Coevolving Innovations

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New measure required: beyond billable utilization

Posted on September 20, 2007 by daviding

When I’m in an academic setting looking into research into services, there’s one idea that I’m continually looking out for: finding a measure that is superior to counting billable hours.

Billable utilization is one of the measures common in knowledge intensive business services (KIBS). This category of services includes professionals such as consultants, lawyers and accountants.

I’ve been triggered on this topic by reading “Exile on Bay Street” by Alec Scott, in the September issue of Toronto Life. This well-written personal account of the life of lawyers on Bay Street — the financial centre of Canada — parallels that of management consultants. Firstly, there’s the external perception of what the life is like (or at least what it was):

The lawyers of the last generation lived the cliché; they worked and played equally hard. Unlike my peers, they loved telling war stories, vividly recounting the ups and downs of the practice. [….]

In off-hours, my dad’s colleagues were cryptic-crossword doers, streaky bridge players, easy company in good and bad times. After boozy dinner parties at a cottage, they’d light cigars and roll up the carpets to dance. The next morning, they might take to a hammock to read this or that classic, followed by an afternoon playing golf or tennis. In summers, they’d join their law school chums in shooting the rapids of some Northern Ontario river, growing their beards out for a couple of weeks. In the winter, you could often see them schussing down the slopes at Osler Bluff.

Professional service firms used to be small, but have followed the industrial model of growth.

“Big law” has emerged as the generic term for these firms. [….]

The sheer size of these organizations has changed the experience of practising law in their corridors. McCarthy’s tax department alone takes up almost an entire storey of the TD tower; one of the firm’s partners, the dean of the city’s family law bar, Stephen Grant, has to telephone an old friend for lunch because he works on a different floor. “Otherwise, I’d never see him.”

With growth comes a loss of person-to-person contact, and the reliance on more quantitative measures.

There is little room at big law firms for the five-and-a-half-day, 50-hour-a-week lawyer. The current practitioner must be reachable by BlackBerry any time, day or night, holiday or not, and 50 hours represents a slow workweek.

Being a lawyer in 2007 means being a slave to the billable-hour system. Most downtown firms have actual or de facto billable targets for associates ranging from 1,800 to 2,000 hours per year. Not, seemingly, too high a bar, but usually you have to work three hours to produce two hours of billings. [….] Before the billable-hour system became common, companies and individuals with ongoing legal issues would pay a retainer annually to firms for their counsel. Others without regular legal problems would be billed roughly on the thickness of their files—as good a measure as any of the quantity of work put in.

In most big firms now, partner salaries are linked to the number of hours they and associates assigned to their files log. And thus, partners have a financial incentive to drive their associates to bill long hours. A modest proportion of the profits earned is returned to the young lawyer. In blunt terms, what we’re talking about is a pyramid scheme.

Every consultant knows that 52 weeks x 40 hours means 2080 hours per year. Lawyers seem to run more hours than management consultants … but it’s common for management consultants to be working out of town, and travel time isn’t billable. (I have a Toronto colleague in his second quarter in Bermuda.)

There’s irony in young adults striving for professions where the practice is no longer as it was in their parents’ day. The cameraderie and collegiality of continued relationships within a small group of experts is gone. I encourage anyone in or thinking about such careers to read the article!

When I’m teaching, I often challenge students to think about the problem of measuring professional services by the hour. I thought that the reason that we got universities degrees was so that we wouldn’t have to count the number of hours we work!

4 to “New measure required: beyond billable utilization”

  1. Aneel says:

    Don’t hours *have to be counted*, if for no other reason than to understand work effort?

    Working at IBM GTS, I’ve come to the conclusion that it’s the “billable” part that’s a problem. And that has more to do with large professional organizations being incapable of even remotely accurately predicting work effort and thus being unable to have project-, value-, or asset- based pricing.

  2. daviding says:

    Steve Haeckel, in Adaptive Enterprise classes, used to speak about the old saying “what can be measured, can be managed”.

    However, applying systems thinking, Steve also said “what can’t be measured MUST be managed”. We should be looking towards measures aligned with system level effects (i.e. outputs, results or benefits) as opposed to input level measures (e.g. hours of work).

    Hours are an indirect measure of productivity. As an example, an asset-based strategy is discouraged by consultants pursuing high utilization. There’s a lot of hours to be gained by reinventing the wheel.

  3. Aneel says:

    “Hours are an indirect measure of productivity. As an example, an asset-based strategy is discouraged by consultants pursuing high utilization. Thereâ??s a lot of hours to be gained by reinventing the wheel.”

    ..and a lot of business to be lost. If you can do something faster, then you can do more of it. Overall– more business for the company and still high util for you. If we could project risk and work effort accurately, then we could charge by results and deliverables, quasi-fixed rates. Then when you do things faster, you increase profit. But large organizations seem to be utterly worthless at doing that. Boutique consultancies do it and they beat the pants of service orgs like GTS when it comes to profit.

  4. Gabby Kent says:

    Working in a large IT services firm, I’ve observed that billable utilization strangles innovation, and drives wrong behaviours in management. When combined wtih cost conscious company, its a killer over the long term for the company. The question is, and the article started with it, what is the other options to billable utilisation? I’m looking at this for IT services market, not lawyers



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