Hourly Billing

“So, what’s your rate?”

A question almost guaranteed to get me flapping when it pops up in a sales conversation. It would be easy just to spout a figure. But the truth is - I don’t have a rate. I have three pricing options and none of them are based on “money for time.” But that’s not what a prospect expects to hear. So, hopefully this post will go some of the way towards explaining why I don’t charge for time.

Time & Cost were two of the themes in my previous expert roundup post. Popular, but separate themes. In consulting they’re often inextricably linked. But here are two of the realisations I had that showed me that they might be better off decoupled.

Hourly billing strangles innovation

As a solo consultant I am all about process efficiency and innovation. The slicker I can make my process, the more work I can get through. See Rule #07 from my consultancy manifesto:

Your time is more valuable than compute time

If a computer can do it then let a computer do it, they scale much more easily than you. Having said that, you need to do a job before you can automate it. Do things that don’t scale, systematise then automate — simples.

By continually investing in my process I can spend less time doing the easy/automatable/low-value things. I can then choose to spend that time dreaming up new concepts to test, puzzling on a problem or even just playing with the kids.

If I’m billing by the hour, what’s my incentive to invest in process or tools to get through the work quicker?

Take this rather extreme example, inspired by Jonathan Stark. Say I had a $5000 project (or 50 hours @ $100/hour if I’m billing hourly). What if I could invest $1000 in a tool which meant I could do the project in 10 hours? I could:

• Buy the tool, work 10 hours, bill 10 hours — Income = $0
• Buy the tool, work 10 hours, bill $5000 — Income = $4000
• Ignore the tool & bill 50 hours — Income = $5000

The customer is happy in all of those scenarios. They got their project for the price quoted & within their timeframe. I’m happiest with the second option, $4000 income and a 5x quicker process next time. But, if your project proposal is selling hours at $100/hour, then option 2 isn’t available to you.

Clients don’t want to buy hours

What am I selling? I’m trying to sell results. The answers to clients problems. An innovative step that could transform a clients business. Things that have real value to a client. A value that can then be used to evaluate a proposed budget.

What I’m not selling is my time. Time is a commodity. Commodities are sold by the unit. Is my time worth more than yours? What if the next guy has an hourly rate half of yours?

Are all of my hours equally valuable to the client? Is the hour I spend meshing a model as valuable to the client as the hour I spend on a call with them explaining what they should do next?

The hours might be equally valuable to me, but the value to me is not really important. So, do I need different hourly rates for different activities? Should I charge for meetings? How about travel? Down the rabbit hole we go…

In most projects it is almost impossible to work out what the anticipated workload is going to be. Project scope is comparatively easy. The effort required to fulfil the scope is undefined (unless it’s a cookie cutter project that you’ve done 5 times before).

How many hours are going to be required to reach the project goal? What happens when we’ve reached the goal but are over budget? How about if we are under budget? Who benefits or takes the pain in those cases?

However, in nearly every project there is both a deadline and a “must-not-exceed” budget. Both of these will help me scope the best possible project.

“But I don’t want to tell you my budget”

Digressing slightly. I hear this question quite a bit when talking about budgets and fixed-price projects. It’s fair enough that you don’t want to say. But if I don’t know have an idea of your budget then I’m going to find it hard to scope your project. I need to know that you have a budget that fits with your project goals. Just as importantly, I need to know that you’re comfortable spending it to make the project a success. If you aren’t comfortable with exact numbers than we can always talk in ranges.

At what level would the project be a no-brainer. At what level would it require serious thought. And at what level would it be dead-in-the-water. I can work with that.

Re-aligning Incentives

A fixed, value-based budget helps align the consultant’s and the client’s incentives. We both want a successful project delivered on budget and in time. Placing some financial risk on my side of the equation increases my focus. It gives me an incentive to invest in process. And most importantly a golden opportunity to over-deliver. Which makes for happy clients & less time cold emailing.