Monday, January 15, 2007

Time-Based Accounting is Behavior Modifying to the Deteriment of Profits

Time and time again Human Resource executives reinforce the concept that what you measure and reward is what you get for behavior. Nobody I know disputes that this is true. If you accept it as true, then you create a linear relationship where common behaviors can be explained by looking to a firm's measurement and reward system. It seems like companies today have become obsessed with collecting and analyzing data . . . . simply because they can. So much so that most companies would rather reward the wrong behaviors because they can easily measure them, rather than reward the right behaviors that are more difficult to quantify with numbers. As a result, time-based accounting creates a distorted sense of reality that changes the behavior of professionals to the detriment of profits. Let me explain:

Factual Foundation:
Billable hour requirements are at all-time highs in our profession
Attorneys are therefore working harder and harder just to meet these billable requirements
Billable Hours are the most important factor in one's compensation (Aside from origination, which is only relevant at the Partnership level)

If I were to ask you what the firm above values what would you say?
ANSWER: Billed Time

OK -- So how does this impact attorney behavior?
Attorneys therefore, in order to see their families every once in awhile, are trained to put in as many "billable" hours as possible and do not value "non-billable" time. Put another way, since it takes roughly 70hrs a week of work in order to meet the 2000 hour billing requirement for the firm, attorneys have no financial motivation to act in the best interest of the client or in the interest of the firm -- Let me explain:

The quest to meet billing requirements is inherently a short-sighted. For instance, there are severe pressures on attorneys to pad bills and over-lawyer legal matters with no regard for the risk-return relationship on which businesspeople make decisions. These concerns are not only ethical ones, but also foster a relationship of distrust between the client and the attorney. In addition, the efforts to raise short-term revenue are clearly at the expense of clients (who know they are being taken for a long walk) and end up leaving or simply never become loyal to the firm. So, say for example that an attorney (who really needs to put in some hours to make quota) gives into temptation and decides to put in 20% more hours on a case than is necessary. Do you think that the 20% extra revenue this year is greater than the Net Present Value of future cash flows NOT EARNED by virtue of one attorney's self-interested behavior? Of course not! The problems are these:

1) At a firm-wide level these practices are short-sighted and arguably driven by greed of the Partners. The problem is that the reward system creates individual pressures that may not be driven by greed alone, but simply a desire to get off the treadmill of time before 10pm so they can go kiss their wife and children goodnight once every few days. Either way, the result compromises the integrity of our profession, the service to our clients, and sends the wrong signal to our people about what is truly important in life.

2) If you agree that these pressures can have a severe impact on the client relationship and compromise the long-term cash flows of the firm (remember, getting a new client costs 5 times more than keeping a current client!), then do you realize what you are doing? You are giving each and every individual in the firm the power to compromise the long-term viability of your organization by creating financial incentives for over-billing and over-lawyering, temptations for billing fraud, padding, and absolutely NO INCENTIVE to provide excellence in client service. Your people, some responding to the reasonable pressures of family life and some responding to the desire to earn more by these compensation systems, are doing EXACTLY what you are telling them you value. BILLING TIME!!! Congratulations! You just treated your people like a stopwatch! No wonder attrition rates are at all-time highs. Firms have no concept of how to value people, and so what they end up with are cogs in a wheel.

What we have done at Exemplar is realize that time-based billing is not only a poor way to value people, it is inhumane. As a result, we work hard to identify that leading indicators of value in our organization and reward each individual on the basis of one's strengths and contribution. Value-Pricing is not just a better billing model, it is a better way to show your people that you truly care about who they are and what they have to offer. It makes all the difference in the world when you wake up every day looking forward to going to work. It makes all the difference in the world when I see our people leveraging their strengths at every turn knowing that we both know and value what each of them have to offer. More than anything, seeing people thrive is the most rewarding experience . . . it is why we persevere . . . and why I am so proud of what Exemplar stands for!


Joerg Weisner said...

a very well written article.
I would like to translate that article to German and to use some of that in my Job&Joy Blog.

When asked about my opinion to this matter, i express it sometime quite drastically:
"Do You want me, to get paid for my arse (time based, for just sitting around) or for my head (including all the creativity I have)?"

The answer from my customers is quite clear.
They never want my arse, they want my head ;-)

Anonymous said...

2 questions

A) without internal time records, how do you measure productivity

B) without internal time records, how to you file fee apps for clients when fee shifting is appropriate, which doesn't always include litigation. What if, for example, you are hired by a lender to document a loan and the borrower is going to pay your bill?

Jeff Donner said...

Agree with question (B) above only because it remains the case that the law (at least in Florida, for example) still requires the use of the "lodestar" method for fee shifting. In other words, even if your contract with your client is a flat fee arrangement, the Court might require you to have time records in a fee-shifting situation if you want to get paid. And then the old-fashioned judge will determine a "reasonable" hourly rate and a "reasonable" amount of time you should have spent.

I try to get flat fee engagements too, but I keep time on all my matters in case I ever need to tell some third party what I did. At least in Florida, in divorce cases for example, it is the law that the judge will base the fee award I get from the other party (where he or she has the ability to pay and my client has a need) solely on hours worked and reasonable rate, and will literally override my contract with my client providing that we agree that my services in the matter are worth $XX,XXX.XX regardless of the time spent by the attorney.

Christopher Marston said...

Hi Anonymous, Allow me to answer some of your questions. They were:

A) without internal time records, how do you measure productivity

ASNWER: WITH Time records, how do you measure productivity? Seriously! Do you really think that is what you are measuring? In some instances, you are inversely measuring it. Isn't measuring hours about as opposite from measuring efficiency and productivity as possible. You ask the question and if you have no idea how the economy of the world operates aver single day . . . Millions of companies, global and local, are not counting time right now . . . somehow they still know who their high producers are! Put another way, they know "generally" how much resources are required, human or otherwise, to produce an outcome, and so does Exemplar. trust me, if you stopped counting your entire life in 6-minute increments (but instead maintained a general understanding of how long a job takes) then you will still know who your producers are and who they are not. The only reason you count time in minutes is because you have to justify them to the client when you bill time, not to measure productivity.

You wrote:
B) without internal time records, how to you file fee apps for clients when fee shifting is appropriate, which doesn't always include litigation. What if, for example, you are hired by a lender to document a loan and the borrower is going to pay your bill?

ANSWER: Again, there is nothing in the fee shifting rules that says: 1) You have to docuement time in minutes, or 2) you have to document the resources used at the time you use them. As you said,the judge will ultimately decide the reasonableness of the time (in total, not in 6-minute increments. . . trust me, the judge has much better things to do than to sit there and determine if every phone call you made and charged for was "worth it") Don't you agree?

Stuart said...

It's not the time value that is arbitrary but the monetary value. If you live long enough you will probably die. In others we can extend our life span by our actions but only to a limited degree. Our time on earth is variable but finite.

Time definitely has value. If you choose to value it with money then you have an issue.

My first choice is to value my time by the contribution it makes to extending my life. Money can play a role but it is not the only role player.

My next choice is to value my time by the contribution it makes to me having fun. Within limits, I believe this extends my life and the quality of it.

Hope this provides some food for thought.


Stuart said...

It is not the arbitrary value of time that is the issue, but that of money.

If you live long enough you will probably die. In other words our time on earth is variable but finite. Certainly worth valuing, but how?

Firstly I value what I do with my time by the contribution it makes to extending my life. Yes money has a role, but it is not the only player.

Next I value what I do with my time by the fun I have. Within limits I believe it extends my life and my enjoyment of it.

Hopefully food for thought.


accounting services said...

Thanks for sharing...
accounts payable outsourcing