As law firms respond to demands to make the delivery of their services more efficient, the entire scope of how we view and measure the economics of legal practice is changing.  As we change, I believe that one of the most valuable metrics for law firm managers is becoming Revenue Per Lawyer Billable Hour.

The problem with most of the metrics being used is that they are either focused on the traditional system of hours times rate or on alternative billing options (fixed fees or contingent fees).  But this “either one or the other” view of pricing ignores two issues.  Firms continuing to focus exclusively on billable hours are missing an inevitable change in client relationships: law firms will be driven to alternative fees, particularly fixed fees and blended rates.  This is not so much because clients demand it (which many clients seem ambivalent about), but because it is the only means firms have to increase their revenues.

When billing by time expended, inefficiency is to the advantage of the law firm.  Ergo, if law firms are being pushed by clients to become more efficient, they must, at the same time, change to a billing system that allows them to share in the financial benefits of their efficiency.  However, the traditional measures of law firm performance, especially for compensation purposes, are built around billable hours and the realization from those hours.  To encourage efficiency, the metrics must be reconstructed to recognize efficiency.

The other issue ignored by the “either one or the other” forms of economic measurement is the unlikelihood that the transition of billing practices will magically happen overnight.  Undoubtedly, for the foreseeable future, firms will continue to bill a portion of their work on an hourly basis, therefore, metrics must function in both the hourly rate and alternative fee environments.

While not a perfect metric, there are three things I like about Revenue Per Lawyer Billable Hour.  First, the metric works simultaneously with fixed fee, contingent fee and hours times rate billing by measuring how much effort was required to generate the fee charged to the client – essentially creating a comparative cost accounting system.  Second, Revenue Per Lawyer Billable Hour can be measured by the matter, client, office or an individual billing lawyer, thereby providing maximum flexibility.

But most importantly, the metric encourages lawyers to actively manage engagements.  The win at the client, matter or office level is to generate the highest amount of revenue with the fewest lawyer hours, which incentivizes the use of para-professionals and outsourced resources.  At the same time, it rewards the engagement manager who moves work to the most efficient resource, regardless of whether that is a partner or an associate.

There are most likely other measurements that might even make more sense in the new economic environment.  The key is for firms to define the outcomes they wish to achieve and design a set of non-traditional metrics that are appropriate to their objectives.