08 Mar Obituary: The Billable Hour
We are gathered here today to say goodbye to the billable hour.
Its death was predicable, given its age, and the change in business practises since it was in its heyday, and brought about by natural causes as we would expect something of a 100 to suffer from.
Born in 1919, the offspring of Boston lawyer Reginald Heber Smith, it was hoped the billable hour would help him diagnose and correct ills in his firm.
It started life nursed by the ‘scientific management’ unit and grew up mentored by the followers of Frederick Winslow Taylor and his time-and-motion studies of the late 19th century.
Perhaps that cosseted beginning was the reason for the delayed maturity, which only occurred when the billable hour was 40. It was in 1945 that it hit the news when New York law firm Shearman & Sterling officially adopted timekeeping and by the next decade the billable hour was welcomed into the hallowed halls of most firms.
Living the high life
The very first job of the billable hour was to measure and control the “inventory” of firms who had welcomed it, 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 perhaps it was only a matter of time before problems started to appear. When famed management consultant and author Peter Drucker came along, drawing strong distinctions between manual work and knowledge based work, the complexities of the billable hour began to emerge.
By the turn of the millennium, as the billable hour reached old age, it became increasingly clear to thinking professionals that using the billable hour as the primary revenue model was not going to work as its internal functions started to fail. It was sick, and the sickness was terminal.
Those diagnosing what was going wrong with the billable hour discovered a number of symptoms which resulted in the terminal diagnosis:
- It misaligns the interests of the professional and the client. What suits the firm is the opposite of what suits the client: hours.
- 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: they pay regardless of results.
- It fosters a production mentality, not an entrepreneurial spirit.
- It penalises efficiency. The faster the firm can solve a problem, based on deepening expertise, the less the firm earns.
- It commoditises the firm’s talent and intellectual capital into a unit of time, whose payment is not aligned with income, 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 business instead of effectiveness and accountability.
- It discourages innovation. With time constantly measured, a professional’s motivation is to be “billable,” not innovative and not effective.
- 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 incentivises 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.
The Cost of Life Support
Keeping the billable hour alive is expensive: somewhere close to twelve percent of a firm’s gross revenues are spend supporting timekeeping and billing. As consultant John Chisholm observes, this means you could discontinue time tracking and give your whole firm a month’s holiday with no loss of profit. Better still you could invest it in training, technology, and other initiatives that would make a real contribution to your long-term success.
Was death inevitable?
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, and possibly don’t even bother to switch them off at night, such is their lack of consideration for efficiency and sustainability. These firms probably have lucrative public sector contracts.
Companies that stick to this model won’t be optimising their success, and will experience the multitude of undesirable consequences that will eventually spell the death of an incredibly suboptimal approach.
When it comes to a long and healthy life, the billable hour’s lifestyle just could not support it. And so we say goodbye.