The Bottom Line: Beyond the Billable Hour

I’m happy to be the cover story in this issue of the State Bar of California’s Law Practice Management and Technology Section. You can even earn an hour of MCLE reading my article (I flunked).

VeraSage is quoted throughout the issue, including Mark Chinn and Jay Shepherd, and Exemplar Law gets a mention, too.

It’s also encouraging to see so many “director of pricing” folks who are quoted throughout the articles.

But reading through the articles has been less than encouraging. Here are some brief comments on each article.

Will Hoffman: I’ll let our lawyers comment on the “comprehensive petition pending” to the California Supreme Court. But the fact that the Bar should acknowledge and encourage Alternative Fee Arrangements (AFAs) is, I suppose, progress, even though it lags way behind the free market.

Ed Poll: “All pricing is arbitrary.” What? This would come as a shock to the thousands who work as professional pricers. Why are they needed then? We’ll just let computers do it all.

Poll is still stuck, like most of the other authors, in an Industrial Era mindset of efficiency and cost cutting. There’s no mention of why or how knowledge work and knowledge firms work differently then Henry Ford’s factories.

This worldview invalidates nearly everything he writes about value and pricing.

Dr. Silvia Hodges: Silvia interviewed Mark Chinn for her article, along with Pat Lamb, and she mentions Exemplar Law. She quotes the ACC’s definition of value, which is unnecessarily complex. The ACC has yet to understand that all value is subjective, and they continue their quest to provide a checklist to quantify and qualify value.

She writes:

The purpose of AFAs is not to reshape a firm’s business model—although this is exactly what it might do in some firms—but to meet clients’ needs.

But Value Pricing is a business model change; it’s much more than just meeting the needs of clients. It’s also about meeting the needs of the professionals who work in those firms, as well keeping the profession relevant.

One of the reasons why so many of these articles are muddled is because they seem to get the idea of value being externally determined, but they miss the concept when the work comes back into their firms. They insist on applying Industrial Era, Six Sigma, and cost accounting principles to that same work. This is a prescription for failure, since it’s a contradiction to the theory of a Professional Knowledge Firm.

She also cites Pat Lamb, and if he’s right that most firms’ work is not customized, then their value is on the low-end of the Value Curve. But even here, a firm can utilize Value Pricing—see Southwest’s pricing on any flight offering a wide range of offerings.

But I believe Lamb to be wrong. The work that adds the most value is, by definition, customized and represents the applied judgment of experienced lawyers. To apply cost accounting principles to such work is to misunderstand—at the most fundamental level—the patterns and cadences of knowledge work.

Henry Turner, Jr.: Henry is with Valorem Law Group, and writes:

A proper value fee will not involve adding up the number of hours you think a matter will take and then quoting a fixed fee based on those hours. That is simply a “wolf in sheep’s clothing.” If you commit to pricing on a value basis, you can no longer think about pricing in terms of hours.

True. Why, then, does Valorem continue to maintain timesheets? He who says A must say B, and if hours are meaningless externally to the customer, they are also meaningless to the internal workings of a knowledge firm.

He uses the Apple store and iPhone as an example, but here’s the point that he and the rest of these authors are missing: the Apple store employee is not told to spend less time with you to lower costs and make more profit.

Rather, she’s taught to spend as much time with you as necessary, and Apple considers this cost an investment in the lifetime value of the customer.

Tracking time, and cost accounting, destroys this attitude, which is Paul Kennedy’s point in this brilliant essay. Read this essay and you won’t have to pick up a book on Lean Six Sigma.

Donna Seyle: Jim Hassett is quoted as saying he’d switch to hourly billing for his business in a heartbeat?

Wow, this is truly ignorant, as hourly billing is suboptimal for capturing value. The entire pricing revolution was started to move away from cost-plus pricing, not to hold it closer.

It also makes me wonder why he is spending so much time writing on Value Pricing and encouraging firms to make the change? The cognitive dissonance is indefinable.

Donna suffers from the same efficiency and cost containment mindset as the others in this issue. She also writes that a lawyer’s knowledge has “intrinsic value.” But nothing in this world—except for human life—has intrinsic value. Value is subjective.

Reading these articles illustrates the importance of linguistics. These authors will never truly understand the subjective theory of value if they continue to hold on to their existing vocabulary of commodization, cost control, efficiency, lean six-sigma, etc.

What do you think?


  1. Ron,

    No disagreement on your overall premise, but I do take issue with this particular statement:

    “…if hours are meaningless externally to the customer, they are also meaningless to the internal workings of a knowledge firm.”

    Substitute the word “costs” for “hours” and try to apply this to any other industry, and the falsehood of this statement becomes apparent. Any organization’s internal costs are meaningless externally to its customers, yet surely all organizations need to be concerned about their costs or they will soon be out of business. In a knowledge firm, hours are costs. Now before you dispute this, true, a given employee that is already on the payroll and spends extra time with a client is not generating incremental cost, BUT the time requirements of each client dictate how many people you need on the payroll to begin with.

    On a related note, I like your example of the Apple store employee as it theoretically liberates the knowledge firm employee to spend extra time with a client to add value. But by the same token,the management of the Apple store clearly needs to understand how much time – on average – is typically spent with each customer so that he or she can figure out how to staff the store.

    My point being, just because costs/hours are “meaningless” to the customer does not mean that they are “meaningless” to the organization as you stated.

    Jim Caruso

  2. Jim,

    You’re my favorite cost accountant! Here’s the problem: you say “hours are costs.”

    Ok, that’s progress (at least you’re not arguing hours = value). If hours are costs, than tracking hours is dividing a cost by a cost. That allocation makes no sense. Think about this for a while.

    Fixed costs are meaningless, and certainly costs allocated by hours are even more meaningless, to the pricing function. That was my point; I should have been more precise.

    But I still think you are confusing “time spent” with “duration.” The customer cares about the latter, not the former. So should a firm.

    I highly doubt Apple Stores measure the time spent with customers. In fact, organizations like Zappos, Ritz-Carlton, Nordstrom, Disney, Nieman-Marcus, etc., pride themselves on giving one-on-one personal attention, even though it’s less “efficient.” Disney has tons of stories on this that I’ve heard personally at Disney University.

    Stop worrying about your costs and staffing needs. You’ll know (and so will your team) when you need more people. It’s obvious if you’re a good manager, no?

    Focus on value, and costs (and cost allocations) do become meaningless, as the thousands of firms who operate without cost accounting prove.

  3. Richard Green says

    Fixed costs are time-related (measured in units of $ per year) but are ?fixed? within the relevant period (a year), and are independent of level of production (measure in units X per year, where ?X? is the unit of whatever is the firm?s product).

    If the firm?s product is billable time and X is the billable hour, we have a problem: time divided by time; an arbitrary pure number, ?N?, which is the number of billable hours per year. And the cost of each billable hour, attributable to fixed costs (which are the vast majority in a service industry), is inversely proportional to N.

    There is, of course, an absolute upper limit on N: 8,760, the number of hours in a year. N, expressed as a proportion of this, measures the utilization ?U? of, say, a worker. 1-U measures that worker?s idling (perhaps allowing for sleep and leisure). U is independent of the number of workers in the firm.

  4. Thank you to tell us so much useful information. I’m glad to read it.

  5. Of course, an overall maximum on N: 8,760, the variety of time in a season. N, indicated as a percentage of this, actions the usage ?U? of, say, a employee. 1-U actions that worker?s idling (perhaps enabling for rest and leisure). U is separate of the variety of employees in the company.

  6. My point being, just because costs/hours are ?meaningless? to the customer does not mean that they are ?meaningless? to the organization as you stated.

  7. A great post without doubt. The information shared about iphone is of top quality which has to get appreciated at all levels. Well done keep up the good work.

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