An Obituary for the Billable Hour
LinkedIn Article by Tim Williams
October 31, 2016
Here lies the billable hour. It died a slow and predictable death, brought about by natural causes. The billable hour would have turned 100 in just a few years. Born in 1919, it is the offspring of Boston lawyer Reginald Heber Smith, who was hoping his creation would help him diagnose and correct certain ills in his firm.
In its youth, the billable hour was nurtured by the “scientific management” movement, receiving significant mentoring from the followers of Frederick Winslow Taylor and his time-and-motion studies of the late nineteenth century.
It took 40 years for the billable hour to reach maturity. In 1945 the New York law firm Shearman & Sterling made news by officially adopting timekeeping. By the 1950s, the billable hour was welcomed into the hallowed halls of most firms.
A Chronic Condition
The very first job of the billable hour was to measure and control the “inventory” of the firm but soon was promoted to become the inventory itself. By the time the billable hour reached middle age, it was living the high life inside professional firms of all kinds, from law to accounting to consulting. In advertising, the iconic David Ogilvy took credit for introducing the billable hour to the agency business.
But when luminaries like Peter Drucker came along, drawing strong distinctions between manual work and knowledge work, the complexion of the billable hour began to change.
By the turn of the millennium, it became increasingly clear to thinking professionals that as a primary revenue model, the billable hour was sick and unlikely to recover. The list of symptoms is a long one:
- It misaligns the interests of the professional and the client. What the firm wants more of (hours), the client wants less of.
- It focuses on efforts, inputs, hours, costs, activities, rather than what clients really buy: outputs and results.
- It places all the transaction risk on the client.
- It fosters a production mentality, not an entrepreneurial spirit.
- It penalizes advances in the firm’s effectiveness. The faster the firm can solve a problem, based on deepening expertise, the less the firm earns.
- It commoditizes the firm’s talent and intellectual capital into a unit of time, which significantly reduces the firm’s ability to differentiate itself from the competition.
- It places an artificial ceiling on a firm’s income since there are only so many hours in a day.
- It rewards "busyness" and utilization instead of effectiveness and accountability.
- It discourages innovation. With time constantly measured, a professional's motivation is to be "billable," not innovative.
- It provides no useful information about what really matters, such as the quality of the work, the satisfaction of the client, or the effectiveness of the firm.
- It incents the wrong allocation of resources. Instead of assigning the talent that can most effectively solve the problem, firms assign people the client can "afford."
- It builds silos and produces a disincentive to collaboration. The goal becomes coming in “on estimate” rather than drawing on internal brainpower that can solve client problems.
Costly Life Support
Finally, keeping the billable hour alive is expensive. Think about how much you invest in your firm to feed the timekeeping and billing system. Somewhere close to 12 percent of a firm’s gross revenues are spent supporting the timesheet system. As consultant John Chisholm observes, this means you could discontinue time tracking and give your whole firm a month’s vacation with no loss of profit. Or better still you could invest it in training, technology, and other initiatives that would make a real contribution to your long-term success.
Can you run a business billing by the hour? Obviously, yes — this ailing revenue model manages to sustain countless thousands of professional firms who turn their lights on every morning. It’s just that you won’t be optimizing your success, and you’ll experience the multitude of undesirable, unintended consequences that will eventually spell the death of an incredibly suboptimal approach.
Thanks to my colleague Ron Baker whose tireless research on this topic provided much of the background and inspiration for this article.