How many times have you assured your clients that your firm only bills for the work done directly for them?
- A phone call about their project or matter? Billable to that client.
- A meeting to discuss progress or gaps in the client’s project or matter? Billed to that client.
- A Continuing Education course that will help the firm work on client matters or projects? Not billable to any client.
- Firm overhead, company admin (HR, tech, licensing) and marketing/sales? Not billable to any client.
Forgive me, but these last two are lies.
Why?
Because every hourly rate reflects some portion of the firm’s TOTAL expenses.
How to calculate your hourly rate
A quick check of guidance on how to calculate hourly rates includes this formula:
Revenue+profit+ALL compensation+ ALL overhead divided by the total number of hours worked=hourly rate.
That compensation number includes every non-direct person on staff as well as those who work directly with clients.
That overhead includes the office, equipment, utilities, taxes, licenses, insurance, etc. that make it possible for the firm to be in business.
Those working hours? That’s the number of hours actually worked, and doesn’t include vacation, sick leave, holidays, and unsold hours.
But you have to compensate people for time off and you have to cover your overhead expenses 24/7. So reducing the number of hours worked to increase the hourly rate is another lie.
The lower the number, the higher the hourly rate:
$1 million/2080=$480/hour
$1 million/1800=$556/hour
The client paying $556 per hour is paying for all the non-billable time as well as the overhead.
Hourly billing hurts client relationships
People who are adamant that hourly billing is transparent have difficulty when a client objects to an item on an invoice.
My clients have heard all of these before adopting an alternative pricing model:
“I can’t believe you charged me for that 2 minute phone call!”
“You billed me for a 3-sentence email?”
“I want a lower priced associate to do all of the work. You should just check it over.”
“I won’t pay for that many hours. It shouldn’t take you that long to do this work that you’re the expert at.”
Imagine being a client who hears this:
“Time spent on billable tasks contributes to an associate’s salary and firm profit margins, while time spent on non-billable tasks does not, and can cause the pendulum of profitability to swing in the opposite direction.
While the firm still has to pay the associate if a client cannot be billed for the time, non-billable hours are actually costing the firm money.”
Hourly billing NEVER puts the client first.
How can it when the goal is to bill as many hours as possible to ensure firm profits?
To cover up the fact that the hourly rate is necessary to keep the firm in business, not for the benefit of the client.
No matter how many times hourly billers insist that it’s fair to the client, we know the truth:
Hourly billing puts the client last.
Find an alternative that works for the client and the firm
There are numerous alternatives. In order from most beneficial to least (but not as bad as hourly billing):
- IMPACT Based Pricing
- Value Based Pricing
- Fixed Fees
- Flat Fees
All of these have in common that the fee or price is related to the outcomes delivered to the client.
Obviously, they all are intended to generate a profit for the firm and do so in the course of doing valuable work for the client. They do not require lying.
If you feel more uncomfortable now that I’ve explained why hourly billing is lying, we can discuss how your firm could adopt an alternative model.
Text FEES to 703-801-0345 to schedule this conversation.
