For those of you that missed John Stossel’s fine show last week on Licensing Madness, I submit the following excerpt.
How do you think that the regulation of the professions in the market effect you, your businesses and even your customers?
Yesterday, I was forwarded a post from Dwayne Wright who could not be more wrong about project management and value pricing. Please read his post before continuing.
I posted wrote a comment, he rejected it saying, “Well, just rejected the first comment for a blog that wasn’t clearly SPAM. It came from a value billing advocate and was equally harsh, combative and lacking of substance.”
“Harsh, combative," HELL yes. “Lacking in substance,” I’ll let you be the judge.
My comment:
I am probably the original source of the comment about billing by the hour as being unethical. (It is clearly suboptimal and I believe immoral as well, but that is a whole other story.)
First, let me be clear, I do not accuse anyone personally of being unethical; it is the practice that is unethical because it promotes some very bad habits.
- It puts the consultant and the customer is an adversarial role. It is in the consultant’s financial interest to maximize hours; in the customer’ interest to minimize hours.
- You state, "It also says this (hourly billing) is often used when a precise statement of work cannot be quickly prescribed. Does that sound familiar to you and your consulting business?" Yes, it sure does and that is just plain wrong. Prescription before diagnosis is malpractice in any profession.
- While the PMBOK (and PMI, in general) have some good things to say about project management, they are overly obsessed with costs. After all most of this stuff comes from government (think defense contractors and NASA). In business, customers do not care about your costs, nor should they. They care about the results. They pay for results not efforts. This again is a misalignment.
- You are arguing that the risks should be borne by both the customer and the consultant. That is just wrong. You are the one with the knowledge not the customer. It is your job to spread diversify your risks across all your customers not put it back on each of them. Your customers hire you because of risk. If what you did was easy, you would not be hired in the first place. To put it back on them is ludicrous.
Lastly, it is not "vale billing" is it "value pricing" or better yet "pricing on purpose." A price is set ahead of time a bill comes after the fact. You bill now, we at the VeraSage Institute, encourage you to set a price beforehand.
Ed Kless
Senior Fellow, VeraSage Institute
By the way, Dwayne Wright, you are free to post any comments here they will not be rejected. You can thank me later for giving you are larger audience then you ever thought possible.
A few Sage business partners have inquired as to what sessions I am doing at the upcoming Sage Summit customer conference in Atlanta next week.
Without further ado, here they are:
| Time | Session |
| 8:30 AM - 9:30 AM | GEN02 - Altruism, Profit, and the Basics of the 7S Model |
| 11:00 AM - 12:00 PM | GEN03 - Creating Shared Vision |
| 2:15 PM - 3:15 PM | GEN04 Creating Strategy in a Small Business |
| Time | Session |
| 8:30 AM - 9:30 AM | GEN05 - Initiating Projects in a Small Business or Small Team |
| 11:00 AM - 12:00 PM | GEN06 - Building Community: A New Paradigm |
| 2:15 PM - 3:15 PM | GEN07 - Fundamentals of Strategic Pricing |
It would be my honor to meet your customers, so bring them by if you can.
On May 12, 2009, I presented a session at Sage’s annual partner conference, Insights. The session was entitled Issue List Management (or how to replace your time sheets with something that actually matters to your customers).
First up are the slides from the session.
Next, here are the video highlights.
And finally, the big finale! This is only for those of you who are radicals (like me) - a song which I believe demonstrates the immorality of tracking your time.
I genuinely believe that most people in the world desire only good thing for their fellow man and are trying to do good. What is disturbing is that we all tend to dismiss any facts that are contrary to our own belief system, rather than investigate them further and resolve the contradiction. To quote Ayn Rand, “Contradictions do not exist. Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong.”
As a consultant one of the first things I learn about a prospective customer is if the are open to the possibility that they are wrong. Not that they necessarily are wrong, but just if they are open to the possibility. I will not work with anyone who does not respond positively to this idea. Of course, I reciprocate and state that I am open to this possibility myself.
One of my all time favorite quotes is from a little know business/psychology author named Edwin Friedman. He opens his book A Failure of Nerve: Leadership in the age of the quick fix, with this gem, "The colossal misunderstanding of our time is the assumption that insight will work with people who are unmotivated to change."
He demonstrates how this applies to all levels of human relationships: parent/child, spouse/spouse, neighbor/neighbor, employee/boss, company/company, citizen/government official, country leader/country leader. It is only through lowering our own level of anxiety, thereby increasing our own ability to think creatively and remaining connected to those we hope to change, can any transformation occur.
Advancing the dialogue requires the ability to self regulate your own anxiety level.
Go-to-market Strategies posted an article entitled The truth about selling value: you must ADD Value.
While there is much in the article with which I agree (Value is subjective; It is hard to get to value, etc), there is one key point to which I object strongly. The writer’s definition of value is "the amount of money or relative worth that is considered to be the fair equivalent for what is to be received in return." (Emphasis mine.)
This continues the thinking of business-as-zero-sum-game. The value the customer is getting should outweigh, in some cases significantly, the price that they are paying. This is the beauty and morality of the free market. Wealth is created on both sides of every transaction because they are a) mutually beneficial and b) entered into with the freedom to choose. The buyer benefits more than the price they pay and the seller benefits because they provide the good/service/knowledge for less cost than their price. Of course, this is called profit.
Yesterday, the United States government agreed in principle to provide almost $8 trillion on behalf of American taxpayers. The complete story is available on Bloomberg and various other sources. The amount is more than one-half of the value of everything produced in United States last year alone.
The question of who is going to pay is settled. The citizens of the US are. This agreement is tantamount to repealing the Thirteenth Amendment to the United States Constitution which reads in part, “Neither slavery, nor involuntary servitude, except as a punishment for a crime...shall exist within the United States.”
If you think this is extreme consider this question, can I opt out of contributing without being put in prison? The answer of course is, no!
As a reminder the $8 trillion mentioned above does not include the unfunded liability for Medicare, Medicaid and Social Security. Our lives and our fortunes have been pledged to the government. We, in the United States, are all slaves.
Every so often you read something and say to yourself, “Wow, I wish I wrote that!”
It happen to me just a few minutes ago when a friend of mine sent me this link from a blog post written more than two years ago. It is certainly an echo of the famous “This is John Galt speaking…” in Atlas Shrugged.
I am not sure how I ended up at this site today, but I did.
It is pathetic. If there was ever any doubt that a professional knowledge firm is based purely on intellectual capital, this proves it.
This is what remains of Andersen.
Ron has been blogging a lot about ROWE (Results Only Work Environment) lately and with good reason. It is an idea whose time has come. In fairness, I thought I would present the anti-ROWE or, at least, one element of it.
If you need this product, creepily named Spector 360, let me give you some advice — save your money ($2k) and just go out of business! If anyone can make a rational case for using this kind of software in a professional knowledge worker (or really any) environment, please attempt to educate me in the comments below.
A lot has been written on whether or not hourly billing is unethical. My colleague and friend, Ric Payne, recently weighed in with his thoughts, mostly in response to something Rob Nixon out of Australia wrote in his newsletter. Obviously, Ric thinks hourly billing can be ethical.
Our friend and colleague Mark Bailey also weighed in on his Blog, arguing that hourly billing is unethical. (This post also prompted Mark to apologize to Ric, but I’m going to avoid that debate).
But I think all the posts missed the main reason why hourly billing is not ethical. To explain, we have to discuss what, exactly, is ethics, as well as a bit of philosophy.
Ethics—originating from the Greek word ethos, meaning habit—is the study of morality. Morality is concerned with social practices defining right and wrong. It exists prior to the acceptance by any one individual. In other words, morality is not a personal choice but a social construct. I’m sure Hitler thought he was ethical. So what?
Ethical theory is a reflection on right actions. Aristotle wrote that ethics was a branch of politics, and since morality and politics are inseparable the political question is, “How ought we to order our life together?” After all, you would not need to study morality or ethics if you were stranded on an island, since there would be no one to be “just” or “unjust” to.
The Josephson Institute of Ethics, one of our favorite resources for ethics education, defines ethics this way:
Ethics is about how we meet the challenge of doing the right thing when that will cost more than we want to pay. There are two aspects to ethics: The first involves the ability to discern right from wrong, good from evil, and propriety from impropriety. The second involves the commitment to do what is right, good and proper. Ethics entails action; it is not just a topic to mull or debate.
Rather than merely analyzing the consequences of actions, there exists a philosophical theory that holds that one should do what is right. This is known as deontology, a Greek term meaning duty.
Deontologists believe in universal principles (thou shall not steal, murder, etc.) and that consequences should not be the only criteria used to judge moral behavior. The leading deontologist is the German Philosopher Immanuel Kant (1724-1804). Kant proposed two questions, “What may we hope for?” and “What ought we to do?”
Kant’s theory places motives for actions as higher importance than the consequences of those actions. In other words, one should do what is right, for the right reasons. If one is honest only because they believe honesty pays, it’s not as moral as those who are honest because it is the right thing to do, according to Kant.
Kant proposed broad principles in order to provide a framework for making moral decisions, described as categorical imperatives:
If you apply this test to hourly billing, you find it fails miserably on all the questions, especially the first and third.
Would you want hourly billing to become universal? Would you want all businesses to utilize it?
If the Golden Rule is true—treat others as you yourself would want to be treated—how can one defend the morality of hourly billing?
Now Ric countered that he believes it’s ethical as long as the customer knows in advance what the price is, and agrees to it. That’s true.
But the reality is, most firms that bill by the hour do not quote fixed prices up-front, they quote hourly rates, or at best, a range of prices. Again, would you accept that from a hotel, an airline, a grocery store?
My earthquake insurance companies quotes me a fixed premium, even though it really doesn’t know the costs of a future earthquake. It’s called taking a risk, the source of all profits.
Hourly billing also misaligns the incentives between professionals and customers, and there exists much empirical evidence for this. Just look at any ABA survey, or advertising survey. For a detailed explanation of the ethics of hourly billing, the best book is The Honest Hour, by William G. Ross. This book documents all of the ethical challenges caused by the billable hour in the legal industry.
Ross actually concludes, like Ric, it can be ethical policy; again missing the point completely.
As Aristotle wrote, “It’s not easy to be a good citizen in a bad society.”
Hourly billing creates a bad culture, focused almost exclusively on the convenience of the seller, not the customer.
It’s not how you purchase anything else in your life. You wouldn’t tolerate it for one minute if any other business tried to price this way.
Hence, it’s unethical.
I think Kant would agree.
Hat tip to Simon Tupman for sending me the new regulations from the New Zealand Law Society, part of which deals with fees.
As is typical with regulations, the wording is turgid, dry, and not at all comprehensible. But it’s Chapter 9 (page 18) that caught my eye, since it’s very similar to the ABA’s Model Rules of Professional Conduct, Rule 1.5 on factors that make a fee “reasonable.”
While the ABA’s Rule lists eight factors to consider in determining if a fee [I sure wish they’d use the word “price” instead] is reasonable, the New Zealand rules lists thirteen.
Either way, they both go way beyond “the time and labor expended.” I especially love this factor to consider from the New Zealand rule:
The degree of risk assumed by the lawyer in undertaking the services including the amount or value of any property involved.
Risk is incredibly important in determining price, probably more so than scope, according to Ed Kless in this post.
What’s amazing, though, about all these pages of rules on fees is that they could be replaced with one sentence:
You should price all of your work up-front, agreed upon by the customer in advance, and utilize change orders for when unexpected items arise—again, approved in advance by the customer.
Or, more simply put: capitalist acts between consenting adults.
Some answers are simple; it’s the fallacies that get complicated.
Billing by the hour is an enormous fallacy, requiring page after page of rules, regulations and interpretations not needed in any other business on the planet.
Amazing. I wonder if lawyers will ever learn?
Thanks (again) to Stephanie West Allen for alerting me to the Wall Street Journal article discussing Jeff Bleich, President of the California State Bar, calling for reform of the billable hour in the April 2008 California State Bar Journal.
You might want to read both articles before reading my thoughts below, especially some of the comments on the Wall Street Journal blog after the article.
Jeff Bleich begins his article by citing the refrain of all governmental regulatory agencies:
The work of the State Bar ultimately is to protect the public and ensure that the people of California have access to the legal help they need.
This is poppycock. Economists have proven this over and over with empirical evidence. Licensing professions rarely protects the public; it’s more about protecting the profession from the public, limiting competition, and driving up wages and profits. Milton Friedman, with Simon Kuznets, wrote his PhD dissertation on this very topic, entitled Income From Independent Professional Practice, in 1945, wherein he empirically—and quite controversially—proved licensing professions drives up wages and profits.
He expanded on this work in his two most famous books—sometimes referred to as the Old and New Testament—Capitalism and Freedom and Free to Choose. The Cato Institute has published a wonderful book on why occupational licensure is a ruse, The Rule of Experts, by David S. Young.
Another in-depth look at the folly of occupational licensing is Naked Economics by Charles Wheelan.
If anyone can read any of these works and still believe that licensing occupations protects the public all I can say is they are impervious to empirical evidence. Like free trade, this is one area where the overwhelming majority of economists agree. Nearly every study ever done on all types of occupations conclude licensing limits competition, increases wages and profits, all accruing to the benefit of the profession being licensed rather than serving—let alone protecting—the public.
Why is it that it’s only ever the occupation itself that runs to the government, hat in hand, wanting to license its members, from casket, lightening rod, and yacht salesman, to florists and interior decorators? Yep, that’s right, interior decorators. I guess the government has nothing better to do than to protect people from those not savvy enough to match the carpet with the drapes. Yet the interior decorators used the same logic for licensing—"to protect the public.”
Just look at the comment on the Wall Street Journal blog about how the State Bars “need to reduce the number of lawyers.” How does limiting competition ever protect the public?
I point this out merely to say that I’m highly skeptical when any member of a regulatory agency proffers any reform. Bleich claims that the billable hour is threatening the capacity of lawyers to serve the public effectively. He says it’s corrupting the profession and reducing pro bono work of lawyers, while reducing the quality of life.
These are not new arguments. The ABA Commission on Billable Hours Report, 2001-2002 made exactly the same points. It fell flat.
I was incredibly excited when it was published, thinking it would get international attention, providing an impetus for law firms to change to a Value Pricing paradigm. Boy was I naive. The overwhelming number of attorneys I asked after its publication had never heard of it, let alone read it.
Unfortunately, I suspect Mr. Bleich’s call to arms will suffer the same fate. And that’s sad, because he makes many good arguments against the billable hour.
Correcting the History of the Billable Hour
Bleich claims the following with respect to the history of the billable hour:
...management consultants beginning in the 1970s complained that this “black box” lacked accountability and was probably inflating the cost of legal work. So they devised the current approach: lawyers set an hourly rate, write down everything they do and how long it takes to do it, and then bill for the time.
While the consultants promised that this would reduce the cost of legal services and make lawyers more accountable, it has done just the opposite. It has made litigation more expensive, and it has largely eliminated accountability for outcomes. In the bargain it has cast an ethical cloud over the work we do, demoralized lawyers and degraded our efforts to train lawyers to solve problems.
Well, not quite. The billable hour dates back to the 1940s. I have run across recent evidence that it actually goes back to the 1920s, in the form of maintaining timesheets.
It’s somewhat true that management consultants taught lawyers about tracking time, but where did they get the idea? You have to go back to cost accountants—engineers really—from the automobile, chemical, textile, and railroad industries.
Where’d they get the idea? That goes back to Karl Marx’s Labor Theory of Value, which actually can be traced back to St. Thomas Aquinas. Even Adam Smith believed in a cost-of-production theory of value.
I have elsewhere provided a history of this theory of value, along with the more correct Subjective Theory of Value.
I have also explored all of this history in great detail in my Professional’s Guide to Value Pricing, Chapter 6, “The Genesis of Hourly Billing.” You may access this at Google Books here.
The most authoritative histories of the billable hour are the three seminal books by Richard C. Reed, all published by the ABA: Beyond the Billable Hour (1989); Win-Win Billing Strategies: Alternatives That Satisfy Your Clients and You (1992, apparently out of print); and Billing Innovations: New Win-Win Ways to End Hourly Billing (1996).
Also, by William Ross, The Honest Hour: The Ethics of Time-Based Billing by Attorneys (1996).
Tracing an idea back to its origins is important if we ever expect to replace it. The consultants who taught lawyers about timesheets were using it as a cost accounting tool, not a pricing tool—the difference is critical.
What was originally designed to track inventory transmogrified into the inventory—that is, “we only sell time.” You’ll even see this in one of the comments on the WSJ blog. Abe Lincoln said it, but he never kept a timesheet, nor did he price by the hour.
Bleich further makes this point, which I find to be nonsense:
And worst of all, it does not seem to have met the ultimate goal of solving problems more efficiently and at a lower cost.
But that was never the purpose of the billable hour or timesheet, nor should it be. I don’t want an efficient surgeon, I want an effective one. Lawyers are no different.
Customers are not price sensitive, they are value conscious. What the billable hour has done has shifted the focus from value and results, to inputs, hours, costs, activities, as if these latter attributes had anything at all to do with value.
Here on earth, customers want results. Efforts will be rewarded in Heaven. But the billable hour’s entire focus is on efforts.
The real problem is the billable hour does not comport with economic reality. Value is subjective, not determined by how many hours you work. There’s no way to do the wrong thing more efficiently, which is why all reforms that still maintain an hourly focus are doomed to fail.
Eating Their Young
The leaders of law firms are chasing away their most precious wealth-creating ability—their human capital. The incessant and ruthless focus on billable hour quotas is killing the profession. This is where I totally agree with Bleich, especially this conclusion:
The destruction brought by billable hours can be subtler in that it affects not merely the cost and efficiency of our work, but the quality of our profession as a whole. Firms now have only three ways to make more money—work longer hours, increase the number of lawyers or raise rates. Predictably, in a profit-maximizing system, firms have been doing all three. Instead of working 1,700 hours a year as lawyers did in the 1970s, today, new lawyers typically bill around 2,100 hours. Those additional hours come out of two places—evenings and weekends. That means less sleep, fewer outside interests, less commitment to loved ones and the crumbling of a decent life. Lawyers feel guilty about doing the very things that we should do to achieve access and justice—such as pro bono work for those in need or service to the community. Instead new lawyers come to view themselves as people who merely rent out their brains for a certain price per hour. And they and their work are degraded by the experience.
This is no way to treat knowledge workers, who are ultimately volunteers. Today’s knowledge workers know something most elder law firm leaders don’t: Their ability to create value is not dependent on how many hours they work. Today’s knowledge workers know Karl Marx was full of it, which is why we at VeraSage preach the enormous differences between manual and service workers and knowledge workers.
The billable hour is a form of negative intellectual capital. Alternatives do exist—it’s called Value Pricing. Every other business on the planet does it, providing their customers with certainty in price while capturing the value they create.
So despite its flaws, I applaud Jeff Bleich’s article for bringing up the topic. Unfortunately, if history is any guide, it won’t amount to much.
The onus is on law firm leaders to reform the billable hour. Certainly not a governmental agency.
Come to think of it, how sad is it when the governmental agency is more innovative than the profession it regulates?
In the aftermath of Enron and other assorted accounting scandals of 2002, there has been a lot of discussion about the trust factor in the professions. Terms such as the trusted advisor have become common in mission and value statements at firms.
In fact, many firm leaders seem to believe that trust is a core competency of their profession. I have a different perspective on this issue, which I have learned is very controversial (when sharing it with many colleagues it ignites quite a debate).
There is no doubting the importance of trust in business relationships. In fact, the accounting profession, for instance, owes it origins to this very issue, since, from the late fifteenth century on, businesses that were originally based on kinship and family ties grew to a size that made it imperative to hire outsiders. In addition, as personal finances became further separated from business finances, double-entry bookkeeping became a necessity in order for the principals of an enterprise to monitor the agents they hire.
In any economy, a high level of trust acts as an expedient to commerce, reducing the need for lengthy negotiations, protracted contracts, and costly litigation, or what economists refer to as transaction costs. Nobel Prize-winning economist Kenneth Arrow explains the function of trust:
Now trust has a very important pragmatic value, if nothing else. It is extremely efficient; it saves a lot of trouble to have a fair degree of reliance on other people’s word. Unfortunately this is not a commodity that can be bought very easily. If you have to buy it, you already have some doubts about what you’ve bought. Trust and similar values, loyalty or truth-telling, are examples of what the economist would call “externalities.” They are goods, they are commodities; they have real, practical, economic value; they increase the efficiency of the system, enable you to produce more goods or more of whatever values you hold in high esteem. But they are not commodities for which trade on the open market is technically possible or even meaningful.
With high levels of trust, commerce is more fluid and transactions costs can practically be lowered to zero, as economist Thomas Sowell points out in Race and Culture:
Commercial transactions that require trust and reliability are more readily concluded among people who share not only certain traits, but whose possession of these traits can be verified more easily. An extreme example of this are the Hasidic Jews of New York’s jewelry industry, who give each other consignments of precious gems to sell, without the need for contracts or other costly safeguards that would be absolutely necessary if dealing with strangers. Lebanese traders in the interior of Sierra Leone likewise have had to depend on the honesty and reliability of other Lebanese traders in the port city, who sold their consignments of produce in the international market and shared the proceeds. The Chinese in Southeast Asia have also been noted for the large and complex transactions which they conduct among themselves without written contracts.
You can’t purchase trust; it is a table stake in a free market economy, and not just for professionals, but for all businesses. All transactions require trust; it is a basic expectation when conducting business. It certainly is not a core competency, because it is not an attribute you can do better—or at lower cost—than your competitor.
Trust is complex and, obviously, there are different levels of trust, as it is a contextual concept. It is one thing to purchase a pack of gum at a convenience store, or get a shave from a barber, and quite another to trust a babysitter with your child. But it is a mistake for any firm to advertise or market its trustworthiness; it is frankly something that must be demonstrated and earned (one way to accomplish this is to offer a money-back guarantee on all of your work). Merely having trusting relationships with your customers does not ensure they will remain loyal.
I fly quite extensively on United Airlines; I trust them with my life, which certainly requires a higher degree of certainty and confidence in a complete group of strangers than in my accountant or lawyer. In the airlines, safety is simply a table stake—it is necessary, since it is hard to sell anything to a corpse—but it doesn’t ensure customer loyalty, or even profitability.
If United’s service ever begins to decline, I will defect. We witness the same response among customers of professional service providers. Moreover, no airline would advertise: “Fly with us, we won’t kill you.”
The majority of transactions that take place in the world-wide economy are done under an umbrella of trust. Professionals are among the most trusted advisors. So what? This is a subtle point, but an important one. The professions—or any firm therein—does itself no favors by continuously trumpeting its level of trust. Like your technical quality, it is merely a table stake. Those who talk about it, injure it, and are perceived less believable.
Your reputation, like trust, is based on what other people say about you.
Certainly you can lose customers if they lose faith or trust in you—and usually, like husbands, you will be the last to know—but that is not the reason the majority of customers defect from their professional. As we know, most defections occur over the service experience, not issues of integrity and trust.
I cringe when I see a professional’s business card, Web site or brochure that touts “trusted advisors.” It makes me want to immediately count my spoons.
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