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Billable hours – a popular KPI in the Professional Services industry

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Billable hours

One of the favorite performance measures in the Professional Services industry (legal practice, management consulting, accounting, it consulting) is “# Billable hours”.  This volume of time is generally considered “productive work”, while administrative matters are often ignored because they aren’t “revenue generating”.

The Billable Hour Model

Firms make money (revenue) by billing their clients for the time spent on a given matter. According to William S. Boyd School of Law at the University of Nevada (2007), one common billable hour model used by legal services firms is:

Profit = Revenue – (Costs + Expenses)

Each employee at the firm has an hourly rate which increases each additional year of practice. Thus, the firm’s revenue is the sum of each employee’s hourly rate multiplied by the hours billed. These  firms also have costs or expenses. Salaries, benefits, office space and other overhead are examples. Firms will expect you to bill enough time to cover your salary and overhead and to generate revenue for the firm.

When firms takes in consideration factors like recruiting costs and summer associate program costs, associates do not show a profit until approximately the fourth year. In order to ensure the firm will make sufficient revenue, some firms have “average,” “target” or “minimum” billable hour policies. In the legal services sector, these yearly billables typically range between 1700 and 2000 in Nevada and up to 2400 in New York and other primary markets.

“Working” vs. Billing

In order to accurately bill your time, employers need to meticulously track and record the time you spend on assignments down to a fraction of an hour (i.e., tenths of an hour, or six-minute increments). To give a sense for the “working” vs. billing distinction, below is a typical schedule for firms requiring 1800 billable hours:

Full Time Job: Target 1800 Billable Hours Billable Hour Calculation
You’re in the office from 8:00 a.m. – 6:00 p.m each day 10
You take an hour for lunch -1.0
You take two 15 minute coffee breaks -0.5
You spend a half-hour reading legal updates and reviewing general correspondence -0.5
Attend department meetings, occasional conferences, etc. -0.5
Billable Time (Result) 7.5
If you work a 5 day week x 5
You have been at work 50 hours and billed 37.5
If you do this all year long, and we assume: 3 weeks vacation
2 weeks holiday
No sick days or personal days
You will work 47 weeks x 47
And have billed an annual average of 1762

Source: adapted from Yale Law School Career Development Office, 2009

Considering the above scenario and if you want to gain an extra 70 hours “to be respectable”,  you could add approximately 1 ½ hours a week (approximately 20 minutes a day): 1 ½ x 47 weeks = 70. So come in at 8:00 am and work until 6:20 pm Mon – Fri. You have achieved 1832, however you have been “at work” 2420.

It is also worth noting that this exercise does not factor in your non-billable training, pro bono work, writing an article, interviewing an applicant, etc.

Billable hours and performance measurement

Professional Services firms strive to engage workers in high-productivity work that earned the company more money. Time-tracking allows firms to know exactly how much labour time is sold to clients, and which workers contribute relatively more to the company’s revenue numbers.

However maximizing billable hours often comes at a cost: limited time spent on innovation, knowledge management, training and general business development. Oftentimes it leads to stress and burnout. Sometimes to abuse and unethical behavior. While monitoring it is a must, a balanced approach to using it should be considered. Performance management is both about achieving and learning.

References Image source:
Evaluating executive performance - global ranking of top performing CEOs
R&D Investment and Performance around the world - a European Commision report

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