Billing by the hour: should it become obsolete?

[Odyne]

I am sharing because I thought this was an interesting read. From the New York Times.

What’s an Idea Worth?

By ADAM DAVIDSON

Like a lot of accountants, Jason Blumer never really wanted to be an accountant; he wanted to play guitar in a hair-metal band. But like most guys who want to play guitar in a hair-metal band, Blumer eventually realized that there wasn’t much money in touring bars and being paid in beer-smeared $20 bills. So he changed gears and decided to follow his dad into what seemed like one of the more steady businesses around. After college, he bought some suits, joined a midsize firm in South Carolina and processed his clients’ payroll and tax returns. He billed them by the hour. He hated every second of it.

Blumer, 42, wanted to infuse a bit more rock ’n’ roll into his industry. So when he eventually took over his father’s small firm, he made his own rules: There would be no time sheets, no dress code and, most radical of all, no billable hours. He was convinced, in fact, that the billable hour was part of a series of mistakes that took all the fun out of his profession. To him, it seemed like a relic of a dying economic age and one that was depriving his industry of billions in profit.

The notion of charging by units of time was popularized in the 1950s, when the American Bar Association was becoming alarmed that the income of lawyers was falling precipitously behind that of doctors (and, worse, dentists). The A.B.A. published an influential pamphlet, “The 1958 Lawyer and His 1938 Dollar,” which suggested that the industry should eschew fixed-rate fees and replicate the profitable efficiencies of mass-production manufacturing. Factories sold widgets, the idea went, and so lawyers should sell their services in simple, easy-to-manage units. The A.B.A. suggested a unit of time — the hour — which would allow a well-run firm to oversee its staff’s productivity as mechanically as a conveyor belt managed its throughput. This led to generations of junior associates working through the night in hopes of making partner and abusing the next crop. It was adopted by countless other service professionals, including accountants.

During the past few decades, as the economic logic of the United States has changed, global trade and technology have made it all but impossible for any industry to make much profit in mass production of any sort. (Companies like G.E., Nike and Apple learned early on that the real money was in the creative ideas that can transform simple physical products far beyond their generic or commodity value.) Similar forces have ripped through professional services, particularly accounting, a profession that, until recently, was little changed from its 16th-century roots. Software like Turbo*Tax has made the most basic work worth little. Cheaper accountants in India, Ireland, Eastern Europe and Latin America have steadily taken over the more routine types of business, though not quite as voraciously as once predicted.
Just as Apple doesn’t want to be in the generic MP3-player business, Blumer didn’t want to be just one more guy competing to charge a few hundred dollars an hour to do your taxes. A few years ago, he said, he realized that the billable hour was undercutting his value — it was his profession’s commodity, suggesting to clients that he and his colleagues were interchangeable containers of finite, measurable units that could be traded for money. Perhaps the biggest problem, though, was that billing by the hour incentivized long, boring projects rather than those that required specialized, valuable insight that couldn’t (and shouldn’t) be measured in time. Paradoxically, the billable hour encouraged Blumer and his colleagues to spend more time than necessary on routine work rather than on the more nuanced jobs.

But those complex problems were the ones that Blumer wanted to solve, and he also knew his insights were more valuable than the time it took him to conjure them. So he identified a niche — creative professionals who struggled to manage their finances as their start-ups became mature businesses — and he endeavored to help his clients make (and save) enough money that they would gladly pay a significant fee without asking about the hours it took him to figure out what to do. Blumer has been so successful in his approach that he has become a leading voice among a national band of accountants who call themselves the Cliff Jumpers. Many Cliff Jumpers have abandoned the traditional bill-by-the-hour approach to focus on noncommodity accounting solutions for specific client groups. One focuses on entrepreneurs hoping to sell their new businesses; several work with people who are terrified about starting a small business.

Perhaps without realizing it, the Cliff Jumpers are at the forefront of one of the great challenges of modern economics. Measuring productivity is central to economic policy — it’s especially crucial in the decisions made by the Federal Reserve — but we are increasingly flying blind. It’s relatively easy to figure out if steel companies can make a ton of steel more efficiently than in the past (they can, by a lot), but we have no idea how to measure the financial value of ideas and the people who come up with them. “Compared with the mid-1900s, goods production is not as important a part of our economy, but we continue to devote about 90 percent of our statistical resources to measuring it,” says Barry Bosworth, a Brookings Institution economist who is a leading thinker on productivity in the service sector.

Many economists have tried to break professional “knowledge workers” down into their component parts. It’s fraught enough with lawyers and accountants, Bosworth says, but it’s all but impossible with other professions, like doctors and teachers. “We don’t even try with education,” he says. In the meantime, the Bureau of Labor Statistics directly measures the productivity of only 60 percent of U.S. industries, which means that nearly half of our economic activity is unknown, including almost all of the fastest-growing sectors. If education and health care are not becoming more productive, as many economists fear, it will be hard to know if government policies to improve those sectors are working without knowing what to measure in the first place.

During the 20th century, industry started out in small workshops that created unique handcrafted products. Over time, they morphed into massive plants that churned out a countless number of identical units. Now there’s a synthesis. In the era of mass specialization, companies are using high-tech efficiencies to make customized products that each consumer finds especially valuable. This has enormous advantages for both consumers and producers, but the big problem it creates is that we don’t know how to do the math. Blumer, who, after all, is an accountant, told me that set formulas and financial spreadsheets are just not compatible with this new approach to work. He can only figure out what to charge his clients after spending a lot of (unbilled) time talking to them about their needs. But now that it’s clear that the fundamental nature of work has changed, it is fitting that a bunch of rogue outliers from one of the world’s oldest professions are helping guide the way.

Do you feel that this applies to your profession? If yes, how so?


Feel free to comment, discuss, wonder or quietly reflect. Enjoy.

 

[Gaze]

I think the idea that working 40 hrs a week and down to the very minute is problematic. That's a poor judge of productivity. You can sit in one place for 40 hrs and not get anything done or work extremely hard and accomplish a ton in 40hrs, and still get the same pay. That's inherently unfair to anyone. On the other hand, if we pay per project and per quality then the assumption is, the quality must always be good or superior to have a regular income coming in. A business usually has to be established and consistent expeerience profit and require a good per project pay to sustain a living. Additionally, if you are in a job which depends on subjective evaluation of quality or productivity, you may be hurt more than helped by that policy since you can work very hard, and put in overtime on a project and yet the outcome or result of all the hard work is not considered satisfactory or measured as being of sufficient or high quality. And someone could then justify paying you less because they are paying for the result or outcome not for all the work you've put in. So, it also depends on who is evaluating productivity and outcomes and what criteria is being used to evaluate productivity or satisfaction of outcomes. Unfortunately, many companies prefer to have workers sit in the same place for 8 hrs, going crazy doing routine, monotonous work, where you lose brain cells, than be at home working the same amount of hours since you are less likely to be completely focused on the job and apparently less likely to be as committed or involved or productive because of course, being productive means completely focused on the same job or task for hours. That's the definition of productivity. Problem, we judge quality or productivity by what we SEE people doing only, not also considering WHAT they do to get something done which is not always seen.

 

[this is only temporary]

Hmph, yes, I suck at tracking every last minute of time spent, thus, accountants hate me. Much too vague.

However.

If you don't know how much time you spend doing something, you can't know how much energy you spend, and you can't know if you're being paid fairly for the time and energy invested. And you don't get time back.

It's really a problem if you are a freelancer or a small business trying to decide to take on a client or not, you can unintentionally get really screwed. It's never a good idea to work for a loss, whether you're working for yourself or an employer, you have to make sure the math works out in your favor. If it doesn't, go elsewhere.

That said, it's better to bring passion and knowledge and curiousity to what you do than it is to track every last minute spent, because despite what most accountants would prefer, you really can't measure everything. There are many intangibles!

 

[SpecialEdition]

I think that concept is very interesting. I am constantly contemplating ways I can get out of a 40 hour work week because it's cramping my style in a serious way. The only alternatives I can come up for my particular skill set are writing. Everything that I can conceive of for myself personally involves having some kind of audience or followership. I've also debated getting into coaching which would follow along the lines of selling an idea rather than a day to day dragging my heels sort of job or service. I like the idea of eliminating billable hours but I don't think most people have the creative capacity or ability to function without a set schedule... I guess that makes it easier for those of us who want to pave our own way.

 

[Korg]

I don't bill by the hour in my business either. The biggest reason:

It's a big hassle if ethics matter at all. I mean, what's considered fair / reasonable when billing a client for time that wasn't actually spent working (which is inevitable)? Let's say I'm charging $25/hr. Do I start the clock the minute I sit down and then stop it when I get out of my chair to go to the kitchen? What if it's only a ten minute break? Ten minutes doesn't sound unreasonable, but if I tell my client he just gave me $4.16 to eat two pickles and pet my cat, he might not like it. In a typical working day, it could reach $20.00. In a working week, it might be $100.00.

Sure, I could start and stop the clock but, again, it's a hassle. That kind of clock-watching bullshit is part of the reason I undertook freelancing in the first place.

Moreover, there are dozens of these breaks all the time. Some of which fall into grey territory in terms of fair / reasonable. For example, let's say the client sends me a file that requires an apple computer. I don't have one. So I email him stating I need a PC version and it takes us 3.5 hours of going back and forth to get the right file to me with the right codec installed and all that. Do I bill him $87.36 since that "time" was still work-related even though nothing really came from it?

I don't know how it is for others, but there are literally hundreds of minor problem-solving cases like this in my line of work. To me, it's work-related enough to bill for it. Hardly any client will see it that way. Even if it we did establish what was / wasn't work, I'm not going to enjoy having to constantly start and stop some clock all the time, let alone race it so I don't lose profits.

I think paying-per-project alleviates most of the above and also establishes 'good faith' between me and the client. They pony up the money via milestones throughout the project (I usually break it down into four milestones) and then let me worry about everything else. Some days, I might work ten hours with two breaks and some days I might work two hours with ten breaks. The client needn't concern himself with how or when I'm working, he need only pay the agreed upon amount and then completely forget about it until I have results ready. It's way, waaayyy easier like this. Especially because my working schedule can be erratic as hell (latent P : ) )

It also establishes a good faith relationship since we're both vulnerable to each other in different ways and the mutual benefit is measurable.

 

[this is only temporary]

Korg, I like your way of doing things. In my line of work it is important to make sure you don't experience scope creep or you could find a project that you budgeted 10 hours for is suddenly taking 100 and you're making like $2 an hour. (in my work, anyway)

That's why it's good to clearly define what's expected and if the scope starts changing massively you can be protected from that kind of scenario. But it would be ridiculous to nickel and dime clients to death, or be nickeled and dimed to death yourself, that does not build trust at all. I try to avoid working with people who operate that way.

 

[rawr]

I don't bill by the hour in my business either. The biggest reason:

It's a big hassle if ethics matter at all. I mean, what's considered fair / reasonable when billing a client for time that wasn't actually spent working (which is inevitable)? Let's say I'm charging $25/hr. Do I start the clock the minute I sit down and then stop it when I get out of my chair to go to the kitchen? What if it's only a ten minute break? Ten minutes doesn't sound unreasonable, but if I tell my client he just gave me $4.16 to eat two pickles and pet my cat, he might not like it. In a typical working day, it could reach $20.00. In a working week, it might be $100.00.

Sure, I could start and stop the clock but, again, it's a hassle. That kind of clock-watching bullshit is part of the reason I undertook freelancing in the first place.

Moreover, there are dozens of these breaks all the time. Some of which fall into grey territory in terms of fair / reasonable. For example, let's say the client sends me a file that requires an apple computer. I don't have one. So I email him stating I need a PC version and it takes us 3.5 hours of going back and forth to get the right file to me with the right codec installed and all that. Do I bill him $87.36 since that "time" was still work-related even though nothing really came from it?

I don't know how it is for others, but there are literally hundreds of minor problem-solving cases like this in my line of work. To me, it's work-related enough to bill for it. Hardly any client will see it that way. Even if it we did establish what was / wasn't work, I'm not going to enjoy having to constantly start and stop some clock all the time, let alone race it so I don't lose profits.

I think paying-per-project alleviates most of the above and also establishes 'good faith' between me and the client. They pony up the money via milestones throughout the project (I usually break it down into four milestones) and then let me worry about everything else. Some days, I might work ten hours with two breaks and some days I might work two hours with ten breaks. The client needn't concern himself with how or when I'm working, he need only pay the agreed upon amount and then completely forget about it until I have results ready. It's way, waaayyy easier like this. Especially because my working schedule can be erratic as hell (latent P : ) )

It also establishes a good faith relationship since we're both vulnerable to each other in different ways and the mutual benefit is measurable.

the only issue with this is in support or technical scenarios that are not always clearly defined project and don't have explicit SoWs (Statement of Work.)

I could say I'd charge you $100 to fix your computer, based on what I think the issue is, but if something else arises, and labour ends up being a lot more than expected, should i not charge you for that?

That being said, i know some shops that charge a small fee for diagnostics, and go on a per assignment basis once the issue's confirmed.

 

[sprinkles]

the only issue with this is in support or technical scenarios that are not always clearly defined project and don't have explicit SoWs (Statement of Work.)

I could say I'd charge you $100 to fix your computer, based on what I think the issue is, but if something else arises, and labour ends up being a lot more than expected, should i not charge you for that?

That being said, i know some shops that charge a small fee for diagnostics, and go on a per assignment basis once the issue's confirmed.

Yeah it works crazy in reverse too.

At one point I was working on about 300 MLM template sites and the parent company decided that for certain terms on all the sites, all the circle R's had to be changed to small TM symbols. They were freaked out about this and thought it was a big deal - it was several thousand iterations to locate and change.

It took me all of a few minutes to write a small script to automate it. The machine did the rest.

 

[rawr]

Yeah it works crazy in reverse too.

At one point I was working on about 300 MLM template sites and the parent company decided that for certain terms on all the sites, all the circle R's had to be changed to small TM symbols. They were freaked out about this and thought it was a big deal - it was several thousand iterations to locate and change.

It took me all of a few minutes to write a small script to automate it. The machine did the rest.

so how did you handle the situation?

 

[sprinkles]

so how did you handle the situation?

Well I was being paid by the hour and ended up filling that hour with mostly other stuff, so it didn't really matter.

It would have been different if that were my only job with them for the day though.

 

[sprinkles]

Also there's an issue with non-professionals hiring professionals. In my case above I could have held them over a barrel because they knew nothing about computers, and thought this would be hard. I could have arbitrarily said "Yeah this is hard! It's going to take me a lot of work!" and then proceed to faff about. Fortunately I don't do that.

 

[rawr]

Also there's an issue with non-professionals hiring professionals. In my case above I could have held them over a barrel because they knew nothing about computers, and thought this would be hard. I could have arbitrarily said "Yeah this is hard! It's going to take me a lot of work!" and then proceed to faff about. Fortunately I don't do that.

yeah, i think that's a given.

For the sake of the topic right now, let's assume you're an integrous

Spoiler

eff you firefox, that is a word

worker (i know, not always reality) and want to do the right thing.

How would you handle a situation in which your SOP was billable hours, but the job took either much longer or shorter than expected? What would be the best ways about this?

 

[sprinkles]

yeah, i think that's a given.

For the sake of the topic right now, let's assume you're an integrous

Spoiler

eff you firefox, that is a word

worker (i know, not always reality) and want to do the right thing.

How would you handle a situation in which your SOP was billable hours, but the job took either much longer or shorter than expected? What would be the best ways about this?

Depends on how personable and flexible they are, and if there's any stipulations under some sort of contract.

Some people get paid for full hours without fractions, and this is agreed upon and known by the employer. So 10 minutes is still an hour. My dad currently gets paid like this, but he's piloting a boat around and is some times on for 20 hours straight so it averages out. He's also allowed to credit work hours when there's no work, in a sense being paid for work that will be done in the future during slow times.

Best thing I think - if you're self employed or flexible - is to just make the employer aware and arbitrate an agreement. Some times they just pay you full hours anyway because they're happy with you and the fact that it is done. They might be able to offer some form of credit or other reward.

Also some larger companies simply don't care and write it off because they're fully aware that this is a hazard.

 

[Nixie]

I find it difficult to credit the article since they are talking about niche work within the accounting field. I think it depends on the situation and whether or not you are confident in your ability to set a flat fee for the work being offered. Figuring out a baseline of overhead cost with profit attached is a must for every business that sells something (whether tangible or intangible) and I doubt that figuring the amount of a billable hour will go away anytime soon. However, there is little chance of creating opportunities for brilliance within the work office if one confines itself to simply billable hours (basically contract work in a sense), so I understand the bent toward seeing moving away from such a concept appealing. Ingenuity is generally not found in anything that is micromanaged down to counting minutes. However, to be successful in a more a la carte work environment, the provider of goods/services better be able to define the point where effort/cost and profit exist to be successful.

 

[sprinkles]

I find it difficult to credit the article since they are talking about niche work within the accounting field. I think it depends on the situation and whether or not you are confident in your ability to set a flat fee for the work being offered. Figuring out a baseline of overhead cost with profit attached is a must for every business that sells something (whether tangible or intangible) and I doubt that figuring the amount of a billable hour will go away anytime soon. However, there is little chance of creating opportunities for brilliance within the work office if one confines itself to simply billable hours (basically contract work in a sense), so I understand the bent toward seeing moving away from such a concept appealing. Ingenuity is generally not found in anything that is micromanaged down to counting minutes. However, to be successful in a more a la carte work environment, the provider of goods/services better be able to define the point where effort/cost and profit exist to be successful.

We also need to ditch the robotic 'strictly business' mentality.

Over worked and under paid employees are not nearly as profitable. Human beings need care. It doesn't have to be buddy-buddy I love you care, just the sense that a physically and mentally healthy, happy employee is more capable at the same job than if they're overworked and stressed.

We're biomachines and like any machine it works better if taken care of. Even from a profit standpoint, if the machine doesn't function optimally then you get downtime when it malfunctions and may end up needing to replace it.

 

[Nixie]

Well, I hope you aren't making a specious argument about something I didn't allude to in the post you quoted and are making a totally new statement aside from what I wrote.