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Beyond the billable hour

Beyond the billable hour

The billable hour is so ingrained in the mindset of law firms that it will be extremely difficult to unravel it from the profession, says Ron Baker - despite the fact that it is fundamentally…

The billable hour is so ingrained in the mindset of law firms that it will be extremely difficult to unravel it from the profession, says Ron Baker - despite the fact that it is fundamentally flawed. He speaks to Angela Priestley

Up until the late 19th Century, withdrawing blood from a patient - or bloodletting as it was more commonly referred to - was considered a legitimate means of curing and preventing disease.

The practice spanned a period of almost 2000 years, but after around 500 years of debate, the practice was for the most part abandoned and eventually, backed by overwhelming evidence, considered harmful to patients. These days, the term bloodletting conjures memories or an archaic medical practice that lacked little to no scientific proof of success.

According to Ron Baker, founder of value pricing think tank, the Verasage Institute, who is visiting Australia this month for the national APLMA conference, bloodletting in the medical profession provides an equivalent example to time billing in the legal profession. "There was lots of debate about what side of the body you should poke and how much blood you should drain and how we can get more efficient at bloodletting," he says. "The problem was that no matter how efficient you got, it was the wrong theory."

Baker says that for professional services organisations - especially law firms - time billing is similar in some analogical ways to bloodletting - in that it continues to be practised, despite the fact that it holds firms back from being truly effective. It's a bad habit that Baker is so passionate about eliminating from firms, that he has written five books on the topic, and made an international career by advocating the elimination of billable hours across various industry sectors.

For Baker, it's a personal mission. He recalls his early career when he started life as a CPA and joined one of America's largest accounting firms. "They taught me, just like they taught two generations before me, that I sold time," he says. "I didn't question it; these were smart people in big firms and they gave me an hourly rate, told me I needed to do a timesheet in 10 minute increments or I wasn't going to get my pay cheque, and I accepted all of that."

It wasn't until Baker started his own CPA firm and found himself inundated with phone calls from unhappy clients asking why they weren't aware of how much his services were actually going to cost, that he started to realise something was awry with the concept of time billing.

Baker reached a fundamental economic conclusion that every other business on the planet besides those who priced by the hour, gave their price to the consumer before the consumer purchased the product or service. "I book a hotel room, I know the price. I book a flight to Australia and I know the price," he says. "It doesn't matter how long United Airlines takes to fly me down to Australia, they are going to assume the risk of their traffic and the weather that may very well occur on the flight, but they are still going to give me a fixed price."

Needless to say, in 1989 Baker adjusted his firm to offer clients a fixed price - a mission he describes as time-consuming and extremely difficult given just how revolutionary such a move was at the time and the few trailblazers who had made the change before him. Baker taught his theory to fellow CPAs, then wrote a book about it in 1998. Four books later, he is now one of the globe's most noted speakers on everything that's wrong about time-based billing models. While Baker has made significant progress with firms across the world, he is the first to admit that his once prediction in 1998 that the billable hour would disappear as a form of pricing in firms within the next 10 years is still very far off the mark.

So why are firms - particularly legal firms - still tied to such traditional models of billing, when business and technology have made such considerable inroads to practices over the last half a century? Baker believes the change is difficult for firms to grasp because it's not just about changing a pricing strategy of moving to alternative pricing; it's a fundamental business model change that is required in a world where the sale of time is so heavily, and traditionally, ingrained.

These days, Baker admits that he doesn't even believe a tipping point away from the billable hour will occur in his lifetime - despite, he says, the effect such pricing models have on professions and knowledge workers. "It burns people out," he says on the impact of time billing on careers. "It divides their life into two segments - saying you're either billable, or you're not billable. If you're not billable that's incredibly stressful because we only make money if we're billing ... We're all mortals and we all have limited time."

Baker points to Bill Gates to further make his point, noting that the Microsoft founder effectively has the same amount of time as the rest of us on the planet, yet he is incredibly wealthy because he chose a business model that sells on intellectual capital instead of time. "This is far more leverageable then an hour," he says. "We can only do one thing at a the one time, but intellectual capital like a book or a video presentation can be watched and shared by millions of people at the same time. It's like the alphabet. We can all use the alphabet without diminishing it for ourselves or for others."

If Bill Gates isn't proof enough of the leveragability of intellectual capital, says Baker, then surely author JK Rowling can provide a pertinent example. "I assure you she didn't get paid by the hour to write Harry Potter," he says.

Meanwhile, the argument that time-billing provides a measureable means of cost accounting and ultimately necessary figures for the performance management of knowledge workers simply does not add up to Baker. He says there are much better ways to measure the performance of an lawyer other than timesheets - but the shift will require firms to have the confidence to be subjective in their performance measurements. "A timesheet tells me nothing about how good an attorney is, it just simply tells me how much they lie on a timesheet," he says. "The timesheet is a measure, it's not a judgment on the quality of the work. There are better measurements out there to assess the effectiveness of the knowledge worker."

It's this effectiveness of the knowledge worker that Baker says will make all the difference to the value of the legal work a firm performs. "I want a lawyer or a doctor who is effective, not efficient," he says. "I think efficiency is the wrong talisman in a professional knowledge firm. Was Einstein efficient? Who the hell knows and who the hell cares. Was he effective? Absolutely!"

Baker's notion of effectiveness comes down to the belief that lawyers are artists in that they take their knowledge, craft complex strategies and find the means to help their clients achieve objectives. "The only way to increase the efficiency of an artist is to give them a paint-by-numbers kit," he says. "That will allow an artist to paint more, but it will be crappy art."

From a client's point of view, says Baker, the value they gain from their law firms is much more important than the price they pay, so if a firm can maximise a client's profit then they can get a higher price for the service, as long as they continue to add more value. "A fixed price adds value, because it takes away the risk from a client and gives them certainty," he says. "This is why the profession needs to become skilled pricers and they're just not at that point yet."

Despite popular opinion, Baker does not believe the global recession and the power that is consequently falling in the hands of the buyers of legal services will provide the catalyst for a fundamental change of billing models. He believes the pricing paradigm is so linked to the business model of law that any innovation in the business model can only come from the sellers of the services, and not the buyers. But even with all the flaws of the billable hour, Baker is adamant that at the current pace of change within law firms, it will be with us for a long time yet.

The theory of bloodletting, some scholars say, was questioned for at least 500 years before the medical profession gave it up. Baker wonders - with the element of science for the most part missing from law firms - just what chance the profession stands of eliminating the billable hour when it's so fundamentally ingrained.

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