Why Hourly Billing IS Unethical–A Theory

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:

  1. Act only on that maxim by which you can at the same time will that it should become a universal law (e.g., no stealing).

  2. Act so that you treat humanity whether, in your own person or in that of another, always as an end and never as a means only (people are to be respected because they have dignity. Moral agency is what gives humans dignity).
  3. Kingdom of Ends formulation: You should act as if you were a member of an ideal kingdom of ends in which you were both subject and sovereign at the same time.

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.


  1. Ron,
    I would reason that a lot of businesses do not make enough profit because they have no understanding of their costs.

    To track the hour is simply measuring a part of the cost.

    Even the baker was curious to know how much the sausage roll cost him – to find out we had to study the pastry cook in his trade and determine how long it took to make it. The baker had to do it so he could make a wage bigger than the checkout chick – a common problem for small business.

    Costing is important and hours are part of the formula – how can you incorporate intellectual capital into a sausage roll – I mean whoever invented them surely stood on the shoulders of giants?

    Aristotle also states – “virtus stat in medio” – I hasten to interpret this as truth being somewhere in the middle which would support Ric Payne’s thoughts.

  2. Ron Baker says:

    Hi Rod,

    No, the reason a lot of businesses don’t make enough profit is because they don’t have an understanding of their value. This is especially true in professional knowledge firms, whose costs are fixed.

    It doesn’t take a rocket scientist to do cost accounting in an environment that has 95% fixed costs. It is far more complex, however, to understand value, since it requires looking outside the four walls of the firm.

    There are other ways to perform cost accounting than tracking time. And better cost accounting does not lead to better pricing competency. If it did, accountants should be the best pricers. They’re not.

    Again, here’s your problem (and it’s Ric’s too, for that matter): there’s 500+ flesh-and-blood firms that don’t do timesheets. How do they continue to exist? Some of them are the most profitable firms in the world. All of them have a better quality of life without timesheets. Not one will ever go back.

    If you are an empiricist, Rod, these Black Swans should peak your curiosity. Rather than defending a status quo that’s already dying, you should be investigating, with all of your intellectual capacity, how these firms are doing it.

    And again, I used to have your view. I talk about it in the Preface to my latest book, Mind Over Matter, in detail. My view was shattered when I realized that businesses exist to create value, not track costs. And when I read Profit Beyond Measure by H. Thomas Johnson, who studies how Toyota operates without a standard cost accounting system (and no timesheets) I realized how dangerous cost accounting really is. I think Toyota is a bit more complex than a baker or an accounting firm.

    I know it’s heretical, but what is, is. I hope you take the time to further research this topic. You are wasting your time if you think anyone in VeraSage will be persuaded to re-embrace timesheets. We’ve won the argument. It’s just a question of when enough of our colleagues will see the light to create a tipping point.


  3. Firstly – respect to you and the change you have instigated.

    Now in fairness let me respond.

    I am not an empiricist more an impulsive person that buys somethings before Its proven to be good for me. I thought my comments would have left suttle hints about my philosophical tendencies.

    Also your argument about the 500+ firms would suggest that you are an empiricist in justifying your position.

    Indeed I was one of those black Swans (curiously these creatures are the emblem of my birthplace). I embraced your philosophy like an impulse buyer, and founded my firm on that glorious ideal (yes thats right its an “ideal” just like communism is great in theory, unfortunately the perfect circle only exists in the dimension of forms) of having no timesheets. In 2001 I was a black swan and for 2 years practiced in this world of perfect forms (ie no timesheets).

    Now, then, I had a firm of 2-3 people. Now we have grown to 14 people, and I hasten to add that without the re-introduction of the timesheet I wouldn’t have succeeded in such a manner.

    These are some of the issues I grappled with:
    1. When it came time to generate an invoice (even if I did pre quote) I found my pricing was grossly under par as opposed to too much. I, like many other accountants, am not naturally good at pricing and after ripping myself off for two years found timesheets to be a comforting safety net to ensure I didn’t underprice (yes no wonder my clients loved me so much and especially the way I did my pricing complaints were very rare).
    2. I found timesheets to be an extremely valuable resource to fall back on to record my movements for both audit trail purposes and to refresh my memory of what I had been through with the client on their journey in business. My memory is bad and they help me remember things – which also looks a lot better for any authorities scrutinising my practice. Sure I could get away with things being a one man band but to build a serious firm you need to have a degree of “Orthodoxy” which strangely enough I also find comforting, especially after venturing over to the other side!

    So, once again respect to Verasage I wan’t in where do I sign? I love you guys, however you should be careful where you are leading these Swans (Henny Penny?) because I can speak from experience here not just opinion but hard facts experienced in battle. All idealistic systems eventually run out of legs and Aristotle rings true about the truth being in the middle.

  4. Ron Baker says:

    Hi Rod,

    Again, I appreciate your comments and believe I can shed some light on your journey.

    First, let me say that trashing timesheets is not a theory like communism, because we know it works. Many firms have operated before 2001 without them and didn’t bring them back. Once I started to hear about firms that trashed them and brought them back, I did some investigations, and I found two reasons why they did so:

    1) They wimped out on pricing, by quoting prices that were far too low, and not at all commensurate with the value. You confirm this in your comment #1 of issues you grappled with. In fairness, if you underpriced to begin with, is it really because you didn’t have timesheets? Or was it because you hadn’t developed a core competency in pricing to value?

    2) No catching scope creep thereby missing Change Orders.

    These two things will kill a fixed priced change. However, they don’t have much to do with timesheets, and everything to do with getting better and comprehending, communicating and capturing value. #2 is a leadership issue, as well as a project management issue.

    Your comment about a 2-3 people firm going to 14 isn’t at all convincing, since many firms that have trashed timesheets have that many employees, if not more.

    As I write in The Yank Strikes Back post, what replaces timesheets are:

    Price-led costing
    Project management
    Key Predictive (not performance) Indicators
    After Action Reviews
    Before Action Reviews
    Fixed Price Agreements, Change Orders
    Chief Value Officer and/or a Pricing Cartel

    I will admit this was not fully developed back in 2001. We know so much more than we did even 2 years ago about this; it’s constantly evolving and getting better. But only because these firms have stayed the course and learned from their mistakes.

    The problem with going back to timesheets is you will continue to make mistakes, but won’t learn from them. It’s as if Tiger Woods puts one in the lake and throws down his club, exclaiming, “This game is hard.”

    Well, pricing is hard. So is leadership. So is project management. So is developing KPIs that actually predict customer behavior and define the success of your firm the same way they do. These are the right topics to focus on, and timesheets don’t provide any answers whatsoever. They also will never tell you how much money you are leaving on the table.

    I understand your experience, but I think you gave up without really reflecting on why you weren’t getting the results you expected. Most of it lies in weak pricing. Timesheets won’t help you be a better pricer.

    This is not an “idealistic” system, as you say. Its grounded in reality. But I will admit, not all firms have the capacity to do it. It’s obvious to me you do, but you just need some confidence and coaching.

    I would encourage you to contact Brendon Harrex in New Zealand, who runs a firm with 15 employees without timesheets. Also, Peter Byers, who’s firm is 12 employees. You can find them under “People”, Senior fellows. Email them. Call them. Ask them. They will help you.

    The “Orthodoxy” is going to do nothing but hold you back. No young person who is a knowledge worker wants to do a timesheet. No one entered this profession to bill the most hours. You’re eating your young if you don’t change from this “orthodoxy.”

    There’s a lot more I could say, but I’ve said too much. Call Peter and Brendon, and keep in touch.

  5. Thanks for your time, you make good points.

    We have over 60% of our clients on FPA’s and I am interested to learn more.

    If I can find simple, easy to use, and useful measurements I will trash the timesheet again you have my word – but this time I am not rushing in with my eyes closed.

    I will contact those people thank you again you are a legend even for a yank.

  6. Hi Rod,

    You’re quite welcome, but I hope it’s not the time but the value of the intellectual capital you’re thanking me for.

    For KPIs that replace timesheets, see my books Measure What Matters and Mind Over Matter. I think they will answer your questions.

    I’m glad you contacted Peter, he will be able to help you tremendously.

    Keep in touch.


    Interesting discussion Ron and Rod, and it may seem I am sitting in the fence, but I can really see both sides of this debate.

    I am a former Chartered Accountant from public practice, and have grabbled with the no timesheets, fixed price agreements and value pricing issues.

    We have developed a price matrix based upon tasks for all compliance work … idea being to overcome the ‘wimp’ pricing by accountants and to provide a tool for moving away from hour x rate pricing.

    Keeping the timesheets with the task based pricing model is a great tool for measuring the effectiveness of processing compliance work by employees. If person a takes twice as long as person b but the task is priced up front (and consistent across the firm for that) then it is easy to see person a was in fact less effective than person b.

    Rate x Hr pricing on jobs allows person a to hide unless there is a standard measure for the work completed.

    With compliance work the work is often different from client to client, so the trick is having a system that breaks it down into the common and unique elements, and then allocate a value to each. Add up all the tasks and that gives the value for the total job. Simple.

    Firms can then tweak the values assigned until the market will not bear anymore … simple method that accountants can use to set a value fee for complicance work.

    Yes, I know, it is not true value pricing, but accountants need tools that help them get there and this is a start.

    So, this is long, but as for the ethical basis, using the pricing matrix to set the fee in advance also means the client is not overcharged when person a takes twice as long to do the work.

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