aside the practical difficulties of implementing any such system, doesn’t this dodge the real issue, i.e., that hourly billing has to go away? According to publicly-reported studies, the barriers that conspire to preserve this silliness are, ironically, corporate counsel who, despite being quoted at conferences about this being the time to change, blah, blah, continue to expressly prefer hourly billing.

    Clients could eliminate hourly billing in a day, simply by declaring that they won’t hire any firm that depends on it, or pay any bill based on it.

    Unfortunately, for too much of BigLaw, “clients” means internal counsel, many of whom grew up on hourly billing and understand no other system. If the definition of “clients” were to expand to include line-of-business executives, I suspect we’d see different survey results. It’s hard to imagine LoB execs, who must live or die by budget compliance, continuing to tolerate a system where nobody can tell them what the service will cost in total, and where the supplier’s incentive is to maximize the bill.

    So far, the only argument I’ve heard in favor of hourly billing is that old canard, “It’s hard to predict legal costs; there are too many variables.” Really? Harder than predicting what you’ll encounter when you excavate a foundation for a skyscraper? Harder than predicting what cement and steel will cost in three years, when you’re fabricating the building’s exterior?

    Lawyers act as if their business was the only one on the planet with complexities that affect production cost and resale-price. I think many of their clients, who have invested lots of time and money developing systems to manage variable risk, might find that just a bit condescending and insulting.

    Just because lawyers have historically had no compulsion to measure their cost of service delivery, and thereby accumulate the volume of data necessary to model their costs and project variables, doesn’t mean that it can’t be done.

    To me, the final irony of hourly billing is that it’s 100% focused on line-item task performance. As a result, few matter-managers get paid for the time they spend doing that. A task-based economy also doesn’t allocate any time to marketing, sales, management and lawyer-development, which means that partners must do that on what would otherwise be their own time, or it doesn’t get done at all. There’s the foundation for your Misery Index.

    Let’s point out the emperor’s nakedness and expose hourly billing for what it is: A longstanding habit, bordering on addiction, that’s destructive to all affected.

  4. Consultants do this kind of non-hourly based billing on projects all the time. However, I would note that (1) it does not mean that the fee is lower – it is usually quite high, (2) it seems to lead to a tendency to give the client what they have ready on the shelf, rather than top-notch, particularized work, and (3) that is enabled by that non-legal consultants do not worry much about malpractice claims, so are more comfortable reaching a point where what they have is good enough.

  5. Arthur,
    Your point 2 is very broad, and I would suspect that most consultants find it insulting. This one certainly does. I would hope that you would have solid, objective data to back up such a claim. Perhaps you’ll be kind enough to share it with us.

  6. If one believes that hourly billing by law firms incentivizes performing more hours on a project, then I think one would also believe that a fixed fee by a consulting firm provides an incentive to minimize the hours on the project. And that has been my experience. And the greater pressure on the lawyer to avoid malpractice (you cannot put a “we do not provide legal advice, consult with your counsel” disclaimer on your reports) I believe leads to a difference in where the lawyer and the consultant draws the line on how much work has to be done. Your experience may be different. Consulting isn’t bad. It is just different.

  7. Arthur,
    Thanks for your clarification. The problem is that the issue isn’t “how much work has to be done.” It’s delivering whatever the client and you agreed upon. If you do that, it’s nobody’s business how long it took. Consultants and other professionals accomplish this with scope-of-work declarations, arrived at after whatever level of due diligence is necessary to do so with confidence. Whether or not you’re able to charge for that due diligence is a function of your relative selling skill, but that has nothing to do with the inherent need to define the deliverable to the client’s and your mutual satisfaction.

    Lawyers have long avoided this because they could. The perceived scarcity of “the right lawyers” enabled them to establish a time-and-materials economy that pushed all the scope risk to the clients. Good for them. However, the conditions that allowed that are now gone, permanently.

    Lawyers would be well served to get ahead of this curve, rather than trail it. Right now, they’ll find their clients receptive to helping them along this learning curve, and willing to share more of the estimating risk than will be the case later, once T&M is no longer the standard.

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