What’s happening behind the curtain when my clients decide to drop hourly billing?
Different industries, different kinds of clients, very similar struggles:
- How do we scope our work?
- How do we price our work?
- What can we do to ensure positive cash flow?
I’ve had the honor of working with more than 37 companies in the past year.
Most of them are professional or B2B services providers (e.g. law, accounting, consulting, web design, fractional CXO, training, compliance, operational excellence, leadership development, business coaching, conflict resolution).
All of them, like you, try hard to be successful.
Success usually starts with making clients happy and solving their problems.
But without solid revenue and net profit margin, the Owners/CEOs can’t keep doing their good work.
That’s where I come in.
Behind the curtain, these companies were facing three primary problems due to hourly billing:
- Cash flow, cash flow, cash flow
- Complaints from clients about their bills
- Feeling the need to compete on price
Cash flow
Cash flow means the timing of money coming in and going out from the business. When the money going out in any given period exceeds the money coming in during that same period, that is negative cash flow.
(Cash flow is not about the money you have in the bank.)
Hourly billing produces negative cash flow.
How?
You cannot bill your clients until the work is complete (or perhaps each month), but your expenses to do the work and maintain the business do not wait.
To make things worse, most hourly billing terms give the client 30 days to pay.
It is not al all unusual for client work to be performed on the first of a month and for the company to not receive payment for that work until the last day of the following month. That is a 60 day mismatch in timing!
Negative cash flow is the leading cause of business failures by far. It’s been estimated by SCORE that 82% of small business failures are caused by negative cash flow.
Complaints from clients
It is no surprise to these companies that clients would frequently complain about their bills.
Who can believe with 100% confidence that every minute billed for was actually a minute spent on the client’s work? Or that the work done was actually needed? Also, clients hate being billed for a few minutes spent writing an email or answering a question on the phone.
When providers charge by 6 minute increments, and send invoices for those increments, they invite scrutiny and objections by clients.
One CEO told me she spends hours every single week reviewing her associates’ time sheets and writing off time spent that she thinks the clients will object to!
Competing on price
When a company sells its time, they are inviting every client or prospect to compare that rate to the rates of other providers. The people who price shop will come back and ask your firm to meet the rate of the competition. They threaten to go elsewhere, and often do.
Who can blame them?
It’s extremely hard to differentiate based on knowledge and expertise, or even “benefits” when you offer your services for an hourly rate.
An hour is an hour is an hour. No hour is intrinsically more valuable than any other hour.
And what really bites is that if you justify your higher rate by claiming to be better than the competition, then clients will expect you to take less time, and bill fewer hours, and that means lower fees!
The decision to drop hourly billing
Most of my clients chose to transition directly to IMPACT Based pricing.
What that means is that the fees they charge are proportional to the life changing differences (IMPACTs) they deliver.
We do two exercises to begin.
The first is a qualitative one, where they describe the way they change clients’ lives. This is a great conversation over a couple of sessions and includes all associates to get the widest range of differences.
The second is a quantitative one, where we look at all the money the company spends to conduct business everyday. We divide that by the number of hours the company is working per year. This produces what I call the “resources applied” number. It is multiplied by the markup needed to generate the target net profit margin.
The resources applied number combined with the life changing differences descriptions enable the firm to set fees proportional to the IMPACTs delivered.
Success is fast!
Most of these firms made the transition with new clients first. None reported objections to IMPACT Based Pricing fees that were presented using the Choice Framework.
Many then began talking with existing clients. Most reported that existing clients loved the idea of choices(!) and easily saw how the fee and the IMPACTs made sense.
If you don’t mind me asking….
- Is your cash flow tenuous?
- Do your clients ask for write offs?
- Are you often competing on price?
If you answered yes to even one of these questions, it may be useful to talk to me. Text HOURLY to 703-801-0345
