The History of the Billable Hour: Creative Mornings Toronto

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I gave this talk on the history of the billable hour at Creative Mornings Toronto Feb 28, 2014. There was a baby in the audience.

I gave this talk on the history of the billable hour at Creative Mornings Toronto Feb 28, 2014. There was a baby in the audience.

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  • 1. CREATIVE MORNINGS TORONTO JON LAX TEEHAN+LAX Feb 28, 2014
  • 2. Imagine a cage containing five monkeys. Inside the cage, hang a banana on a string and place a set of stairs under it.
  • 3. Before long, a monkey will go to the stairs and start to climb towards the banana.
  • 4. As soon as he touches the stairs, spray all of the other monkeys with cold water.
  • 5. After a while, another monkey makes an attempt with the same result all the other monkeys are sprayed with cold water.
  • 6. Pretty soon, when another monkey tries to climb the stairs, the other monkeys will try to prevent it.
  • 7. Now, put away the cold water. Remove one monkey from the cage and replace it with a new one.
  • 8. The new monkey sees the banana and wants to climb the stairs. To his surprise and horror, all of the other monkeys attack him. After another attempt and attack, he knows that if he tries to climb the stairs, he will be assaulted.
  • 9. Next, remove another of the original five monkeys and replace it with a new one. The newcomer goes to the stairs and is attacked. The previous newcomer takes part in the punishment.
  • 10. Replace a third original monkey with a new one, then a fourth, then the fifth. Every time the newest monkey takes to the stairs, he is attacked.
  • 11. Replace a third original monkey with a new one, then a fourth, then the fifth. Every time the newest monkey takes to the stairs, he is attacked.
  • 12. Most of the monkeys that are beating him have no idea why they were not permitted to climb the stairs or why they are participating in the beating of the newest monkey. ! After replacing all the original monkeys, none of the remaining monkeys have ever been sprayed with cold water. Nevertheless, no monkey ever again approaches the stairs to try for the banana. Why not? Because as far as they know that’s the way it’s always been done around here.
  • 13. And that, my friends, is how we began doing time sheets.
  • 14. We often accept things as truths without question. A natural order, it’s just the way things are. In the professional services business broadly and the creative services business specifically it is common to charge for our time. Most companies have an hourly rate, clients ask us what our hourly rate is. We buy software to track our hours, we dutifully fill out our timesheets. ! ! But why? Where did this come from? Why do we do this? You would think, that with something as foundational as how we get paid we would clearly understand where this came from. It is easy to find many articles explaining in great detail how to determine an hourly rate, but almost none explaining its history. So I would like to share that with you today.
  • 15. Like most histories, the history of the billable hour is the result of a combination of people, events and circumstances. A confluence of events over a span of 60 years. I am going to do my best to try and explain the history of the billable hour. ! The reason we have hourly rates begins here.
  • 16. FREDRICK TAYLOR 1856 –1915 Frederick Winslow Taylor, born on March 20, 1856, into a prominent Quaker family in an upper-middle-class suburb of Philadelphia. ! ! He was obsessed with Cricket, which, like baseball is a statisticians dream. He would pore over charts of averages and cricket stats. When he attended dances he would draw up charts rating the attractiveness of the girls to determine how much time he should spend with each.
  • 17. He began work at Midvale Steel in 1878, where he became an industrial engineer. His job as a manager, he believed, was to extract maximum efficiency from workers. He believed that if the worker was more efficient he could produce more which would be economically beneficial to the worker and the company. ! ! He instituted pay based on productivity, trying to incentive workers. While some workers earned up to 70% more, the overall effect was disastrous. His shop was full of resentment and anger. Taylor believed that management is “a true science” with “laws as exact, and as clearly defined…as the fundamental principles of engineering.”
  • 18. The crux of his belief was that knowledge was the ultimate productive resource, but that knowledge only existed in management and workers were merely there to execute. He believed that knowledge could be embedded in a system. In Taylor’s world he separated the thinking from the doing. ! To accomplish this, he performed a series of time and motion studies. He would brake every task into its constituent movements. Then using a stopwatch he would time each movement and determined the ideal duration for each task.
  • 19. Over the years he wrote down his philosophies and methods that he called “Scientific Management” into a series of papers and books. On June 23, 1903 at the 47th meeting of the American Society of Mechanical Engineers titled “Shop Management.” It was this book that made Taylor a celebrity. His theories became widely accepted at the time and quickly spread beyond the factory into other industries.
  • 20. HENRY GANTT 1861–1919 His popularity and theories gained him a number of acolytes, including his co worker at Midvale steel Henry Gantt who developed the, Gantt Chart. A systematic way of sequencing a schedule of tasks. ! Taylor’s theories also impressed a young Harvard Law student named Reginald Heber Smith.
  • 21. “The service the lawyer renders is his professional knowledge and skill, but the commodity he sells is time” - Reginald Heber Smith, INVENTOR OF THE BILLABLE HOUR In 1914, Smith was hired to head Boston Legal Aid which was in financial ruin. Smith was faced with the challenge of funding and staffing approximately 2,000 legal aid cases per year on a shoestring budget, with the help of only a few assistant counsel, a social service secretary and some clerical assistants. ! Smith, drawn to the emerging discipline of scientific business management, took his own management dilemma to the halls of Harvard Business School. There, Professor William Morse Cole and a group of his students set about devising a functional system of accounting and recordkeeping—including a method for tracking statistical information on cases—for the Boston Legal Aid Society. ! Armed with this information, Smith was able to implement new controls, training procedures and management practices, such as weekly conferences with all attorneys, that greatly improved the functioning of the office. In 1915, the Society cleared an impressive 65% more cases than it had the prior year, and reduced the average net cost of each case from $3.93 in 1913 to $1.63 in 1915. ! ! This included the keeping of time sheets broken into 6 minute increments. Smith wrote all of his methods into a series of articles called “Law Office Organization”. In 1940, the American Bar Association published Smith’s Law Office Organization. It gained a very lukewarm reaction. At the time lawyers found the idea of having to account for their time as dehumanizing and well beneath them. In 1945 the New York law firm Shearman and Sterling first adopted time sheets in 1945 as a method of cost accounting.
  • 22. “the habitual charging of fees less than those established in suggested or recommended fee schedules… may be evidence of unethical conduct.” – ABA Comm. on Professional Ethics Opinions (1961) Prior to this Smith’s invention of the timesheet and billable hour lawyers charged clients off a menu of fixed price services. The American Bar Association and State Bars published minimum flat fee schedules for lawyers, a will is $25, court case $500 etc. Until 1975, when the Supreme Court made fee schedules illegal under anti trust laws, it was an ethics violation under the rules of some states to financially undercut thy fellow attorney. ! In the 1950s, a series of reports were released showing that the earning potential of lawyers lagged behind other professionals, such as doctors and dentists Also in the 1950s the process of litigation, in particular, had become more complex and risky — for the law firm) to work on a fixed-fee basis. Looking for an answer to this problem, the found Smith’s book which was in it’s 11th printing. In an effort to derisk and increase earnings. — the national Bar mounted a campaign to promote the billable hour as a business strategy. ! “To improve productivity, law firms began adopting policies requiring attorneys to bill a certain number of minimum hours each year. What seemed like a harmless and prudent business decision worked pretty well until the number of those hours began to rise steadily beginning in the ‘80s.”. The magazine american lawyer started publishing a Big Star list of the best lawyers. In an effort to lure or keep top lawyers at firms, hourly rates went bananas !
  • 23. David Ogilvy Ok so by the 1950s, time sheets and time based billing began to propagate through the legal profession and slowly to the other professional services but how did it jump over to advertising and the creative profession? <click> ! For that we need to thank David Ogilvy. The original Mad Man. Here is what happened in 1962 Shell Oil was growing increasingly dissatisfied with their agency JWT. At the time, agencies were paid on commission. They were paid through a 15% commission on the media they bought. Clients began to balk at the increasing media budgets and began to request fees instead. In order to win Shell Oil, Ogilvy agreed to be paid on a fee basis rather than commission. ! At the time JWT begged Ogilvy not to move to fees claiming it would ruin the industry. His partners also fought him. Basically no one wanted it. Publicly Ogilvy claimed a moral high ground, believing that fees were morally superior to commissions where the incentive the agency was to purchase an ever increasing larger budget of media.
  • 24. This part of ad history appears fictionalized in an episode of Mad Men called “Commissions and Fees” 
  • 25. I pioneered the fee system, but I no longer care how I get paid, provided I make a reasonable profit. – David Ogilvy The transition from fees to hours wouldn’t be overnight. By 1970 Ogilvy claimed that over one half of their clients were on fees rather than commissions but not 100%. ! ! ! Despite the moral position, Ogilvy didn’t really care how he got paid, just as long as he made money. He seemed uninterested in Taylor-esque efficiency or optimizing billable hours. Essentially the reason you track time is that David Ogilvy wanted to win a pitch. But the movements of Scientific management. The agency shift from commissions to fees needed one more catalyst to entrench itself in business and that came in the form of Dupont ROI calculation. as the predominant method of management accounting.
  • 26. The Dupont ROI system, was created by an electrical engineer at the company named F. Donaldson Brown in 1914 (the same year as Smith bringing Scientific management to Law). Brown developed a method of cost accounting that was essential for selling gun powder, at the time Dupont’s big seller. Once again it was designed for manufacturing where costs can be complex. The Dupont system is a set of financial formulas that allocate costs and determine returns on those costs. ! Brown’s theories of management accounting were discovered by MBAs in the 1950s and became the dominant theory taught for at least two generations of MBAs. These MBAs are released into the professional work force at precisely the same time time sheets are being implemented in law firms and the fee system is being introduced to advertising. This is the wet cement that we are treading upon 60 years later.
  • 27. Taylor and Brown’s work at Dupont comes at an important time in American industry. ! The ideas and methods of scientific management and ROI were exactly what was needed to be added to the American system of manufacturing which was in the process of transformation from craft work by humans to mechanization and automation. Taylor’s theories would fuel the first half of America’s growth and be incredibly important for war time production. ! But these overall theories of worker’s and management were built for the manufacturing economy. By the 1940s a new type of economy was emerging which included a new type of worker. The knowledge worker. The theories and principles conceived at the turn of the century ended up being codified in 1950s. Even though Scientific management and Management accounting have since fallen out of favor, they are entrenched in how we conduct business today. All of you are operating off a playbook created for the efficient production of pig iron and gun powder.
  • 28. IRON ORE PRICES (2011 $/DRY METRIC TON) Taylor’s work were originally intended to be methods to extract efficiency but not intended to be the thing that was sold. What I mean by that, is that time tracking was never intended to set prices. In Taylor’s world of steel, the price of steel was not determined by his worker’s productivity. The price of steel was set by the market not by the costs of the steel mill.
  • 29. But the rise of cost accounting in the 1950s created a culture where businesses put all their energy into measuring costs. Methods of cost accounting and the technical innovation of computers made an irresistible combination for business. This culminates in the famous Mckinsey Maxim “What you can measure you can manage”. Which is total bullshit. The majority of what we manage in our lives there is no way to measure. The love of our spouse, or children, the trust we have in co workers. ! The problem with measuring things is that once you start measuring something it very quickly becomes all you see. What you measure defines what you value. If you look at any company, look at what they measure and you can instantly tell the kind of culture they are. What you value is intrinsically tied to what you sell. It shapes you and it shapes your culture. It creates the wrong incentives.
  • 30. In 2002 when Geoff and I started Teehan + Lax we had a few basic ideas about the business. ! 1) we believed that over time design of user experience was going to become increasingly more important 2) We wanted to create a company that was focussed on designing things people used 3) We didn’t want to fill out time sheets. ! No one ever said, when i grow up I’m going to sell an hour. So why do we sell them?
  • 31. The best thing about starting your own company is that you can make the company you want to work at. The company I wanted to work at didn’t do time sheets. As a business owner I knew that the data from time sheets was a fiction. How did I know? Because I had made them up for past few years. The idea that I would collect bad data and then make decisions based on it was insane. We made a decision to just not track time. We made a choice to just focus on other things. To focus on things like the work and not focus on hours. ! ! 12 years later we’re still here. In 12 years i have never filled out a time sheet and it has had zero impact on our success or our failures. Now I will caveat this and say we do understand our costs. At the end of the day I can’t run a business if our price doesn’t cover our costs. I have a very good mechanism to understand costs. It’s called an income statement. It works really well. ! Whether teehan+lax succeeds or fails will have nothing to do with our costs. It will have to do with our ability to create an offering that clients are willing to pay for. We have chosen to focus on that. To measure that.
  • 32. I think it’s time for a rebellion in our industry. To question fundamentally what we measure and what we sell. ! We’ve become an industry that sells time, not because it is the best for our clients or our businesses or our staff but because we blindly inherited thinking from another era.
  • 33. “The last buggy whip factory was no doubt a model of efficiency…. There is nothing so useless as doing efficiently that which should not be done at all.” ― Peter F. Drucker It is time for us to discuss better ways. We need to stop making better time tracking tools and make better tools that understand if the work we do is valuable to a larger world. We need to have discussion about how effective we are, not how efficient we are.
  • 34. We need to realize that an obsession with efficiency focus our gaze inward and does nothing to asses the quality of what is produced. An obsessive focus on costs leads to the wrong outcomes. If you measure the wrong thing you’ll get the wrong thing.
  • 35. CREDITS Tegan Mierle - Illustration Ronald Baker - verasage.com
  • 36. FURTHER READING The One Best Way: Frederick Taylor and the Enigma of Efficiency - Robert Changes Measure What Matters - Ronald Baker The Billable Hour Must Die - Scott Turow
  • 37. THANK YOU @jlax @teehanlax www.teehanlax.com