Dial Down These Risks to Your Company

How many times have you said, “We charge by the hour because everyone in our industry does it”?

Maybe you’ve said “Clients understand hourly billing. So it’s easy to just tell them an hourly rate.”

Or maybe you believe “time is money” and the only way to get paid for your time is by attaching it to a dollar mount.

Another rationale is that hourly billing protects against scope creep.

Or perhaps you really don’t like hourly billing but feel the transition to a model of predetermined fees feels just too hard, takes too much time, or will fail.

When you choose hourly billing instead of a model of predetermined fees, you are choosing severe risks to your firm. These rationalizations cannot overcome the risks.

Let’s look at 5 risks

Risk #1

• Unpredictable revenue.
  1. No matter how zealously you track every minute, the client is the one choosing how much time to buy from you. When they don’t return calls, don’t ask questions, hoard information, and cancel meetings, they know they are saving money.
  2. You have to work 9.5 hours per day, 5 days per week, just to hopefully reach the daily billable hour target of 7.5 hours.
  3. Data show that as much as 20% of billable hours are written off each year. Here’s a startling statistic from Thomson Reuters: “Law firm Partners may write off over 300 hours of their own time annually, totaling nearly $190,000 in lost fees.”

Risk #2

• Unpredictable profit. When revenue is unpredictable, profit also is unpredictable. Each billable hour should include some amount of profit. Thus, when billable hours decline, profit declines. There is no way to make up for this loss.

Risk #3

• Price shopping. As much as you don’t want to, you recognize that time has no intrinsic value. An hour is an hour is an hour. Therefore, it’s perfectly reasonable for buyers to shop for the lowest price among providers like you. You have not tied your fees to your deep knowledge and expertise so clients will not do that either.

Risk #4

• No incentive for associates to accumulate more knowledge and expertise. Hourly billing rewards inefficient or slow work. The longer something takes, the higher the number of hours billed. So why would anyone try to excel? They would just have to work more to keep their billable hours up. You end up stuck  forever at entry level work which only earns the lowest fees.

Risk #5

• High cost of negative cash flow. Accounts receivable (AR) means that you’ve done the work and are now waiting to get paid. The wait can be 30 or 60 days or longer. Thus, you are lending clients money! But you are not getting paid for these loans. If borrowing costs you 8%, you are reducing your revenue by that amount.

In sum, hourly billing causes:

• Unpredictable revenue
• Unpredictable profit
• Borrowing costs
• Low fees

Do you really want to do these things to your own company?

If you don’t, schedule a meeting with me to discuss your situation. You may find that there’s a way to end these risks and build a stronger firm.