Episode 106:

Hello everyone and welcome to The Upstream Leader. My name’s Jeremy Clopton. Glad to be with you here today. I am joined by our producer, Justin Grant. Justin, good to have you on the show.

Good to see you, Jeremy, and happy to be here. Thanks for having me.

I am looking forward to this. We’ve been bantering back and forth a little bit about what we should talk about and what are some of the pressing topics? And frankly, the billable hour just keeps coming up. I thought, you know what? Let’s have a little fun. Which is probably not what anybody thinks when the billable hour comes up, but I figured, why not? Let’s have a little fun. Let’s maybe make the business case for why should we care about it? I figured, you know what, a lawyer turned podcast producer has about as good an insight on the billable hour as anybody. So let’s just have a little fun bantering back and forth about why this could be a good thing.

Before I do though, I do want to point out this episode is going live the morning of November 24th. We are also opening up all of our programs for enrollment this morning. So today, November 24th, if you’re listening to it the day that it launches.

Alright!

Yeah! Pretty exciting! Anyone that registers for programs for next year, so everything will begin in ’26. And our traditional timing, which is June, but if you register before the end of the calendar year, you’ll get next year’s program at this year’s price. Knowing that Upstream Academy obviously sponsors The Upstream Leader podcast, thought it made sense to go ahead and send you all out there to get registered if you’d like to. We’d love to have you in the programs next year.

Yeah, nice little plug.

I don’t do that very often, but I thought, you know what, seems like a good time to do it. Absolutely. So Justin, when I say the billable hour, what comes to mind for you? Fun, joy, happiness?

I think the funniest thing that comes to mind for me is that there’s not been any more universally discussed single thing in all of the accounting podcast production that I have done in the past five plus years than the billable hour. it is ubiquitous and the debate rages on: In some corners. It will never change; in other corners, it’s a settled matter that it should be discarded and consigned to the scrap heap of history forever. So ubiquitous presence not just of the hour itself, but of the contention around it, you might say.

Yeah, don’t talk about politics, religion, or the billable hour. That’s what HR would tell you.

Yeah! That’s right! And you know, having heard all these opinions, I get it. It’s Marmite as they say over here in the UK—you either love it or hate it—for a variety of reasons. I hope we can dig a little bit and maybe bring some clarity to this whole discussion.

Absolutely. And I’m just going to go ahead and call it how I see it, and I’d love to get your thoughts on it: The billable hour has a purpose in the profession. It is not the same purpose that it had 40 years ago. The billable hour is not a measure of productivity. It also should not be what we price, what we’re selling. I’ve heard constantly over my career, “Hours are our inventory,” and it’s one of my least favorite phrases because if that’s what we’re selling, we’re losing. We aren’t going to be able to hit the growth targets that so many firms have.

Well, that’s a commodity then. Is that really what you want to be selling?

Yeah, exactly. And arguably, every time I’ve heard that stated, “Oh, hours are our inventory,” I want to push back with, so you just take it off the shelf, run it across the scanner, bag it, and send it out the door.

Right!

And it’s retail, right? I can just go grab an hour and every whatever, it’s got a price to it and every hour is created equal. I don’t know that to be true. It seems that there are so many that can use a billable hour and accomplish four times what somebody else can. So how on earth can we say that’s what we’re selling?

Well, there’s that element, and then there’s also the element of no matter how much or what you are accomplishing, what is that hour worth to your clients? Why do you even want your client to think about it like that? Because I certainly don’t. And as you mentioned, my formerly having worked as a lawyer, to make my story short, basically I had to open my own law firm, so to speak. I mean, it wasn’t, it was in my house. But I had to do that because when I graduated from law school and passed the bar exam, basically the legal profession’s economy in Arizona had never been worse. So I just wasn’t able to get a job at a firm. And so I just did it the way everybody knew you did it, which was you wrote down every tenth of an hour that you spent doing anything, and I very quickly came to despise that because they’re even more picky about it in the legal profession as far as regulatory sense goes than they are in accounting. I spent a lot of time tracking how much time I was spending doing things, for one, and then I just realized, I’m not accurately conveying to any of my clients what I’m doing for them, just by writing it all down and giving them a list. So that’s kind of where I ultimately fell on it before I just kind of threw everything up in the air and moved across the world, a separate story. But that was my experience. And so kind of what you’re saying, like you take it off a shelf, like that’s exactly how I was presenting it, but I never had a lot of clients, and I never had a lot of success, and I don’t think those are directly related, but I wasn’t helping myself. I certainly wasn’t helping myself.

And you raise a great point. It doesn’t communicate what the value of what you’re doing is really worth to the client. When we say, here’s how many hours we gave you, well, okay, cool. What did you do with those hours? What are my tangible business outcomes? And that’s why when I view the billable hour, I don’t see it as the basis of our price. If it’s the basis of our price, we’re essentially saying we’re selling things at cost plus, rather than what it’s worth in the market. I don’t like that as a business model.

There. That’s the key, is the value of what it’s worth.

Exactly.

If you’re just selling it to me for cost plus, well, I can get that from anybody. So what differentiates your hour that you’re giving me from anybody else? And that was what I realized kind of after the fact, in part because of what I’ve been doing and the smart people I’ve been listening to talk about the billable hour, that that’s just not the formula for a winning marketing of what you’re offering to your clients out there.

Yeah, no, it’s so challenging to communicate what it’s really worth. And you said a word earlier on that I want to come back to and it’s “commodity.” When we commoditize what it is that we do, we are hurting the longevity of our firms, because we don’t want to be competing in a commodity space. Somebody might, don’t get me wrong, somebody might want to compete and they want, you know, cheapest, fastest, high volume, low margin, that’s what they want to do. And if that is you, by all means, please run your firm that way and find a way to be as successful as you possibly can. Most of the firms that I work with, they don’t have a desire to be cheapest and fastest. They want to be known for what they provide from a value standpoint. And the challenge there is, when we fixate on the billable hour as this cost plus mechanism, it actually keeps you, as you said, it keeps you from communicating the value. Arguably it can keep you from investing the time needed to provide the value to the client, to demonstrate that it’s more than just the hours. Because now we’re fixated on, okay, well it’s our cost plus, it’s also our measure of productivity. It’s not a measure of productivity, it’s a measure of efficiency compared to a budget, which is all predicated on our budget being right. And I don’t know about you, I don’t get the impression we’re necessarily great at budgeting. We go best case scenario, and I don’t know anybody that has that happen on a regular basis.

If they do, I want to know what they’re doing.

Oh, I would love to know how they budget!

Yeah! And you know, it’s funny what you said there. Ironically, I don’t even think the fastest, cheapest firm needs to use the billable hour either. They can offer, you know, I’m going to file your taxes for a couple hundred bucks—who cares how long it takes them, if that’s what they’re charging? Certainly the client won’t care. Like you said, it’s not a measure of productivity, but it does incentivize behavior that probably ultimately is not productive, because if you’re not billing it to a client, you feel like you’re wasting your time. Well, you probably aren’t, depending on what you’re doing. You’re probably making all of your processes more efficient by focusing on stuff you can’t just attribute to any one client. But if you create a system where the only way you have revenue is by attributing your actions to clients, you’re never going to be able to change anything, you’re never going to be able to make anything better, other than just on an individual case by case basis. And that’s not an efficient way to run anything.

No. It really stifles personal growth, professional growth, and innovation. It’s absolutely a killer for that. And you know, one of the other things that you said, I remember early in my career and looking at this from an analytics standpoint and having talked with some firms and worked with firms in this capacity, the amount of time as a profession that we spend tracking our time. And there are firms out there, some of you listening are like, oh, we have a code for that. Yes, you do, and I bet you’ve never added up how many hours there are spent tracking your hours, because that’s not a fun number to look at when you then extrapolate out, okay, what was the cost of all that time? The opportunity cost is completely different because even just using a cost plus, which I disagree with, it’s a big number. You look at the opportunity cost where you could actually generate value, it’s even worse. It’s like, what on earth are we doing? So all that to say, I think we need to keep the billable hour, Justin, and I don’t mean that sarcastically.

I knew we were going to go there somewhere! The title of the episode. So obviously all this bashing we’re doing right now, there must be a point.

There is, and it is shifting the mindset of the billable hour. Here’s what I love about the business model of public accounting. It is one of the simplest business models there is. Fairly predictable revenue, fairly predictable costs. Most firms by January or February could probably get within five or ten percent of the bottom line within the first month or two of the year. They could look at it, say, well, based on the clients we had last year, based on the people that we have, generally speaking, almost all salaried, yes, there are some hourly workers, but not as many as most professions. Lots of salary, lots of predictable recurring revenue. I can come up with pretty darn close to how profitable are we going to be this year right out of the gate? If we utilize our resources effectively, we can actually improve that.

And that’s where I think the billable hour is so important. It’s the fact that we have a significant number of salaried employees and by significant, what, 90+% of employees and firms. Excluding. I know some of my Canadian firms that are listening are thinking, no, we have more hourly. And I get that. California as well. Similar from an employment law, there’s some nuance there. I get that. But if you hear me out, we have a lot of people that are on salary, and again, there’s a lot wrong with the billable hour. What we miss with it though, we do have an expectation and we should have an expectation from a business standpoint. That every salaried employee will work an agreed upon number of billable hours because a salary and you’re, you’re the lawyer here, so correct me if I’m wrong. A salary is a contract. I give you pay, you give me hours. Fair?

It’s the consideration in the contract. It’s in exchange for the work you do, I will give you this consideration, your salary, yes.

Right. So if we talk with our employees, when we hire them, we give them a salary and we say, in exchange for the salary and benefits, you’re going to work X number of hours. Now, I don’t think that number needs to be three thousand. I think it needs to be a reasonable number of hours. But in that total, we’ve got to have an expectation of this many billable hours. That’s not a bad thing. We have vilified the concept because it’s a billable hour and there’s so much that, again, we bashed, but we have vilified the concept of the billable hour when the reality is, if I am giving you a salary, I have a reasonable expectation you will provide me in consideration for that salary, a set number of hours. Some of those will be billable, some of those will be non-billable. Is that fair?

I think that’s a generally accepted and reasonable expectation. I don’t think it’s absolutely that in the end. I think there are the firms out there that will say, “Work as many hours as you want to, as long as you get the work I give you done. I don’t care how long it takes you, just finish your workload. That’s what I’m actually paying you for.” Even though we have classically measured it all on kind of a nine to five basis and taken it from there, it doesn’t have to be that.

Or seven to six, depending on the firm.

Right! If you’re especially quick at doing this particular accounting task, and that’s eighty percent of your job, and you get it done twice as fast as the average person, more power to you. We see this a lot more as firms go more hybrid and remote too. However, I see nothing illegitimate about, no, you’re going to work a set number of hours. Because even if we define your salary as just a set figure and treat it that way, we’re still kind of saying, well, yeah, and then we divide it by the number of hours you’re working, you’re getting that much per hour. That seems reasonable to me too.

And the reason that I go that direction and I get the get your work done, anybody that knows me knows that’s what productivity is, the right people doing the right thing at the right time. In practical application, what happens if we don’t have some expectation of what you will provide the firm, high performers will be penalized by being given the more work and asked to pick up the slack for those that don’t, with the promise of some future benefit and ascension to the top, if you will.

And put accounting to one side for a moment. That is rife throughout every industry and profession, the world over, that attitude.

Absolutely. And what I like about the billable hour in this context is it allows you to say, Hey, I’ve got X number of employees by level, at each level or with each employee. Maybe it’s individualized. I know a lot of firms that do that individualized. This is the number of billable hours that each individual has agreed to at each level. Those are now the resources that I have available to serve the clients. The reality of the matter is client work takes a set number of hours. Whether it’s super efficient or a little bit less efficient, we can come up with—

We’ve got a range.

—this is what a project should take. And we’ve got to know, do we have the right hours to serve the clients that we have? And we use that to workload balance so that nobody is being unduly penalized. And a high performer is not, you know, yeah, the expectation’s, you know, 1,500 billable, but if you want to work 2,300, that’d be great too, because that person over there, they’re only going to get about seven hundred in because they’re lazy. By the way, we’re going to pay them the same and probably promote them at the same rate too, but we’d love for you to make up for it. I like the billable hour as actually a great way to communicate to the team: “Look, we’ve got X number of people. Which means we have Y number of hours available. We need Z number of hours to serve the clients. What we’re going to do is we’re going to use that to balance it appropriately, and then from there,” back to your point Justin, “Go get the work done. If you can get it done faster, please do and go home. That’s fine. If it takes you a little bit longer, okay, it might take you a little bit longer.”

The idea is trying to figure out how do we use it to ensure—the billable hour, that is—how do we use it to budget more appropriately so that we can better serve our clients, better invest in the long-term future of the firm. Because the other risk with the high performers taking on an extra three, four, five hundred hours of billable work is they then get less time to invest in their own growth. I know somebody will say, “Well, they should just work an extra three or four or five hundred hours.” Perhaps, but you should probably get rid of the low performers they’re having to make up all the work for as well, but we’re not going to have that conversation either, probably. So we’ve got to figure out how do we use the billable hour to educate our teams on how we manage resources in a way that doesn’t overwhelm anyone, but allows for growth and sustainability of the firm. That’s kind of my thought. I’m curious: Your take?

Yeah, I think there’s a distinction here that people don’t make sometimes, I feel like, and that’s that a billable hour, particularly the way you are treating it, which is just, “We’re going to bill this to the client because this is roughly how much time we know on average the task is going to take,” doesn’t mean you’re going to track that many hours in the end.

Right, and maybe I should change the word. Maybe I shouldn’t be talking about “billable hour.” We have a set number of “client service hours” available.

Yeah, there we go.

Because we’re not going to bill for the time. I’m thinking about the time as a resource to get the work done.

Exactly, yeah.

Which is not billed.

And so to your point, actually ironically, before I became a lawyer, I worked in insurance, and I, among other things, did data entry because I was very young and very low level. And I did data entry at like three times the rate of everybody else, and everything you just said is exactly what my experience was. I partly understand it because they’re like, “Why do we want to move this guy out of data entry when he does three people’s worth of work and we only have to pay him one salary?” So, yes: Balancing this and making sure that, yeah, it’s great to have technicians that really get the work done really fast, and who knows, maybe some of them, they’re not interested in moving up the ladder as long as they’re fairly paid in their own view. They may not want to be partners. They may not even want to move to senior management level. If not, and they’re just happy doing their work, just compensate them fairly. Because they are doing the work of multiple people, or at least an additional fraction of a person, and if you’ve got the people that just, they’re not as talented technically, what other strengths do they have? You obviously hired them for some reason. So the technical side, sure, they can still contribute, but you want to taper how much of their contribution to the overall productivity of the firm comes from technical tasks and place them in areas where they can show skills that will suit what they’re capable of better and contribute more to the firm, relatively speaking.

Yeah, really, those high performers, it runs the risk of stifling their growth.

Exactly.

Because they’re so good at what they do that we’re like, well, we need them doing all the billable work. Because they’re so good at it that they can get more of it done when in all reality they should probably be maybe training other people to do the billable work as effectively. There are so many other great uses. And that’s the challenge when we fixate on the billable hour as a cost plus mechanism, it actually encourages, we’ll only use the high performers. Because they’re going to allow us to, and look, we do it, charge less, or at least feel better about what we charge. The reality is what it’s worth to the client, outside of a couple areas, has nothing to do with how much time it took. They’re not going to care how, I’ve never met a client anyway that you go in and say, yeah, we had some newer people. It took three times as long, so we’re going to have to probably charge you more. And they’re like, I don’t think so. Here’s what we agreed to. So here’s what it’s going to be. Perhaps I’m not making the case for the billable hour. Perhaps I’m making the case for the client service hour.

I like that.

So that we do use it as a resource as to how to appropriately staff projects to ensure that clients are taken care of, because we do need to be client centric, but people are not taken advantage of because we do need to be people focused. And then we’ve got to figure out, alright, now how do we actually build this? Which there was a whole conversation we did with Michelle RIRs on that and the worth. What’s interesting is I would challenge most that are listening to this if you’re thinking, okay, but how do I bill my clients? You probably already know what you’re going to charge them anyway. Let’s just call it what it is. You already have that answer in your mind because it’s what you charged them last year, plus three to five, seven percent, and that’s probably what you’re going to charge them anyway. Don’t spend the extra hour trying to figure it out. Again, predictable income, predictable cost, salary, if you need to figure out what your cost is to determine profitability, again, it’s a client service hour and you could take total hours divided by salary and benefits. If you want to get a cost per hour, you’ve got to use a set metric because there’s going to be some fluctuation there probably. Again, though, it’s not the basis of what you’re worth. You’re worth so much more, I hope, than just what the time is.

I certainly do too.

But there is a purpose in it. We’ve just got to think about it from a different perspective. It’s the time available and then that becomes, to me, one of the key metrics that I talk about with firms is utilization. But it’s not. What’s the total number of billable hours per person? I see a lot of firms calculate it that way. I don’t care about that metric, actually. The metric that I’m most concerned with is for each person, how many billable hours did we communicate to them that we needed them to work this year? How many hours did we have available—client service hours available—from them, and how many of those did we use? And I want it to be as close to a hundred as possible. I don’t want to take advantage of them. I’m not advocating for 120 percent. There again, that becomes the high performance penalty that pulls away from their growth and development for the future. But I’d love to get it close to 100 because if not, we’re not delegating right, we’re not training people. If we aren’t able to utilize those hours, we’re not staffing things correctly. And that’s the use of the client service hour in my mind.

And the other nice thing that kind of goes unspoken is the way that you’ve arranged it to track, it tracks itself. You’re not having to separately track any of this. Because you already have an idea of everything. And of course you have clock in, clock out times. So, you know, you don’t have to say like, specifically track your time. You know, at least combined—you may not know on a per-client basis—but you know the amount of work everybody’s doing and where it’s lacking and where it’s beyond what your expectations were and therefore, you know where to go to fix things.

Yeah, absolutely. And if we’re running the firm like a business—which is one of my really big areas of focus—they are businesses. We should have some level of expectation that there is consideration of, Hey, I’m going to communicate to you. Here’s the number of client service hours I need from you this year. If you can be efficient, great, we’ll get you more projects to get done with those hours, but I’m not going to overwhelm you because of it. It’s not like you’re doing the work of three people, like in your example, so I’m going to now give you all of their work and expect you to work thirty percent more. No, I still have the expectation. I’m not going to take advantage of you, but I need you to provide what you have committed to the firm from a business standpoint.

And that, to me, changes the conversation a lot in a firm. If I sit down with you and I say, Hey Justin, you’re a manager, this year you’re going to make X number of dollars, we’re really going to need, from a resource allocation standpoint, about fourteen hundred client service hours. We expect that you’re going to use in your other time, that you’re going to take vacation holidays, you’re going to have personal development. We’re going to expect that you’re going to work, call it 2,200, 2,300 hours this year, which realistically is not an unreasonable number in our profession.

No, not at all.

For some that are listening, they’re going to think, my gracious, that’d be amazing.

“I’d love to do that!”

Yeah, exactly. And if I set that expectation at the beginning and I say to you, I don’t necessarily care about the hours from a billable standpoint, but I need you to dedicate those hours to client service because that’s what we’re using to determine do we have enough staffing to serve the clients that we need to serve, it’s a resource management thing, and you commit to that, there should be a level of accountability to say, alright, our goal now is 100% utilization. It’s up to me as your supervisor, maybe it’s a senior manager or a partner, to ensure that you have enough work to fill those hours. It’s up to you to communicate whether or not you have enough work to fill those hours, and we have that dialogue. And then if it looks like it’s overwhelm, then I’ve got a responsibility to go to somebody else and say, hey, we’ve got Justin over here, he’s maxed out, you’re 3 or 400 hours under what the commitment was, we’re going to shift some over to you, and we have that dialogue throughout the year. It actually ensures that no one becomes overwhelmed and everyone is focused on getting the work done.

So the case for the billable or the client service hour is to use it in an entirely different way than it has historically been used throughout accounting’s existence.

Absolutely. Throw out the way that it’s always been done, and look at it from a new perspective. And look, if you want to measure profitability on your jobs, by all means do take all the hours at the end of it, whatever their cost was, compare that to what you think it’s worth to the client. Is that profitable? If not, you’ve got to figure out how to make it worth more and telling the client, well, it was three more hours of time, so I want to charge you three more hours’ worth, that’s not communicating worth, right? That’s communicating commodity sales. You’ve got to make it worth the profitability.

Exactly. And this is all readily available information as we kind of discussed earlier too. So you’re not only not doing this time tracking dance that uses time, you are framing things in the right light so that everything that’s related to everything else is kind of coming together to give you an actual complete picture. Not a commoditized, here’s our limit, like what we can absolutely do, and this is what we charge for what we can absolutely do. No, it actually throws the shackles off.

Yeah. And the budget process, you’re probably still going to do some budgeting on jobs because you need to know what’s it going to take to get a project done. Do we have the resources available? But that is essentially, that’s an internal efficiency measure. And that indicates, A, did we staff it correctly, and B, is our training working, and maybe C, do we know how to actually estimate a job? Which, that could be a whole other topic, but that’s what that helps you with. That helps you run the firm better rather than, oh, we need to bill three more hours. Whatever it’s worth to the client is what it’s worth to the client, and I would argue. For most things, it’s a higher price than anybody’s going to charge based on the hours.

That’s the thing. For most firms, they’re undercharging. So you’ve also got that dynamic and that’s yet another whole other episode in this list of other episodes we keep bringing up!

Absolutely. So I think as much as I hate time tracking and as much as I don’t like the general discussions around the billable hour, and for all that’s wrong with it, I think we need client service hours so that we can determine are we running our businesses effectively. Agree or disagree?

Yeah, I do agree. And I really think the best case for this particular form of tracking is that it more or less tracks itself. You just have to go looking through the data you already have to make the determination. And that is so much better and so much more efficient without even getting into all the other advantages we just discussed.

Absolutely. Well, Justin, thanks for a fun conversation. I know everybody was like “billable hour?” Hopefully the banter was helpful and hopefully as much as I don’t typically advocate for the billable hour, you can see the business case for the client service hour. If anybody wants to talk more about it, by the way, you are welcome. When this episode goes live, hit me up on LinkedIn, shoot me an email. I’d love to have a conversation about this and how to actually change the conversation in your firm—we talked about it pretty briefly—hat takes some effort, it’s going to take a collective effort, but man, it could have a lot of benefit, I think.

Yes, it could.

Well, Justin, anything else for the good of the episode?

Oh gosh. I mean, what more can we say other than, I guess closing with: I do think it’s worth underscoring the point about how your high performers in the classic time tracking system can really get undervalued. Just drawing on my own experience in that insurance company, even though it’s not anything really directly related to accounting or time tracking, I never advanced—now obviously you might, as you might guess, this is sort of why I went on to another career—but I never advanced in that company. And I think it was because of what you said, Jeremy, it was sort of exploitative. They knew they had somebody that could just absolutely crank this work out.

Now, and it’s funny to me because this is twenty-five years ago. I don’t even think this work exists anymore. Data entry? Really, really rare anymore. It’s all handled by the computers now, and by optical character recognition. But back then it was a big deal that I could type one hundred twenty words a minute like that mattered. However, my being an attractive candidate for the position limited me ever advancing because that was my quote unquote “ideal position.” And so if you have employees, if you have people that have been with your firm that are really, really stars when it comes to output, but you don’t show them that you value them, you will lose them. This is a way to make it easier for you to reward what they do for you and to make it make sense in your business model.

Absolutely. And retention of high performers is absolutely critical in our profession. People are, and in my mind, will continue to be the biggest differentiator and competitive advantage that firms have. I think as we add technology, and technology becomes more democratized, if you are competing on tech, you will become a commodity very quickly. If you compete on the value and expertise that your people provide, you will have a competitive advantage. People working to the clock and being afraid to lean into high performance as a result of a billable hour mandate, can absolutely stifle growth, it can stifle creativity, and ultimately it can stifle those client relationships. So we’re going to abandon the billable hour, but we’re going to double down on the client service hour.

There we go.

And run our businesses effectively to be client centric and people focused. Sound good?

I think we got it!

Alright, well Justin, I have thoroughly enjoyed our conversation. Our next conversation, between you and I, we’re going to make the case for why Q1 shouldn’t start in January. We will wait and do that mid tax season. I think that’ll be a little bit more fun there. And we’ll see what else we can tackle from a challenging, the status quo standpoint.

Sounds good to me. I like it, Jeremy.

Alright, we’ll talk soon. Thanks Justin.

Thank you!