Episode #162: Is Hourly Billing Unethical and Unprofessional?

Is Hourly Billing Ethical?

Ethics—originating from the Greek word ethos, meaning habit—is a branch of philosophy that explores and analyzes moral problems, concerned with questions such as: What kind of moral principles and values should guide our actions? What do we mean by right and wrong? 

Immanuel Kant proposed broad principles to provide a framework for making moral decisions, described as categorical imperatives:

  1. Act only on that maxim by which you can at the same time will that it should become a universal law (e.g., no stealing).
  2. Act so that you treat humanity whether, in your own person or in that of another, always as an end and never as a means only (people are to be respected because they have dignity. Moral agency is what gives humans dignity).
  3. Kingdom of Ends formulation: You should act as if you were a member of an ideal kingdom of ends in which you were both subject and sovereign at the same time.

If you apply this test to hourly billing, you find it fails miserably on all the questions, especially the first and third.

Would you want hourly billing to become universal? Would you want all businesses to utilize it? 

If the Golden Rule is true—treat others as you yourself would want to be treated—how can one defend the morality of hourly billing? Would you accept that method of pricing from a hotel, an airline, or a grocery store?

Aristotle wrote, “It’s not easy to be a good citizen in a bad society.”

Hourly billing creates a bad culture, focused almost exclusively on the convenience of the seller, not the customer.

It is not how you purchase anything else in your life. You would not tolerate it for one minute if any other business tried to price this way. Hence, it is unethical. We think Kant would agree.

Is Hourly Billing Unprofessional?

“A professional is someone who is responsible for achieving a result rather than performing a task.” - Michael Hammer

The billable hour (and timesheets) are unprofessional as they keep the professional focused on the tasks, not the result.

Day laborers are paid for performing tasks. Professionals should create results. Yet the empirical evidence from nearly a century of the billable hour regime proves it has deleterious consequences on professionalism.

William Ross states the following in his book, The Honest Hour:

Most dishonest billing is the perfect crime. Because there is no practical manner of verifying the accuracy of most time records, every attorney who has billed time knows that hourly billing creates tempting opportunities for fraud.

Ross ends his book The Honest Hour by saying, “Despite its potential for abuse, time remains the best means of billing clients. Hourly billing therefore ought to be reformed rather than abandoned.”

Misalignment in interest

The American Bar Association and courts have opted for imposing standards on hourly billing.

Here’s a partial list of where its brainpower is being applied:

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  • Double billing—billing two customers for different work performed at the same time. A lawyer who flies for six hours for one client while working for five hours on behalf of another, has not earned eleven billable hours. A lawyer who is able to reuse old work product has not re-earned the hours previously billed and compensated when the work product was first generated.
  • Recycled work—billing customers by the hour for work that was created at another time for another customer. The ABA Opinion suggests that the lawyer is reaping a windfall from “the      luck of being asked the identical question twice,” just as the attorney who is able to bill two clients for work performed at the same time is receiving an unfair advantage.
  • Overstaffing of lawyers—assigning too many lawyers to a case or project to fulfill billable hour quotas.
  • Excessive research.
  • Attorneys performing clerical and administrative tasks and billing at their hourly rates. Surgeons piercing ears. Michelangelo should not charge Sistine Chapel rates for painting a farmer’s barn.
  • Charging for travel time. Slippery slope: Shower time?
  • Attorney conferences—chitchat on the customer’s dime or valuable timesaving devices?
  • Charging for small units of time—rounding up to the quarter hour or charging for every minute?
  • Overhead expenses—charging (and possibly marking up) general overhead expenses such as copies, faxes, phone calls, secretary time, and overtime.

There is some sanity. The New York State Bar Association had this to say with respect to alternative pricing methods, "Indeed, subject to the economic realities of the situation an attorney’s professional obligations, virtually any billing method that attorney and client can both agree upon and abide by will result, almost by definition, in a fair fee.

Listener Twitter Comments

Chris Marston’s Concentric Circles

Listen to Chris explain his circles, from the Art of Value Podcast.

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See Ron’s blog post on using Chris’s circles.

Other Resources Mentioned 

Moores, a law firm in Melbourne, Australia offers Moore’s Guarantee

We can’t guarantee outcomes but like price, the quality of our service is another thing we can guarantee up front. If you think the quality of our service didn’t match what was agreed, let us know and tell us how you think that should be reflected in the price you pay.

Ed Kless - The Nuclear Option - Blog Post

John Chisholm - Hourly Billing Is Accurate, Transparent, and Ethical

Economist Bart Wilson explaining the concept of fairness

Donald Rumsfeld on Unknown Unknowns

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.