Hourly Billing: The Perfect Crime?
The Wall Street Journal reported on August 30, 2006 that Matthew Farmer, a 42-year old junior partner in the Chicago office of Holland & Knight, accused the firm of padding its timesheet and billings on a trial for home builder Pinnacle Corp. You can find the article, and the Journal's blog, with comments, here.
You can also read CEO of Exemplar, and VeraSage Fellow, Chris Marston's reaction to the article at his blog.
The article quotes William Ross, Samford University Cumberland School of Law in Birmingham, Alabama, who calls hourly billing "the perfect crime." I wrote about this extensively in my book, Professional's Guide to Value Pricing, where I quoted Ross' conclusion from his book The Honest Hour:
Despite its potential for abuse, time remains the best means for billing clients. Hourly billing therefore ought to be reformed rather than abandoned (Ross, 1996: 263).
He even goes so far as to suggest that lawyers keep track of every single minute of their time in order to keep billing by the hour honest. This reminds me of what George Orwell once wrote: "One has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool."
Ethical problems arise in hourly billing due to the misalingment of interests created by the system. Attorneys may not have malevolent motives when engaging in padding their hours. Ross says that "much overbilling is the result of attorneys' failure to understand the reals goals and needs of their clients" (Ross, 1996: 53). How sad is that?
The problem is that professionals pad their timesheets because they know that the value of the service they provide is worth more than the time spent. If that is the case, then the solution is not to try to cope with the ethical issues of hourly billing but to scrap hourly billing entirely and reach a price agreement with the customer before the service is provided. What a concept. Just like every other business on the planet!
You can apply make-up to a pig, but you still have a pig. The billable hour is flawed because it is based on the labor theory of value. There is no economically rational or sane way to "reform" it; it must be replaced with superior pricing strategies. One wonders whether two attorneys leaving a movie together would be timid about expressing their opinions on the movie. According to the labor theory of value, the movie should be equally valuable to both because it took the same amount of production time. Obviously, this is bad economic logic, and contradicts the subjective theory of value.
The value of any professional service is that which is agreed upon by the parties to the transaction. If both parties do not feel like they are benefiting from the exchange, it will not take place.
The strategies VeraSage advocates are the following:
- Ascertaining customer expectations up-front
- Agreeing to scope of work up-front
- Using Change Orders when that scope changes
- Agreeing to price up-front
The above are the rational alternatives to the ethical quandries raised by the obsolete hourly billing model. Value Pricing requires character, integrity, honest dealings, better communication, and a sense that the firm knows the value of the services it provides. These traits are far less likely to be cultivated with the use of hourly billing.
How many more ethical scandals must be uncovered before the legal profession changes it reigning paradigm from the labor theory of value to the subjective theory of value, and begins offering prices up-front to the customers it is privileged to serve? The billable hour is a Hobson's choice. It's time the profession chose Value Pricing.
