9/11/12

Logic and The Value of Time: Another Counterpoint

Image [cc] israelavila
My good friend and blogging colleague Jordan Furlong suggested an intriguing idea while we were attending the ILTA Conference. We had started down a path on the sometimes taboo topic of timekeeping and the billable hour. Jordan takes the position that it should be abolished, freeing lawyers from the yoke of billable hours. Our debate ended with Jordan’s suggestion of a set of point-counterpoint blog posts. Originally I was thinking more along the lines of a Dan Aykroyd / Jane Curtin approach (with me getting the Dan Aykroyd line), but Jordan’s wisdom prevailed, so we are going with a Star Trek meme, celebrating its 456th Anniversary.

For Jordan’s off-based, rambling dialog (a.k.a. his point of view), check out his post here. What follows is my more prescribed, thoughtful and logical approach to the subject.


As we all know, a tear in the fabric of the space-time-continuum, such as the one Jordan suggests, brings many dangers. What we know and trust can lose cohesion. And we know the most appropriate response to addressing such a challenge: Logic - brought to us by our old friend, Mister Spock.

Mister Spock:

Although the suspension of the laws of timekeeping may have a certain appeal to the more emotional among us, logic will help us find our way back to solid ground. We all know the challenges and pitfalls of timekeeping in the legal market. However, just because something is hard, does not mean it should not be mastered.

To illustrate this, let’s step in to Jordan’s space-time breach and contemplate the world we see. Lacking timekeeping, the only apparent meter of value becomes value itself. Side-stepping the circular logic reference, we end up asking the client to share their perception of value for a given piece of work by providing the price they will pay for a service. Once they have chosen the price, do we commence with work?

Logic would dictate we will want some idea of whether we can obtain a reasonable level of profit on the work since the continued existence of our business and as an extension, our paycheck, is subject to this metric. A simple question must be asked: Are the cost of inputs greater than the price obtained? Which of course leads us to the question: Inputs?

Knowledge workers bring two types of input to bear when they provide a service: their knowledge and their time, a finite resource. So in answer to our question, we will want to know the amount of time required for each level of knowledge worker. We will stress here that we are not referencing their billing rates, but instead their cost rates. This would be our cost per hour per knowledge worker, which of course will be higher for those with more advanced and valuable levels of knowledge.

Moving back to our question, we cannot know the cost of inputs without knowing the cost of time. So we cannot know whether a piece of work will be profitable until we mend the tear in the space-time-continuum and recapture the ability to keep time.

Does this necessarily mean that time, or effort in this argument, equals value? No it does not. Only that time and effort are factors of cost. But to explore this disconnect between time and value, we should consider another possible scenario.

We return back in to our tear where our client values a service at 10,000 Darseks (he’s Klingon - btw).  We accept his offer and immediately hand him the necessary stack of completed legal documents. At this, he pulls his bat’leth and demands the return of his 10,000 Darseks. Why would he do such a thing? He has clearly valued the service at 10,000. Once we get him to agree not to behead us, he asks why he should pay 10,000 Darseks for something so easily provided. His point, although described in more base terms by him: Time and effort have a role in determining value.

It is obvious that the suspension of the laws of timekeeping would have disastrous consequences for the legal market. To be clear, our logic is not dictating that effort equals value, only that it can play a role in determining value. Logic does dictate that time and effort drives the cost of knowledge workers. So in the end, however a client values a piece of legal work, the time and effort required to deliver that service will play a role in determining the profitability of the work.

Now … a dialog on how the amount of time and effort can be reduced might be suggested as the next logical conversation in pursuing a profitable practice. For that, we should turn to Dan Aykroyd.

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8 comments:

Jim Hannigan said...

Labor costs, as measured by compensation, should be indicative of value the marketplace applies to the service based on demand for the service and supply of the providers. Hours need to be measured in order to help the firm determine opportunity cost, assuming there is a time component to the service. If it's not, the attorney is selling either strictly commodity services or such esoteric knowledge that is also easily replicated as to have a hugh competitive advantage. That's rare in the real world.
If law ever got to a point of pure pricing by product rather than hours, attorneys could be measured by the number of deliverables they produce, although these vary in difficulty and uncontrollable external forces, making hours again a necessary input.

KenHirsh said...

This is (or at least last weekend was) the show's 46th anniversary. Jordan Link's post used the headline from a posting a year ago.

Mark Gediman said...

Mr. Spock's logic is impeccable, as always, but doesn't go far enough. If Legal work is treated as a product and is priced appropriately, it would include the ancillary costs of labor, time spent, marketing, knowledge and quality. Time is still a factor but is minimized instead maximized (as the current system would seem to encourage). The Brand then takes on more importance as an indicator of value assigned by the marketplace and the product would be priced accordingly. Unfortunately, this concept is not readily understood by Klingons. Now a Ferengi, on the other hand, would understand.

Jordan Furlong said...

Jim, I agree that time can be measured in order to establish opportunity cost. A firm can legitimately decide that the price for a proposed task is not commensurate with the value of other opportunities the firm would have to forgo in order to take on the task. If the firm calculates that it could earn a better return on its attention and resources elsewhere, it should decline the work; measuring lawyer time can help establish that.

But that's using time as a factor in strategic decision-making and resource allocation, not as the basis for pricing the work. That's the distinction.

Ken, thanks for the correction! As a Trekkie who should know better, my face is as red as my shirt.

lasthonestlawyer said...

Thank goodness Bachelor Pad is over, because I need to catch up on Star Trek.

Richard Burcher of Validatum, in his excellent post "'Value Pricing' - Capitalist Acts Between Consenting Adults'" states:

"Modern legal services pricing should be about the optimal alignment of the fee and the clients' perception that they have received fair value and the lawyer's perception that they have been paid properly (which, to state the obvious, has absolutely nothing to do with arbitrary and homogenous hourly rates)."

Thus, a "fair fee" must balance two "apparently diametrically opposed outcomes" - both the client believing they have received good value and the lawyer believing they have been fairly compensated for the amount of effort expended and outcome achieved. Not an easy task to accomplish, but one that must be accomplished to have a successful attorney-client relationship.

Ron Baker said...

Toby,
You're arguing that time ≠ value, which is correct. Though why you say it needs to play a role in value is beyond me, since this is Karl Marx’s labor theory of value, which was refuted by economists in 1871.

But then you go on to argue that time = cost. Ok. But if that's true, then by tracking hours you are dividing a cost by a cost. Not very logical, no?

As a former CPA, and cost accountant, I can assure you I don't need to see your firm's timesheets to know its costs. As for pricing on value and determining whether or not you'll make an acceptable profit, notice that has to be done BEFORE you do the job, not after, as with timesheets. What matters to any pricer is future costs, not past costs.

Further, costs in a law firm are more fixed than costs in an hotel, and hotels don’t do standard cost accounting (either do Japanese manufacturers, but that's a different topic). They do Revenue Management, which focuses on the revenue and pricing.

You are confusing costs with cost allocation. Timesheets attempt to allocate costs, and they are full of arbitrary allocations, assumptions (like you're rent is payable hourly), and other inaccuracies. Moreover, firms have profit built into their hourly rates, which is not cost allocation, it's profit forecasting. The argument that this is an opportunity costs is irrelevant. Cost accounting doesn't deal with opportunity costs; it only allocates known costs.

For more on this, here’s a blog post that tears down, once and for all, the defense of timesheets for cost accounting (again, coming from CPAs):

http://www.verasage.com/index.php/community/comments/timesheets-are-terrible-cost-accountants/

My books also take down the argument for timesheets with overwhelming empirical evidence. But if you don't want to read them, let me suggest the biggest set of empirical evidence that you seem to be ignoring: there are over 1,500 firms (that we know of) that don't do timesheets, across all professional firm sectors, from advertising to law, and from accounting, IT, architects, to actuaries. Some of these firms are among the most profitable firms in their respective industry. One of them has over 1,000 employees.

If timesheets are so essential, how does your logic, Mr. Spock, account for these massive anomalies?
To argue that something needs to be done when it isn’t being done by some is to believe all swans are white.The world is full of Black Swans that don’t keep timesheets, and they are no less swans than any other.

Susan Hackett said...

Hey, Toby - I couldn't resist. As a member of the dinner conversation that gave rise to this post, I posted up yet another alternative universe in which we can argue about this issue: in my case, one that is dominated by the Planet "Client." Enjoy and reply! at: http://www.legalexecutiveleadership.com/2012/sugar-and-salt-perfect-together

Thomas Bowden said...

Time is not a cost - it is a constraint. One cannot save it - it continues to pass whether you write it down on a timesheet or stare at the ceiling. In any firm (and in most) where layers are paid a salary, there is no marginal cost to time, unless all attorneys are billing 8760 hours per year (24 hours/day (8784 in leap year)). And even that isn't really correct because hours days and years are merely arbitrary measurements of the passage of time. The point is, under any realistic rate of utilization (as the efficiency wonks like to say), there is always an extra hour at nearly zero marginal cost. Since marginal cost is the most important pricing tool, time is worthless as a pricing variable. Of course one might way "How do we know which clients to choose? What is one client will pay 100K for a one type of project and another will only pay 20K for a different project - or what if both projects pay the same but one takes five times longer or five times more people working on it? My answer is that timesheets will not answer this question for you. Project management tools can help, but it's a self-delusion to think that measuring time in six minute increments will tell you anything about how long the next job will take. The seductive illusion of precision masquerading as significance must be avoided at all costs.

 

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