President of State Bar of California Calls for Reform of Billable Hour

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?

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