Value and client satisfaction are higher plus efficiency and profitability better ensured when the billable hour is abandoned in favour of value-based fees fixed in advance with a satisfaction guarantee.
Value, Efficiency, and the Billable Hour
In the 1987 film The Secret of My success, Brantley Foster, a recent university graduate, finds himself laid off from his Wall Street job before his first day of work. Having just moved from Kansas to New York City, he persuades his uncle to get him a job. There, lessons regarding time, value, and money begin for attentive viewers of the film.
Work 2 hours; get paid for 7.
Early in his work for the mail room of his uncle’s company, Brantley learns how to perform his job in a fraction of the time expected. He then keeps the mail room happy each day while using an alter ego to pursue activities better reflecting his ambitions – all in the guise of working full-time hours at his mail-room job.
Maintaining the illusion that it takes a full work day for Brantley to perform his job is important for the business insights that the film offers regarding time, value, and money.
· Brantley’s employer values the work performed at the level of a full-time wage, unaware of the time actually needed to do the job.
· The film shows how efficiencies found and practised can free up human resources for other activities.
· Despite his university studies in finance and his eagerness to prove his merit, Brantley has no incentive to point out that there is a more efficient way to perform his job. He uses the freed-up time for his own benefit; not his employer’s.
These points apply to the fundamentally flawed but widespread situation in which tasks involving expertise are performed for clients who are billed by the hour. This article points to a better way for companies that charge by the hour.
Focus on time spent creates misalignment.
· It is customary for clients to pay for the time taken to perform tasks while what they really want is not time at all. Rather, they want the benefits of those tasks performed expertly.1
· Those logging billable hours for their work have a disincentive to use time-saving efficiencies that could save money for their clients.
· Managers in the billable-hour paradigm necessarily view efficiency in terms of how much time it takes to perform tasks; not necessarily in terms of optimizing value.
A shift in focus from time spent to value provided realigns the worker, the manager, and the client in seeking optimal value through efficiency.
Productivity is about delivering results, not spending time.
In 1899, FW Taylor asked, “How many tons of pig iron bars can a worker load onto a rail car in the course of a working day?” With this question, a clipboard, a stopwatch, and statistical analysis, Taylor brought management theory to life and introduced the paradigm of simplistic, quantified measurement to manage and compensate workers.2
Though Taylorism has since come to be regarded as oversimplistic, the paradigm of the billable hour, and its associated incentives and disincentives, continues to dominate many fields in which tasks involving expertise are performed for clients who really just want value.
Better = more valuable.
In any field, a reliably better overall client experience equates with higher value and justifies higher price. This includes a paradox with the billable hour when quick service increases value and justifies a higher price but reduces time spent.
fundamental sources of value
Value is seldom directly related to time spent performing tasks. This list indicates the nature of value through 12 examples:
How much?
In many industries, goods and services sell for fixed prices. This is convenient because people naturally want to know how much something will cost before purchasing it. A fixed price also creates the incentive to satisfy clients as efficiently as possible. Fixed prices are not standard in some industries, though.
Many people are usually reluctant to ride in a taxi because of the uncertainty about the fare to reach their destination. Only in the absence of convenient alternatives do they take a taxi. Even then, it is common to regard the driver’s route with suspicion. An inefficient route would cost more and the driver probably wants to charge as high a fare as possible.
The same psychological factors that underlie reluctance to take a taxi and suspicion of the driver’s route also underlie, for example, reluctance to call a plumber or suspicion about the time a graphic designer logs in designing a menu. In both fields, by-the-hour billing is the norm. These concerns reduce demand for the goods and services of companies that do not charge fixed fees.
Purpose does not differ.
Businesses succeed by providing high value economically. This remains true of any enterprise that does not normally charge fixed fees:
· blue-collar trades such as carpenters, electricians, mechanics, and welders.
· white-collar professions such as accountants, attorneys, architects, and consultants.
· others who provide goods or services by using intellectual capital and tools such as dentists, designers, counsellors, and writers.
The paradigm of the billable hour is prevalent in these fields, even though their clients just want value.
Focus on value creates alignment.
The billable hour puts the interests of the worker, the employer, and the client out of sync. When that paradigm is abandoned in favour of optimizing value to the client economically, the interests of all three can align under fixed fees, possibly backed by a satisfaction guarantee.
A secret to success for companies switching to the value-focused paradigm would include this four-step sales/negotiation process:
1. Fully explore the problem that your client wants you to solve. For example, at a spa, have a conversation about why your client wants a facial. From that you can learn more specifically how to satisfy that individual.
2. Let the problem discovery discussion cover the rationale of the decision maker to engage your services. For example, maybe the decision maker wants a custom newsletter issued seasonally, like a tailor-made suit every quarter rather than an off-the-rack outfit that anybody could wear. The rationale might be the decision maker’s belief that an authentic connection with clients better reflects the company’s relationship with them, in contrast to most newsletters which do not generate a meaningful sense of connection with the issuer. Understanding the rationale helps to satisfy the need more precisely.
3. Summarize the basic problem and the rationale to gauge the importance of the work and arrive at a suitable budget.3 Then, work back from the budget to identify how to optimize value economically. For example, maybe the problem is an embarrassingly decrepit bathroom and the rationale to engage your services is that you specialize in bathroom remodelling. If you demonstrate comforting understanding of the problem and show professionalism about how to satisfy the client, then they might allot a $15k budget. Comprehend their needs well enough to reverse-engineer a good solution to their problem that ensures your profitability at that budget.
4. The first three steps reduce the risk for both parties. Many who go through the first three steps also have enough trust to pay more for a satisfaction guarantee. A satisfaction guarantee deepens the commitment and, if it adds a premium to the budget, likely increases the profitability of your performing the work.
Welcome to the value-focused paradigm.
Unlike Brantley Foster, people who work in the value-focused paradigm and find time-saving efficiencies point them out and share the benefits from doing so. When the scope of a project already underway must increase, a good purchase agreement allows the budget to increase in tandem.
Companies not already charging fixed fees but stuck in the billable-hour paradigm can make buying from them easier by fixing fees up front and guaranteeing client satisfaction. When buying from them is thus easier, they often find that the cost of making a sale goes down. The often-hidden costs of their personnel and operations not being aligned with the basic purpose of providing optimal value economically also decrease.
Fixed fees with a satisfaction guarantee can catalyze a value-focused shift to greater efficiency throughout an organization. This may lead to happier clients, more productive staff, boosted competitiveness, and increased profits. Let this be the secret of your success.
- Glenn R Harrington, Articulate Consultants Inc.
1: Ronald Baker: Trashing the Timesheet, Association of Chartered Certified Accountants, 2003
2: Matthew Stewart: The Management Myth, The Atlantic, June 2006
3: David Sandler: You Can’t Teach A Kid to Ride a Bike at A Seminar p 164, Bay Head 2003
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