4 min read

Why Timesheets Hurt Everyone More Than They Help Anyone

For a century they have been incentivizing the wrong behavior.
Why Timesheets Hurt Everyone More Than They Help Anyone

Timesheets are a plague that suppresses value. Too much?

Did you know they were never intended to be customer-facing? In fact, the billable hour was an unintended invention, created by lawyers just over a century ago.

It has never made sense to me. The concept of tracking time completely misses the point. Professional service businesses are creative — ideas do not follow a linear path so how can tracking hours describe anything of real value?!

In a nutshell, your customers come to you to solve problems. They don’t wake up in the morning with the desire to make you rationalize every fraction of an hour that your team labored away on a set of tasks. Yet that’s what we have trained them to do by pushing the billable hour as our value metric.

So, if they are so bad, where did they come from, and why are they so pervasive?

The History of Timesheets

In the late nineteenth century, two theories were born. Bare with me for a minute, this may get nerdy, but I’ll be brief.

  1. The Labor Theory of Value. This theory stated that the value of output is the amount of labor that went into creating it. It implied that all products have innate value because labor was necessary to create them. This was the thinking of Karl Marx and became the basis for communism. You remember how that massive social experiment failed, right?
  2. Scientific Management. This theory sought to manage labor productivity, where accounting for every second is prised. The intent is to maximize efficiency by removing judgment and ambiguity. In essence, it is most useful in highly repetitive work (i.e. factories). Again, creativity is highly resistant to measurement on an hourly scale so this is not a good fit for professional services.

Yet in 1919, a law firm introduced timesheets as a form of cost accounting. They were not intended for pricing yet that came over time as the misguided practice of ‘selling time’ caught fire.

In the 1980s, advertising agencies also adopted the billable hour. This was an industry that had enjoyed massive profits in earlier decades, with innovative pricing models. Think ‘Mad Men’. Yet they threw away lucrative pricing strategies for billing by the hour and watched their profits crumble over the next few decades. So to did nearly every other creative professional services industry until revenue became a function of headcount.

I find this amazing given the Labor Theory of Value had been violently debunked by this time and yet most Americans didn’t know the billable hour was so closely tied to Marxist theories. A fact that would have been an immediate deal-breaker for the average Joe.

Some of the Biggest Failings

Now that you better understand how the timesheet and its evil sidekick, the billable hour, came to be, why should you resent them? Here are some of the most egregious reasons.

  1. Completely Subjective — professionals essentially bring their own clipboard and stopwatch. No one is able to check the accuracy of what was recorded. Unfortunately, this can also introduce unethical behavior over time and I’m sure you have a few go-to stories about this scenario. I do.
  2. Perverse Incentives — professionals want to maximize the number of hours billed while customers want to minimize them. This misalignment takes the focus away from delivering something of value and places it in the wrong arena.
  3. Value Agnostic — if an incredible idea (worth $$$ millions) is hatched in 15 minutes, is it worth less than one that took 80 hours? As professionals grow in experience and expertise, they can be “punished” for producing results too quickly. This is known as the ‘experience tax’. Many will askew the clever and revolutionary for the mediocre just to collect more fees.
  4. Political Pressure — while it is not typically shared explicitly, professionals can feel pressured to under or over report hours to meet the expectations of management. These are the unwritten ground rules that can turn the best of environments toxic.
  5. Highly Inaccurate — many professionals record their time at some point in the future and, as humans, we’re generally terrible at remembering what we did in the past. Do you remember what you had for breakfast on Monday? Do you remember when you finished?
  6. Unintended Culture — real culture is the unspoken rules followed during the daily grind, not some contrived mission statement. It is observed and organic — for better or worse. What happens when employees see their world through the binary lens of a billable hour versus a non-billable hour? In my experience, the important things that produce a sustainable business and future value for customers and employees are perpetually cast aside.
  7. Lagging Indicator — many firms insist that timesheets help them manage yet what does the data really say? It’s not reliable nor is it something that adds value for customers. When a problem is found, it’s almost always too late to course-correct.
  8. Wastefully Inefficient — a ton of time is spent managing, reviewing, and recording time that would be better spent speaking with customers to learn what else the firm could be doing to add real value. What would you do if you could get 10–20% of your time back to focus on adding current and future value for your business?
  9. Undue Anxiety — customers have no idea what the overall price will be when said and done due to inadvertently focusing a set of inputs (hours). To add insult to injury, all too often, the scoping and value decisions do not happen so neither party truly knows what is to be achieved, meaning success is difficult, if not impossible, to determine.

So, why did timesheets and the billable hour catch on like wildfire?

It’s not entirely clear, yet I believe it happened due to being simple and easy. A cop-out, if there ever was one. If one only has to come up with an hourly rate, a business can quickly be off and running. Why talk to customers to understand the value associated with the problem to be solved?! Over time, the billable hour has become what everyone else was using so herd mentality won the day. Or, rather, the century.

As an alternative theory, this practice likely became popular with the rise of corporate procurement departments. They looked for simple ways to compare multiple service firms and we were naïve enough to hand them the billable hour as just such a metric. And, thus, gave them a tool to crush profits and ignore the value to be created.

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