The billable hour.
For clients and service providers alike, it’s clear the billable hour is not representative of the value a service business can deliver.
As a result, this week’s big question seemed like a no-brainer.
We all love to hate the billable hour.
So let’s all agree right now that the billable hour stinks, but a service business still has to track its time.
As a result, perhaps I don’t need to go through the preamble I had prepared. It was good. It expounded upon the evils of the billable hour.
And it explained why clients don’t want to pay a crazy hourly rate for the most senior person (not to mention paying in 15-minute increments).
And it recognized they don’t want their project managed by the most junior team member to save money.
I probably don’t even need to explain the appeal of performance-based pricing.
Instead, we can get right to this week’s Big Question.
We know Gini’s position, but what do you think?
The billable hour: Yes or no?
Risk vs. Reward
If you built a website for your client that makes them millions of dollars, what’s that worth?
A fair question, right? It “costs” $X in hours and labor, but that doesn’t communicate the value.
Matt Pinsker notes that what other pricing models—and those who disparage the billable hour—overlook, is the risk factor:
First, a flat fee is nothing more than an estimate in advance of how long I have to spend on a job, and the client and I both have peace of mind of knowing exactly how much this will cost.
Second, your questions completely omit an extremely important aspect of business, which is risk. You cannot make prospective value determinations without first factoring the risk.
Any business venture, such as the example you provided of a new website, could make the client money, or the client might end up losing money.
The client is taking a calculated risk in the market. In contrast, when I bill by the hour, I am not sharing in the risk the client is taking, and unlike the client, am guaranteeing that I see a financial return for my labor.
That is why the question If someone builds you a website enabling the client to make millions of dollars, “what’s that worth?” is a non-factor because that website just as easily could have been a losing venture.
What I certainly could do, if agreed upon by the business, is waive my normal hourly rate or flat fee, and in exchange have partial stock or ownership.
That way, I share in the risk and whether or not I make any money is tied to the success of the business. However, most individuals in communications, web design and other areas which often bill by the hour prefer not to share in the risk, and instead, prefer to guarantee payment.
Although there are some exceptions, given that the overwhelming majority of business ventures fail, guaranteed payment by an hourly or flat rate is standard.
The Billable Hour vs. Flat Fee
Kim McCumber agrees with Matt on the risk front, but takes a different perspective:
As a digital marketing entrepreneur, it’s tempting to bill hourly, but it’s important to understand the business owner’s perspective.
An hourly arrangement carries pretty significant amount of risk, both in planning as well as overall cost.
I’ve found that tiered flat fee structures work best for everyone involved (at least in marketing).
For the business owner, it provides the ability to plan effectively by predicting the cost of my services. As the provider, I have clarity around my expected income while maintaining the ability to scale depending on workload.
#1: For the business owner, be wary of the lowest-cost provider and consider the quality of work you’re going to get. If flat-fee, estimate what that might work out to hourly.
If it’s quite low, that provider is probably spending minimal time on your business OR outsourcing the work to an even lower cost vendor and charging a premium. A practice that, unfortunately, is more common than business owners might think.
#2: For the marketing professionals, make sure you’ve done your homework in calculating your flat fees.
To start, use your desired hourly rate and the amount of time you expect to work on a service for one client per month.
Remember that some projects (for the same service) require more effort while others take less effort, so start from a range and develop your pricing strategy from there.
Don’t try to be the lowest-cost provider, try to be the one that provides incredible value to your client.
The Billable Hour: It Depends
From Lynn Shepherd:
It’s tough because what I’d charge a nonprofit is different than what I’d charge a Fortune 50 pharma company.
So I have hourly rates for different categories and use that to develop project fees.
I also hire contractors and agencies, and I completely agree that things are moving to project fees tied to outcomes.
Clients like to see what they’re paying for. The billable hour does provide a sense of transparency and a certain clarity around what’s getting done. Not to mention what’s not getting done, and how long it’s taking.
From Susan Cellura:
Every project I have had has been billable hours.
One, the client wants to see what I’m doing and two, I like to see how long it takes me to do something so that I can better bid and allot my time.
On the Clock
On the other hand, that very same transparency can hinder creativity and, as Greg Brooks puts it, there’s always an egg timer running:
Historically, the billable-hour model gave the highest returns to all professional-services firms—not just PR shops.
That’s still the case for firms of a certain scale and it’s one reason you still see the model deeply entrenched in law practices. But a lot of us (like me) have moved to value-based billing in the form of fixed project fees or fixed monthly retainers.
Does that mean I don’t know what I make per hour or what my target is per hour? Absolutely not—it’s around $238ish for the quarter so far and $272, respectively.
What it *does* mean is that I have enough experience positioning the work as valuable, estimating the work realistically and sourcing the labor cost-effectively that value pricing usually works in my favor.
Value-based or fixed-fee billing is absolutely the last pricing model I’d recommend to someone who hasn’t done a lot of scoping and estimating.
OK, back to the billable hour: my fundamental issue with it is that it sets the client and me in opposition to one another—every time he or she picks up the phone to call me, there’s an egg timer running somewhere, tallying up the minutes.
That’s great for me if I want to capture every cent of value from tactical execution; crappy for the longer-term, strategic relationship with the client.
And, on top of everything else, it’s utterly risk-imbalanced and just happily assumes the client is going to pay me even if my execution is slow, ineffective or both.
Which is why, in competitive situations, I will always opt for value or fixed-fee billing as long as I feel comfortable that I know enough to scope the project properly.
I haven’t taken work from Edelman because I’m smarter or better than them—I’m pretty sure I’m not.
But if you ask a CEO to compare my one-line, risk-balanced invoice against the half-inch-thick time-and-task report from the big guys? Well, I *have* won based on that.
The Billable Hour: Yes, but No
From Eden Spodek:
I hate them and, ironically, most of my team members bill me hourly.
We use a value-based/project-based billing model for most of our client work (based on estimated time involved, etc.).
That being said, I’m working with a couple of finance experts who may strongly suggest otherwise for the upcoming fiscal year that starts March 1.
Which seems to be the conclusion of this week’s query. The billable hour?
Yes. No. Maybe. It depends.
I could go on (and on) about this, so here are some resources to help fuel further conversation:
- Jon Lax: Let’s Kill the Billable Hour [Video]
- Pricing on Purpose: Creating and Capturing Value, by Ronald J. Baker
- The Great Billable Hour Joke, by Patrick Lamb
- Performance-Based Pricing in a Billable Hours Industry (by Gini Dietrich!)
There are a lot of challenges we face in communications and marketing, including time tracking and the billable hour.
My biggest challenge is productivity and organization.
Sometimes it’s digital distraction. Often it’s an inability to properly prioritize the next thing on my to-do list.
The point: I’m not always as organized as I need to be.
What about you?
Next time we want to know what you consistently run up against. The wall you always hit. Those issues and tasks you dread week in and week out.
Specifically, the next Big Question is:
What are the biggest challenges facing communications and marketing professionals?
You can answer here, in our free Slack community, or on the socials (use #SpinSucksQuestion so we can find you).