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!