It’s not often that I recommend listening to country music, but I want you to listen to this song before you continue on. Go ahead and give it a listen … it’s just time.
Done? Ok. The message of this song is how important it is to spend time with your children. While I certainly agree with that sentiment, I believe there is an underlying business message in this song, too: How can you place a value on your time? This isn’t a rhetorical question; it’s a question we are going to answer here and now.
The Problem with Billing by the Hour
We can’t make more time and we don’t know how much of it we have. Yet, so many of us in the professional services industry are selling our lives by the hour and making peanuts in return.
When you bill hourly, you measure inputs, or the time you put into a job. But, a client cares about outputs, or what was accomplished. So, if you get better at what you do (improved efficiency), you get paid less. And sometimes you may produce significant value for a client in a short time (a bargain for the client). Other times, though, you may work for many hours and not reach the client’s goal (bad for the client, or a big write-off for you). Lastly, there are times when all of our training, experience, and hard work come together to create a brilliant insight in a moment (usually when we are in the shower, or behind the wheel of the car). How do we bill for that?
In an interview with Mark Chandler, general counsel at Cisco Systems, he commented, “I don’t care what law firm billing rates are. I care about productivity and outputs. As a client, what I want to buy is access to information, strategy and negotiation and, in the case of litigation, to courtroom skills.”
Fix it up!
Clients like fixed fees. Why? It’s easier for them to plan around and budget for fixed fees. Don’t you like when you know what something is going to cost?
The other reason clients may prefer fixed fees is that with hourly fees, they are forced to take 100 percent of the risk in the project. It’s possible that you produce absolutely no useable outcome for the client, but your client still receives a bill. On the flip side, you may create a spectacular outcome, but you remain in control of the cost by determining how much time went into it. Either way, it’s kind of crazy. Your client hired you because you were the expert! They don’t know what to expect from your service, the complexities of what you do or the range of outcomes that you can achieve. So, shouldn’t you shoulder some of the risk or at least provide some guidance to the client?
Now you have another problem – you shoulder the risk, but your client doesn’t perceive it, and you get no benefit from it. But how can that be? I’ll give you an example. Have you had a project that took so much time that your conscience didn’t let you bill it all? Did you ever look at a bill and think, “They will never pay that!” When you write off that time, you shoulder the risk. If the bill is too high, you write off time; but if it’s too low, you can’t add time. It’s heads the client wins, tails you lose. In effect, you are billing hourly against a ceiling, even if it’s of your own making. By billing at a fixed cost, your client sees you assume some risk upfront, and you can avoid the lost time that often comes from hourly billing.
When I challenge my clients to explain why they charge by the hour, this is what they say – and what I say back to them:
1. My business is different; there is so much uncertainty in what needs to be done to achieve the outcome that I can’t possibly guess.
If legal firms can do fixed-cost litigation, I don’t understand what service can be too complex for a fixed-cost bid. The complexity of the project should dictate a “risk premium.” Figure out your “best guess” of the costs, and then multiply by a larger number for risky assignments and a smaller one for simple assignments. You don’t have to do this all at once – make some trial runs. Estimate a fixed cost but don’t give it to the client. At the end of the project, see how closely your estimate matched your hourly billing, and then adjust your estimates next time. Once your estimates are where you want and need them to be, start to offer fixed bids.
The other way to combat the proverbial unknowns is to keep your phases short. Break a big project into smaller phases and provide fixed costs only at the beginning of each phase (with a range for the subsequent phases). This helps account for the unknowns.
Lastly, if there really are too many unknowns, propose a diagnostic phase. This allows you to “get under the hood” and really see what’s up with the project. The deeper understanding you get from this time will allow you to not only price the job better, but might also make you more effective in delivering your services.
2. My clients are always changing their mind about what they want. If I use fixed pricing, I’ll lose my shirt.
If your client is constantly changing his/her mind, then more effective project management is needed. Set clear outcomes and boundaries so the client knows “what’s in it for them,” and then continue to reinforce those outcomes and boundaries as priorities shift. Whether the changes result from actual shifts in the firm’s priorities or challenges or simply come from changes in the way the wind is blowing, you may need to address those changes by renegotiating the terms of your deal with the client. Sit down and have a frank discussion, and work out a new scope and price.
3. Everyone in my industry traditionally charges by the hour. It’s what clients want.
This objection is especially confusing to me. It’s time to break the tradition – you’re not everyone in your industry. Remember, you are offering expertise, not time. In every industry, there are those who seek value – find those clients and sell your value to them. You will be insanely attractive to those clients who, like you, see the need for change. Build your business by billing for value and the change will come.
So, let’s revisit the question at the beginning of this article: How can you place a value on your time? You really can’t; your time is priceless. But, what you can do is protect your time and promote your value by billing for value and not for time. This not only aligns your interests with those of your clients, but it properly compensates you for your intellectual capital and experience. If you make your clients realize the value of your services, they will put the value in your time.
Photo credit: [Duncan]