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Implementing Value Pricing: A Radical Business Model for Professional Firms by Ronald J. Baker

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CHAPTER 17

The Deleterious Effects of Hourly Billing

Custom doth make dotards of us all.

––Thomas Carlyle, Sartor Resartus, III, 1836

Nothing is more damaging to a new truth than an old error.

––Goethe, Proverbs in Prose, 1819

We have explored the fallacy of Karl Marx’s labor theory of value and how it fails to explain value, and how it has been adopted by professional firms. The reader is justified in asking the following question: If people are supposedly rational—the assumption of rationality, which is the bedrock of economists—why is it that intelligent members of various professions have continued to apply the wrong theory to the value of their services?

The fact that hourly billing is so deeply entrenched and has been widely used for decades proves that is has some advantages. This is another case of cognitive dissonance. The only way to eradicate this paradox is to explain why hourly billing is a rational policy. The case against the billable hour is not that it is not a profitable pricing policy. Rather, the case being made is that hourly billing is suboptimal (if profitability is your goal), and its disadvantages outweigh its advantages. Therefore, before listing the disadvantages, we will now discuss what is right about hourly billing.

The Advantages of Hourly Billing

Hourly Billing Is Easy and Efficient

Hourly billing can be handled simply with appropriate time and billing software, turning the pricing function into an administrative task handled by less costly personnel, ...

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