From hourly to result-based billing. How to revolutionize your business

All too often I come across clients who charge their clients an hourly fee for their services. Most of these services represent knowledge work that is measured by input (time) rather than output (delivery or results). I see it all the time. A lawyer who charges $325 an hour to write you an operating agreement, or a web developer in India who charges you $9 an hour to develop your website. What buyers of these services want is an operating contract or website, so why do we continue to focus on contracting consultants and service providers based on the value of their investment, not their results?

Let me be clear, the results can take many forms. Results can be an output such as a report or a project, they can be a desired outcome such as a successful implementation, or the results can be business advice that increases market share or profits, achieves cost reduction, etc. The real question for consumers, consultants. , and the service providers are as follows. does hourly pay still make sense in your industry?

I’ve often said that I don’t care about the hourly rate at my local garage shop. I am just wondering how much it will cost to service my truck.

Recently one of my sons had to replace the engine in his Chevy truck. He purchased a comparable low-mileage used engine from a local salvage yard and researched several options for swapping engines. The quotes he got for the job were very different. Shops ran the gamut, too, from a certified Chevy dealer to a shady mechanic working out of his home garage. The latter said that it would take him a few days to complete the exchange. One said the exchange could be done in a day. Although time was not the ultimate determinant, my son was free to focus on the overall value of the work.

It turned out that the shadow mechanic working out of his converted garage had the lowest costs; however, his quote was not the cheapest alternative. Although his hourly rate was much lower than everyone else’s, the time he estimated it took to complete the job more than made up for his low hourly rate. In the end, my son went with neither a shady mechanic nor an authorized Chevy dealership and found a local shop that specializes in engine rebuilds. Since the rebuilds they did required removing and installing engines, simply removing an old worn out engine and replacing it with a newer one was something they specialized in.

Why Review Hourly Billing?

I believe that hourly pay for knowledge work is simply a legacy practice tied to the status quo. However, several developments have caused people to reevaluate the status quo regarding hourly billing and look for alternatives. Below are three reasons buyers start reviewing service purchases hour by hour:

  • Changes in technology, demographics, and social norms have spawned the gig economy and remote work, forcing many to question traditional employment models and seek more flexible alternatives.
  • External pressures such as economic downturns, political upheavals or public health crises have forced consumers to reassess the status quo and seek new solutions. For example, the COVID-19 pandemic has forced many businesses and individuals to rethink traditional ways of working and living.

How hourly pay became the norm

How did we get here? Since the dawn of time, goods and services have been valued according to the value they bring to the consumer. A quilt made by one person could be traded for a pot made by another, or corn grown by a farmer traded for a deer shot by a hunter. Exchange rates were based on the value of goods and services to each party. All that changed with the advent of the industrial revolution.

As industrialization took place, many workers moved from being paid for the value of the goods or services they produced to being paid by the hour. This shift was driven in part by the need for standardized working hours in factories, where workers had to be on the job a certain number of hours per day to ensure the factory was operating at peak productivity.

Later, unions and labor laws helped establish minimum wage laws and other protections for workers that further entrenched the hourly wage system.

Today, most of the workforce no longer works on the floor of an assembly line, where they are simply cogs in an industrial machinery. Now that we operate in a knowledge economy where a computer and a network connection are all you need to produce your product, the hourly wage system is still the norm in many industries.

There is growing interest in alternative models, such as value-based pricing, where workers are paid based on the value they deliver to a customer or employer, rather than the amount of time they spend on a job.

Shackles preventing change

So what are the gravitational forces that keep us chained to getting paid hourly and buying services? There are four forces that bind us to the hourly billing status quo.

  • Billing by the hour or getting paid by the hour is simple. It’s easy to track time spent on a project and calculate total billable hours.
  • Hourly billing remains a common billing practice, and many customers have adopted it as the default option. It is also easy for customers to compare different service providers and understand the cost of the project.
  • Hourly billing reduces risk for service providers because they are guaranteed payment for the time they spend on the project, not the output they deliver to the client. This can be especially important for new or small businesses that don’t have much financial stability or the experience to understand the effort required to produce a product.
  • Hourly billing allows service providers to tailor their fees based on the specific needs of each client and project. This makes it easier to work with clients who have different budgets and changing requirements.

However, as mentioned earlier, charging by the hour has certain limitations and may not always be the best option for service providers or their customers. Many consultants and service providers are exploring alternative payment models, such as value-based pricing or project-based pricing, which focus on the value they bring to the client rather than the time spent on the project.

One great example can be found in personal injury law. Lawyers have always been known for their high hourly fees. There is a limit to how much consumers consider justified, which puts downward pressure on the hourly rate that attorneys can charge their clients. Thus, most personal injury attorneys today have abandoned their hourly fee structure in exchange for participating in the outcome of the case, offering contingency fees in which they are paid based on the outcome of the case.

Why charge by cost and not hours?

Alan Weiss, in his book, Million Dollar Consulting, argues that consultants and service providers should not charge by the hour, but by the value they create for the client. Here are five key points Alan makes about why you should charge based on the value you provide and not an hourly rate:

  • When consultants and service providers are billed by the hour, they are encouraged to work more slowly and take longer to complete a delivery. It also forces them to take on additional low-value peripheral assignments, encourages scope creep, and promotes non-essential tasks, all of which are not in the client’s best interest. The customer knows that the longer it takes to process the product, the more you will charge them. The customer then wants more control to make sure they are not overcharged. Not only does this neglect create extra work for both parties that adds no value, it also creates a sense of distrust.
  • Charging by the hour can limit the income potential of a consultant or service provider because there are only so many hours in a day. When you charge by the hour, eventually you’ll hit a cap on your earnings, which is limited by the number of hours you bill in a day.
  • When it comes to consulting services, hourly billing does not take into account the value you can bring to a particular deliverable or outcome. For example, while many clients may be willing to pay a premium for a consultant’s specialized skills and knowledge, even if the direct value derived from a particular project is difficult to quantify, charging only by the hour means that a consultant who provides significant client value may be underpaid. In contrast, a consultant who provides little value but spends more time on the project may be overpaid.
  • Clients perceive hourly billing as unfair if they feel they are being charged for time that was not needed to complete a project, creating tension in the consultant-client relationship. A few years ago, I recommended a highly rated turnaround consultant to one of my clients. A client objected to the bill when they saw the consultant charging them to attend team meetings that they believed were not part of why they hired the consultant. The fallout led to the consultant’s eventual dismissal, and my client took every opportunity to defame the consultant whenever his name was brought up in the discussion, and this incident continues to create tension in our relationship to this day, as I was the one who forced guidance.
  • Clients often underestimate how much effort and time it takes to achieve results and are surprised when they see the final bill. This leads to frustration and a lack of trust in the advisor, as the client feels that the advisor is not transparent about its billing practices.

Overall, Weiss argues that consultants should focus on charging for the value they provide their clients, not the time they spend on the project. This may help build stronger relationships with clients based on trust, transparency and results. By focusing on value, consultants can also increase their earning potential and avoid some hourly billing restrictions.

Is it time to reconsider whether you should be paying by the hour?

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