Moving away from hourly billing – jump off the cliff

With the industrial revolution came the need for metrics regarding how much human effort went into producing an item of value. Indeed, the industrial revolution gave rise to modern management science. When machines can suddenly produce way more than human labour could previously, we start to need to have a benchmark on how much labour (and at what price) goes into a product. When we understand the value of the end product, we can start to price the value of the labour used in its production, and so began a line of thinking that started with industrial revolution and mass production then filtered into service industries. It continues today with software able to measure all sorts of inputs in our daily lives in minute detail.

Doctors charge a set fee for consultations, platitudes and procedures that are loosely based on the hours they charge. Dentists have the ability to remove or inflict pain and similarly get away with charging a lot for a relatively short space of time. Other professionals aren’t so lucky. The American Bar Association picked up on this in the 1950’s and encouraged their members to start charging by the hour, instead of a broad fee for types of work. The accounting profession (who by nature are largely a compliance sale) quickly copied the idea of time-based billing. In so many ways it makes sense – a project takes 5 hours, the person doing the work gets paid $100 in salary costs so to make profit, cover marketing etc. and put some dough into partners pockets the client is charged $400 for the same time. Billing by the hour allows practice managers to calculate utilisation just as a production line manager would calculate throughput. Since clients only pay for hours worked directly on their business, it’s got the appearance of a very fair system.

Perhaps so for the very routine types of work: the types of work that will eventually be replaced by software – commodity hours, the kind of labour the singularity will gobble up and spit out permanently. The problem with hourly-based billing is that it treats human input as any other resource and is dehumanising. It’s also very hard to make a profit when you’re effectively a commodity, and it may not be so good for the clients after all: hourly based billing encourages long boring projects rather than quick specialised ones that generate valuable insight that’s worth far more than the hours it takes to produce.

There are alternatives: a recent article in the New York Times discussed a group of Accountants, loosely led by Jason Blumer, who call themselves the ‘Cliff Jumpers’ because they refuse to bill by the hour. They don’t have dress codes, don’t keep time sheets and don’t have billable hours. For Accountants, this is radical stuff. Instead of hours the Cliff Jumpers focus on problems where the pay is higher than the amount of time taken to solve them. For example, they work for creative artists who struggle to make sense of their finances as they become more established, or entrepreneurs who want to sell their businesses. So far it seems to be working although I’m guessing that only a few of the 100K plus accountants in the USA have jumped off the cliff so far.

Taken up to the national policy level the bigger problem with service industry productivity is not one of pricing, but one of metrics. Thanks to the focus on productive output given to us by the industrial revolution, 90% of the metrics used in GDP evaluation and policy setting became about goods production. The problem is that the metrics that work for goods production don’t help us understand the value of ideas or the knowledge economy. The value of services is very hard to measure and policy decisions suffer as a result.

The approach the policy wonks take is to try to break services, like law or accounting down into their component parts. This sort-of works for the more formalised, commodity style work but falls flat in areas like doctors, visual design, advertising or education. Even in the USA, a society which values data analysis and fact-based decision making, productivity measures exist for only about half of the US industries. The industries covered are typically the most the older, more slowly growing ones. So it’s impossible at an industrial policy level to know if policies are working or not, which means a lot of spend is probably wasted and opportunities lost at a national level.

What does this mean for service industry or knowledge economy entrepreneurs? Well if we want to be helped, we need to be able to provide bigger players like government and big business with the right metrics to measure our productivity and impact so that we can demonstrate when/how help will be effective. A core challenge then to entrepreneurs and their advisors in the service industries is to develop the metrics. There’s a great business in there for someone…

  • Kenny Williamson

    Very interesting concept. It at least allows for the creative types (e.g. the accountants who have decided to become business owners- as opposed to just an hourly billed account) a bit more latitude to do what they desire and record books, get creative with helping with those books ad so on.