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Ethics and Hourly Billing

Ron Baker - 08/27/2006

In Brendon’s recent post on What is Value Pricing? Part 5, Carolyn Elefant left a comment that deserves a response, and hopefully it will start a further dialogue on the importance of ethics and pricing.

Carolyn, thank you for your comment.  It contains vitally serious questions and I will try to give it as much attention in a short comment in order to provide a meaningful answer, all the while knowing we could debate this topic endlessly, as the ABA has, and never reach any meaningful conclusions.

When a professional firm provides a value proposition to the marketplace, it is offering a bundle of characteristics, most of which can be broken down into three categories:

  • Price
  • Quality
  • Service

We believe technical quality is a table stake, the minimum you need to play the game.  In the airline analogy, no one thinks an airline should cut corners on quality—safety and maintenance, for instance—for the cheapest paying customers.  The plane must arrive safely for all passengers.  But charging different prices to different customers requires differentiating some aspects of your service offering, not your technical quality.

A professional services firm cannot really compete on technical quality for the very reasons you cite.  The bar expects you to bring the same level of expertise, skill, judgment, etc., to all of your clients.  But that doesn’t mean you have to offer the same level of service, or prices, to all customers.  Even under hourly billing, different customers can pay different prices based on who does the work, the mix of personnel doing the work, etc.  The problem is, this is all based on inputs and efforts, not results and value.

If I were to take your reading of the professional code to its logical extreme, all lawyers should price equally.  Why do people, though, willingly pay some lawyers more than others?  Is it because they are technically more competent?  For some, this might be true; but for most we believe people pay premium prices for excellence in service—responsiveness, pro-activeness, reliability, accessibility, certainty in delivery, etc.  These characteristics can be modified based upon level of price paid, just as with airlines or American Express’ Green, Gold, Platinum and Black credit cards.  This is more than just being “nice” to your customers.  It’s actually offering them different levels of service based upon the value you create for them.

For example, some doctors are moving to concierge medicine, whereby certain patients pay a premium in order to have certainty in appointment times, access, and in some cases, house calls.  The doctors have to give the same level of technically competent medical care to all their patients—regardless if they are paid by Medicare or privately.  The differentiator is based on access, much like airlines will bribe low-paying customers off the plane in order to accommodate a higher status frequent flyer.

The ways in which you can differentiate your services in order to provide various levels of value to your customers is only limited by your imagination.  Not all customers want Disney level service, but rather prefer Southwest because of its lower price.  Other customers want to be pampered by Ritz-Carlton and demand a lot of hand holding.  We believe the customer has a right to decide, and innovative law firms recognize that not all customers are the same, nor do they want the same level of service.  All do demand the same level of technical competence, and rightfully so—again, it’s a table stake, not a competitive differentiation.

I would like to turn the question around and ask, What is so ethical about hourly billing?  Given the abuses we have seen with this method over the decades, why do lawyers cling to the belief this is an ethical pricing method?  Here are just some of the abuses it fosters:

  • Double billing
  • Overstaffing of lawyers
  • Excessive research
  • Surgeons piercing ears
  • Travel time
  • Attorney conferences
  • Rounding up issues
  • Overhead allocations

As a customer, I get a fixed price from every business I purchase from, including my homeowners insurance, which has earthquake coverage.  My insurance carrier certainly doesn’t know the exact cost of the next earthquake, so they must price based partly on actuarial risk, just like lawyers should in litigation issues.  No insurance company would price based upon hours, since it doesn’t take risk, or value, into account.

I say this with the following caveat:  some legal work must be based on an hourly basis.  Bankruptcy work is done hourly (unless you are representing the creditors); and some litigation where the court has jurisdiction over the fee must usually be done on an hourly basis.  But even here, courts allow different hourly rates based on a host of factors not related to time, and according to the ABA and other sources I’ve read, only 15%, at most, of legal work is subject to this type of judicial oversight.

From an ethical standpoint, let us apply Immanuel Kant’s categorical imperative to hourly billing.  That is, would you want all businesses to universally price by the hour?  The answer is an emphatic no, since customers want to know the price of what they buy before they buy it.  As one lawyer said to me, “I would never buy the way I sell.” That’s profound.  Offering fixed prices to customers in advance, with a fixed scope like contractors and auto mechanics, meets Kant’s categorical imperative, and thus makes it a more ethical pricing strategy.

There is much more I can say about this topic, which is why I have devoted a chapter in each of my books on pricing to ethics.  I’m sacrificing accuracy and completeness in order to give you a more prompt reply.  But rest assured we should keep this dialogue going, and we will post more on ethics and pricing in the future.  In the meantime, we welcome any and all comments on the ethics of hourly billing versus value pricing.


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Comments

Tom "Bald Dog" Varjan

“I would never buy the way I sell.” This is profound and sad at the same time. This is just as unethical as saying, “Do as I say not as I do.”

The sad fact is that there are so many activities that can be performed and sold to “legally layman” clients. Activities that don’t contribute to the improvement in the client’s condition but keep an army of junior lawyers busy and, more importantly, fully billable.

There is no accountability, just putting up a facade of appearing busy and getting paid for that purposeless busy-ness.

It’s like paying $100,000 for major surgery, and then paying another $50,000 to the surgeon because he volunteers to clean up the operating theatre after surgery to fill up and his otherwise empty day and keep himself billable.

Several years ago I consulted with a law firm where lawyers’ lunches were billed to the clients whose cases they were working on when they decided to have lunch.

Coffee, bottled water and toilet paper were billed in the same way. When they needed a new toaster, each client “chipped in” without even knowing about it.

Ron Baker

Hi Tom,

Great point about “Do as I say not as I do,” as well as the lunches billed to clients, etc.  I once knew a law firm in San Francisco that had billing codes on its Coke machine, much like those on the copier.

This is the kind nonsense one is lead to when you believe that efforts and costs equate to results and value.  It’s much easier to count the costs than describe the value.

Far easier to count the bottles than to describe (and value) the wine, as they say around here.

Please keep in touch and submitting great comments!
Ron

Tom "Bald Dog" Varjan

It seems to me that most firms are not willing to take time away from underpriced project work and invest some time and effort to learn how to present their value for the highest perception, thus optimise value-billing.

I have contact, the president of a web design. The firm is so busy competing on price that in order to be able to pay rent and all overheads, they have to work like plough horses to make just enough money to cover payroll and the cost of keeping the shop open. It’s plain retarded but the president believes this is normal and has accepted that this is how it will go for the rest of her life. It’s sad really, but using Earl Nightingale’s words, “We’re not here to uplift the downtrodden.”

You’re on a great mission, Ron and wish you all the strength and resilience to keep going. It’s great to see the success you’ve achieved to get time sheets scrapped in so many firms and to appoint pricing officers.

Now these firms are really professional service firms, not merely mass producers of all sorts of off-the-shelf deliverables based on Karl Marx’s or Frederick Taylor’s obsolete price and production theories.

Cheers

Tom

Ron Baker

Hi Tom,

Thanks again for your comment.  The president of the web design firm you mention sounds like she subscribes to what David Maister calls the “donkey strategy.” That is, by carrying a heavier load we’ll be more prosperous.

It is amazing how few firms pay attention to the value they create, and recognize that pricing is the number driver of profitability in their firms.

As for the mission, it’s not just me, it’s the entire Team at VeraSage, who are help making this revolution happen.  Just as important, it’s individuals such as yourself who are out their implementing these ideas, which provide the ultimate empirical proof they work.

Rest assured we won’t rest until we reach a critical mass of firms that reject hourly billing and timesheets.  Thanks again for your support, Tom.
Ron

Ed Kless

Long quote from Chapter IX of George Orwell’s Animal Farm:

...After his hoof had healed up, Boxer worked harder than ever. Indeed, all the animals worked like slaves that year. Apart from the regular work of the farm, and the rebuilding of the windmill, there was the schoolhouse for the young pigs, which was started in March. Sometimes the long hours on insufficient food were hard to bear, but Boxer never faltered. In nothing that he said or did was there any sign that his strength was not what it had been. It was only his appearance that was a little altered; his hide was less shiny than it had used to be, and his great haunches seemed to have shrunken. The others said, “Boxer will pick up when the spring grass comes on”; but the spring came and Boxer grew no fatter. Sometimes on the slope leading to the top of the quarry, when he braced his muscles against the weight of some vast boulder, it seemed that nothing kept him on his feet except the will to continue. At such times his lips were seen to form the words, “I will work harder”; he had no voice left. Once again Clover and Benjamin warned him to take care of his health, but Boxer paid no attention. His twelfth birthday was approaching. He did not care what happened so long as a good store of stone was accumulated before he went on pension.

...For the next two days Boxer remained in his stall. The pigs had sent out a large bottle of pink medicine which they had found in the medicine chest in the bathroom, and Clover administered it to Boxer twice a day after meals. In the evenings she lay in his stall and talked to him, while Benjamin kept the flies off him. Boxer professed not to be sorry for what had happened. If he made a good recovery, he might expect to live another three years, and he looked forward to the peaceful days that he would spend in the corner of the big pasture. It would be the first time that he had had leisure to study and improve his mind. He intended, he said, to devote the rest of his life to learning the remaining twenty-two letters of the alphabet.

However, Benjamin and Clover could only be with Boxer after working hours, and it was in the middle of the day when the van came to take him away. The animals were all at work weeding turnips under the supervision of a pig, when they were astonished to see Benjamin come galloping from the direction of the farm buildings, braying at the top of his voice. It was the first time that they had ever seen Benjamin excited—indeed, it was the first time that anyone had ever seen him gallop. “Quick, quick!” he shouted. “Come at once! They’re taking Boxer away!” Without waiting for orders from the pig, the animals broke off work and raced back to the farm buildings. Sure enough, there in the yard was a large closed van, drawn by two horses, with lettering on its side and a sly-looking man in a low-crowned bowler hat sitting on the driver’s seat. And Boxer’s stall was empty.

The animals crowded round the van. “Good-bye, Boxer!” they chorused, “good-bye!”

“Fools! Fools!” shouted Benjamin, prancing round them and stamping the earth with his small hoofs. “Fools! Do you not see what is written on the side of that van?”

That gave the animals pause, and there was a hush. Muriel began to spell out the words. But Benjamin pushed her aside and in the midst of a deadly silence he read:

“ ‘Alfred Simmonds, Horse Slaughterer and Glue Boiler, Willingdon. Dealer in Hides and Bone-Meal. Kennels Supplied.’ Do you not understand what that means? They are taking Boxer to the knacker’s!”

A cry of horror burst from all the animals. At this moment the man on the box whipped up his horses and the van moved out of the yard at a smart trot. All the animals followed, crying out at the tops of their voices. Clover forced her way to the front. The van began to gather speed. Clover tried to stir her stout limbs to a gallop, and achieved a canter. “Boxer!” she cried. “Boxer! Boxer! Boxer!” And just at this moment, as though he had heard the uproar outside, Boxer’s face, with the white stripe down his nose, appeared at the small window at the back of the van.

“Boxer!” cried Clover in a terrible voice. “Boxer! Get out! Get out quickly! They’re taking you to your death!”

All the animals took up the cry of “Get out, Boxer, get out!” But the van was already gathering speed and drawing away from them. It was uncertain whether Boxer had understood what Clover had said. But a moment later his face disappeared from the window and there was the sound of a tremendous drumming of hoofs inside the van. He was trying to kick his way out. The time had been when a few kicks from Boxer’s hoofs would have smashed the van to matchwood. But alas! his strength had left him; and in a few moments the sound of drumming hoofs grew fainter and died away. In desperation the animals began appealing to the two horses which drew the van to stop. “Comrades, comrades!” they shouted. “Don’t take your own brother to his death! “ But the stupid brutes, too ignorant to realise what was happening, merely set back their ears and quickened their pace. Boxer’s face did not reappear at the window. Too late, someone thought of racing ahead and shutting the five-barred gate; but in another moment the van was through it and rapidly disappearing down the road. Boxer was never seen again.

Three days later it was announced that he had died in the hospital at Willingdon, in spite of receiving every attention a horse could have. Squealer came to announce the news to the others. He had, he said, been present during Boxer’s last hours.

“It was the most affecting sight I have ever seen!” said Squealer, lifting his trotter and wiping away a tear. “I was at his bedside at the very last. And at the end, almost too weak to speak, he whispered in my ear that his sole sorrow was to have passed on before the windmill was finished. ‘Forward, comrades!’ he whispered. ‘Forward in the name of the Rebellion. Long live Animal Farm! Long live Comrade Napoleon! Napoleon is always right.’ Those were his very last words, comrades.”

Here Squealer’s demeanour suddenly changed. He fell silent for a moment, and his little eyes darted suspicious glances from side to side before he proceeded.

It had come to his knowledge, he said, that a foolish and wicked rumour had been circulated at the time of Boxer’s removal. Some of the animals had noticed that the van which took Boxer away was marked “Horse Slaughterer,” and had actually jumped to the conclusion that Boxer was being sent to the knacker’s. It was almost unbelievable, said Squealer, that any animal could be so stupid. Surely, he cried indignantly, whisking his tail and skipping from side to side, surely they knew their beloved Leader, Comrade Napoleon, better than that? But the explanation was really very simple. The van had previously been the property of the knacker, and had been bought by the veterinary surgeon, who had not yet painted the old name out. That was how the mistake had arisen.

The animals were enormously relieved to hear this. And when Squealer went on to give further graphic details of Boxer’s death-bed, the admirable care he had received, and the expensive medicines for which Napoleon had paid without a thought as to the cost, their last doubts disappeared and the sorrow that they felt for their comrade’s death was tempered by the thought that at least he had died happy.

Napoleon himself appeared at the meeting on the following Sunday morning and pronounced a short oration in Boxer’s honour. It had not been possible, he said, to bring back their lamented comrade’s remains for interment on the farm, but he had ordered a large wreath to be made from the laurels in the farmhouse garden and sent down to be placed on Boxer’s grave. And in a few days’ time the pigs intended to hold a memorial banquet in Boxer’s honour. Napoleon ended his speech with a reminder of Boxer’s two favourite maxims, “I will work harder” and “Comrade Napoleon is always right"—maxims, he said, which every animal would do well to adopt as his own.

On the day appointed for the banquet, a grocer’s van drove up from Willingdon and delivered a large wooden crate at the farmhouse. That night there was the sound of uproarious singing, which was followed by what sounded like a violent quarrel and ended at about eleven o’clock with a tremendous crash of glass. No one stirred in the farmhouse before noon on the following day, and the word went round that from somewhere or other the pigs had acquired the money to buy themselves another case of whisky.

Ed Kless

By the way my point in posting the above long quote is: You can’t just “work harder” when the game is rigged! The president of the web design firm mentioned above and Boxer are/were victims of a flawed/perverse/controlled system.

Tom "Bald Dog" Varjan

Brilliant, Ed. Brilliant. The story is so appropriate. It seems the professional service world is overrun with Boxers.

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