Why do we still charge by the hour?

I read an article by Adam Davidson in the NY Times Magazine, discussing so-called “cliff jumpers”: service professionals that have dropped the idea of billable hours for their time:

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 Turbo­Tax 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, [accountant Jason] 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.

Davidson preceded this description of Blumer’s rationale for jumping the cliff by pointing out that the billable hour was popularized by the American Bar Association in the 1950s, when lawyers’ fees had been dropping relative to other professions. The ABA successfully promoted the billable hour, and the profession dropped fixed fee agreements, and the rest is history.

We know that the work hour is a fiction, on many levels. First of all, all hours we spend at work are not equal. Yes, you can track what project you are working on so that 10am-11am was work for the Johnson account and 1pm-2pm was dedicated to the budget project, but the value created in each of those hours is variable, to say the least. Besides, why should a client care how much time — or how little — is spent on their project? Shouldn’t it be about delivering value?

Many professional niches use flat billing, as in immigration law, where it is the industry standard no matter the size of the law firm.

Switching to a flat fee model requires the practitioner to carefully analyze their value, and perhaps to more narrowly focus their work. For example, an iOS developer might use standardized tools and techniques so that an initial iPhone app mockup could be “fee”-ed out at $12,000.

Davidson explores how the tax professional, Jason Blumer, transitioned to flat fees by becoming more specialized:

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.

I can’t avoid contrasting this with the billable hour regime that is baked into the placeforms of the freelancer economy. (Marketplaces built on software platforms = Placeforms.) I once discussed that with Gary Swart, the CEO of oDesk, and he made the case that it was too confusing for clients to compare the capabilities of freelancers in other ways.

My sense is that we are gradually becoming more aware of the intrinsic mismatch of value and hours of labor. Even in companies that track time against projects — and even where the time is billed out to clients — there is a tacit awareness that time and value are not proxies, except at the level of a convenient fiction.

Whether we will soon see the end of the billable hour is uncertain. My bet is that it will live on as an annoying relic, that we constantly have to work around, like the base 60 time system we inherited from the Babylonians. (Shouldn’t we switch to digital time? I will leave that argument for another day, however.)

I suspect that inside the most innovative companies the most innovative workers do not attempt to associate the hours they spend working on the value their work creates. But somewhere between that extreme and the factory floor work slides into being treated as a commodity, instead of the creation of value.