Even the father of the billable hour understood Value Pricing

As promised in my prior post, I want to follow-up on the book I’ve now read by Reginald Herber Smith, the father of the billable hour and timesheet in the legal profession.

For those of you interested in more detail on Reginald Herber Smith’s book, Law Office Organization, a detailed review can be found here.

Smith Priced on Purpose…sort of

The Service lawyers render is their professional knowledge and skill, but the commodity they sell is time, and each lawyer has only a limited amount of that. Efficiency and economy are a race against time. The great aim of all organizations is to get a given legal job properly done with the expenditure of the fewest possible hours.

In spite of Smith’s insistence to keep timesheets in tenth-of-hour increments, and his belief that the commodity lawyers sold was time, his views on pricing are more nuanced, since he also knew there was more to pricing than the labor involved.

Even though he’s credited with creating the billable hour, he did primarily use the timesheet as a cost accounting tool, not a pricing method. Here’s how I know this—Smith wrote:

The trouble is that legal services, with few exceptions, cannot be standardized. No two cases are exactly alike. The time necessarily spent, the responsibility assumed, the amount at stake, the skill required, the result—all these are variables.

In arriving at a conclusion, the report on what it cost to do the job is an illuminating and steadying factor. For the exact determination of a bill there probably is no perfect answer, but I know of no better method than open discussion with one’s partners and associates.

[Later in Chapter 4 Smith writes], That is the cost. Maybe the bill will be more than that; if so there is a profit. Maybe it will be have to be less; if so there is a loss. In practicing a profession, knowledge of cost is a helpful guide towards arriving at a fair bill but it’s not a determinant [emphasis added]. However, if the bill must be below cost, the firm at least knows what it is doing.

The variables Smith writes about are now codified in the ABA’s Model Rules of Professional Conduct. Here’s what Rule 1.5 says about “fees”:

  • A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses. The factors to be considered in determining the reasonableness of a fee include the following:
  1. the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly.

  2. the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer.
  3. the fee customarily charged in the locality for similar legal services.
  4. the amount involved and the results obtained.
  5. the time limitations imposed by the client or by the circumstances.
  6. the nature and length of the professional relationship with the client.
  7. the experience, reputation, and ability of the lawyer or lawyers performing the services. and
  8. whether the fee is fixed or contingent.

I count fifteen different variables in the above list, but which one gets all the attention? The only one that can be measured—time involved.

Not even the ABA’s own rules mandate lawyers only look at time. Those fourteen other variables have an enormous impact on the value—and hence the price—a customer is willing to pay.

Proponents of hourly billing are just being lazy. They choose to be precisely wrong with their hours rather than approximately right by taking into account other factors. Even the father of the billable hour understood this.

When will the rest of the profession get it?

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