I’m sure glad my first book, Professional’s Guide to Value Pricing, is no longer in print, for I would need to revise it based upon these new facts regarding the genesis of hourly billing, which was discussed in Chapter 6.
To summarize, my research led me to William G. Ross’s scholarly work, The Honest Hour: The Ethics of Time-Based Billing by Attorneys. In contrast to the books published by the ABA by Richard C. Reed, Ross’s book went into much more detail on the origins of hourly billing, and even the timesheet.
Ross concluded that the billable hour became prevalent among attorneys by the 1950s, thanks to various studies indicating that lawyers who tracked their time made more in net income than lawyers who didn’t track time made in gross income. What further incentive did lawyers need to begin billing by the hour?
He traced the timesheet to 1945—citing the New York firm of Shearman and Sterling that began timekeeping that year—and claimed that it was far more widespread by the 1950s than is commonly understood.
In essence, the timesheet was intended to be a cost-accounting tool, not a pricing method. Prior to the 1950s, lawyers were using fixed-fee schedules, published by the courts and the ABA, to establish prices, which were finally outlawed in 1975 by the Supreme Court. (Yet the billable hour was already widely in use at this time, so in effect the Court’s ruling was a lagging indicator of the market changes that had already taken place).
Because these fixed-fee schedules helped determine price, timekeeping was viewed as a guideline that would allow a firm to measure the profitability of an engagement, not as the means of pricing that engagement.
The timesheet was developed to control the “inventory” of the attorney (time), but as hourly billing became diffused, it became the inventory, providing the final method of quantification to Abraham Lincoln’s utterance, “Time is an attorney’s stock in trade.”
Well, we now have a better idea of the actual beginnings of both the billable hour and timekeeping. The inventor of both is attributed, in the above blog post, to Reginald Heber Smith, a Harvard graduate and attorney hired to head Boston Legal Aid in 1914.
He brought the concepts of “Scientific Management” to this organization, based upon the work of Frederick Winslow Taylor, who was famous for his time-and-motion studies starting in the late 1800s, working to help factories become more productive. He succeeded mightily.
I had traced the timesheet and billable hour back to Taylor’s Scientific Management, as well as to the Du Pont ROI calculation, cost accountants from the railroads, textiles, and auto companies, and then, finally, to Karl Marx’s labor theory of value.
The missing piece was Smith, who does not appear at all in Ross’s book, and I had never come across him in my research. However, I did learn a few years ago that he was using timesheets as early as the 1920s, and actually have a book by him in my anti-library (meaning I haven’t read it yet), Justice and the Poor, which explains his work at Boston Legal Aid, and how he fixed their financial crisis by imposing Scientific Management, including, of course, timesheets in six-minute increments.
Here are some informative excerpts from the blog post above on the origins of Smith’s ideas:
The service the lawyer renders is his professional knowledge and skill, but the commodity he sells is time. —Reginald Heber Smith, inventor of the billable hour
The billable hour did not initially propagate, kudzu-like, through the legal world. After all, commoditizing a profession seemed demeaning to many attorneys. And in order to be effective, lawyers needed to submit to another annoying Smith invention: the paper time sheet. On that rigid, ruled rectangle, every lawyer was required to record the time, client name, and task description for everything he did during the day. As if to rub it in, Mr. Smith’s time sheet was marked in six minute increments.
Meanwhile, what was taking root in other law firms was another, equally insidious system: the minimum fee schedule. Rather incredibly, in light of the spirit, if not the letter, of antitrust law, bar associations were hard at work creating flat fee schedules for common legal tasks. By the 1940s, it had become an ethics violation under the rules of some states to financially undercut thy fellow attorney. Meanwhile, Reginald Heber Smith’s seminal management work, Law Office Organization, was in its eleventh printing, and the process of litigation, in particular, had become more complex (read: risky—for the law firm) to prosecute on a fixed-fee basis.
I have purchased the above book by Smith, which I’m sure will shed more light on this history. In the meantime, there are some lessons to ponder given this discovery.
Timekeeping did not arise separately from the billable hour; they are inextricably linked. After all, if you’re tracking time in six-minute increments you obviously believe you are selling—and your customers are buying—time. The thinking is intertwined, which Smith proved by adopting both at the same time. As we’ve preached for over a decade, it’s the timesheet that is the real cancer in PKFs, as it keeps professionals mired in the mentality they sell time.
This also proves, once and for all, that customers never asked for hourly billing. Sellers, not buyers, change pricing methods and business models, which is exactly what Smith did—back in 1914! The notion that outside counsel forced firms into this pricing method is hokum.
It took at least 40 years for the timesheet and billable hour to reach critical mass in the legal profession. Theories among professions are tough to diffuse, and I wonder if Mr. Smith had as much frustration with his colleagues for not adopting his model with alacrity as we at VeraSage have with our colleagues for not burying his model swiftly enough.
Of course, it’s sort of ludicrous to attribute the birth of the timesheet and billable hour to one person, as the ideas behind these techniques were clearly in the intellectual air during Smith’s day.
I have seen similar credit go to individuals in the advertising profession for burying the commission system, as well as introducing the billable hour—the latter of which David Ogilvy took credit for in his book, Ogilvy on Advertising, in what he calls the “fee system”:
I pioneered the fee system, but I no longer care how I get paid, provided I make a reasonable profit.
This of course is nonsense, as the “fee system” was, by the late 1970s, endemic among the legal and CPA professions, and I’m sure it was being used by other advertising agencies before Ogilvy.
In any event, as far as I can tell, Smith was the first to introduce the billable hour and timesheets into a legal firm, and that makes his work worth studying. I came across an interesting 2001 lecture delivered by Justice Ruth Bader Ginsburg—giving credit to Smith for pioneering a national movement to provide pro bono legal work—saying of Smith:
Roots of what came to be called “poverty law” and a major alert to the need for “legal aid” trace to one of Boston’s oldest law firms, Hale and Dorr. In 1919, Reginald Heber Smith, a partner at that firm, published Justice and the Poor, a groundbreaking study of how the economically disadvantaged fare in U.S. legal systems. Smith exposed vast differences in the quality of justice available to the rich and the poor. His exposé led to endeavors to narrow the gap, including the establishment of the first national legal aid organization (National Association of Legal Aid Organizations).
Reginald Heber Smith galvanized a national movement to provide lawyers for those who could not afford to pay counsel. But he did not neglect the remunerative side of work in the law. Among his other distinctions, Smith is credited with inaugurating the practice of calculating lawyers’ fees by “billable hours.” Yet he fully perceived the need for devoting part of a lawyer’s working time to the pursuit of justice for people who could not be billed.
Apparently, Smith also pioneered a formula for calculating partner compensation, known as the “Smith System.” This was a busy guy.
Look Farther Back to See Further Ahead
Custom is whole of equity for the sole reason that it is accepted. That is the mystical basis of its authority. Whoever tries to trace this authority back to its origins, destroys it.
We’ve known for a long time that professionals have the potential to be knowledge workers, and hence Frederick Taylor’s Scientific Management is nearly impossible to apply to people who work with their minds, not their muscles. Peter Drucker discussed this extensively throughout his many books.
So why do we continue to utilize a model that clearly no longer applies to our intellectual capital economy? It’s clear to me that Reginald Herber Smith was caught up in the intellectual ideas of Progressivism and Taylorism during his day, but why do we insist in believing the methodologies these ideas imposed are still relevant today?
Is the practice of law in 2009 the same as 1914? Should it be?
Having a better understanding of the origins of the billable hour and timesheet should help us more effectively destroy them, so I will undertake to do to Mr. Smith what I’ve attempted to do to Mr. Taylor—that is, prove his ideas are not applicable to a knowledge economy filled with PKFs, which are in turn filled with knowledge workers.
Question to our lawyer friends: Have any of you ever heard of Reginald Herber Smith and/or read any of his work? If so, please post a comment or email me personally with details.
As I learn more about the “father of the billable hour and timesheet” I will let you all know.