Adam Smith on billable hours

No, not that Adam Smith. Adam Smith as in Bruce MacEwen, who writes the definitive blog on law-firm economics called "Adam Smith, Esq."

[By the way, lawyers — let's get something straight: you cannot call yourself "Esquire." It is an honorific. You use it to honor someone, which is bizarre, because no one really honors lawyers anymore. It's like giving yourself a nickname. You just can't do it, T-Bone.]

In his post, "Rumors of Its Demise," Bruce (who's not calling himself "Esq."; he's referring to Adam Smith) gives a fantastic summation of the problems of the billable hour. Many people talk about inefficiency and economic disincentives, but Bruce (correctly) boils it all down to trust:

Doesn't it fundamentally reflect a lack of trust between your firm and your clients? Rather than being able to say "For professional services rendered...." and have confidence that the client will trust you to have put a fair price on things, the billable hour reflects a green eye-shade mentality, notoriously subject to auditing .... The billable hour, I believe, starts from a relationship of mistrust: "See, we can prove we actually did the work!" And the GC or other inhouse counsel can, in turn, tell their finance department, "Yes, see, they really did the work."

This is not the premise from which mature relationships of trust and confidence arise.

Bruce also points out the difference between setting prices based on production costs (hours spent) instead of based on client value:

At the risk of piling on, I'll suggest yet another reason the billable hour disserves our profession: Economically, it begins life with "cost of production" rather than "value to client." Except for the rawest and most basic of commodities, "cost of production" should have virtually nothing to do with price.

...

But for price to be mathematically determined to the second decimal place by "cost of production" is flatly irrational. Worse, it ignores (again) what the perceived value of the services is to the client.

Read the whole post here. If you're a lawyer, you'll be asking yourself why you bill by the hour. And if you're a client, you'll be asking that of your lawyers.