Don't abandon the hourly rate just yet
WHY THE DEATH OF THE BILLABLE HOUR IS GREATLY EXAGGERATED
How often are we told that the billable hour has had its day? That it’s archaic, that it’s inefficient, that it makes our clients angry and holds our practices back?
Well guess, what? I disagree. In fact, I think the billable hour is wonderful - so wonderful that, for many professionals it should be a default in their business development toolkit.
How the billable hour got a bad rap
The billable hour has been coming under fire for a while. It’s almost 30 years since the American Bar Association published Beyond the Billable Hour and Ronald Baker’s Professional Guide to Value Pricing (1998) is now in its sixth edition.
That means a generation of professionals have now built their entire careers in the time since experts started questioning the worth of the hourly rate. In other words, we all now know about value pricing and Alternative Fee Arrangements (AFAs) but time based billing keeps hanging around.
That’s no small feat when you consider that procurement has been lapping up AFAs, consultants (myself included) have been wrapping them up, and the buyers and sellers of services have capped it off as evidence of progress.
Gosh, even the term ‘Alternative Fee Arrangements’ (AFAs) casts the hourly rate as the enemy, at least subconsciously. If you don’t believe me check out the PR job that AFAs get on Wikipedia.
So why won’t time-based billing curl up and die? Here’s what I think...
1. The billable hour is fair
The whole premise of the billable hour is that you get paid for the work you do. What could be fairer than that?
When I say billable hour here I’m referring to any variable rate that’s based on time. That could include hourly rates of individuals or blended rates, tiered rates or a day rates, or rates with a hold back provision to spice things up.
If you say that it time-based billing encourages people to be inefficient, the obvious riposte is that the fixed fee encourages corner cutting. Besides, I’d like to think that, as professionals, most of us are honest. (I know, there are exceptions.)
And, anyway, I think the opposite is often true: the billable hour has been used as an effective training tool for young professionals getting to know their job and what it costs to serve clients.
When you’re learning the ropes and you see how much of your time gets written off, you quickly learn the value of being productive and contributing to the firm’s bottom line.
2. The billable hour suits a lot of clients
Clients come in all shapes and sizes. Some will want a long-term relationship. Others will want to try before they buy, testing you on a small matter while dangling the carrot of a larger one to back it up.
And others still will be looking for a one-off fling away from their regular advisers. For one of these categories, the billable hour simply works.
The ‘Tinder’ client is often prepared to pay a premium for their dalliance with an expert outside their regular portfolio of advisers - especially if they’re reviewing a position or getting a second or third opinion.
And, anyway, as they reach deep into their pockets they’ll at least know both how much time you’re spending on their file and where you’re spending it.
3. The billable hour is transparent
Yep, there’s no hiding anything with the billable hour. If you’ve been spending time on something it will (or should) appear on the time sheet. Whether it reaches the client’s bill is another thing altogether.
I find that some clients, believe it or not, really like to know the details of the effort their advisers take to provide advice, especially if they feel they’ve been ripped off in the past.
You see, the hourly rate can be an early marker in the relationship for all parties. It lets a client immediately know whether or not they are on the same page to build something more lasting.
It can also provide clarity to a client
when your competitors or the market you play in aren’t practising ‘intelligent pricing’. In these situations, quoting a fixed price can seem a bit abstract. It also usually leads to price shopping. Then you find yourself in an argument over scope definition.
4. The billable hour makes clients efficient
You’d be surprised how efficient some clients become when time really is money - or at least how inefficient they can become when it no longer is.
When the clock is off I find that instructions become messier and a lot of the work that could be done by the client gets pushed onto the professional. The billable hour solves all that - Sure, I’ll read through the 15 pages of handwritten notes you’ve given me; I’m happy to sit in on that two-hour long pointless meeting. But, guess what… you’re paying for it.
5. The billable hour is no longer passe
Now here’s something… the billable hour may be coming back into fashion, at least in the US.
I know fashion of itself is no basis for making a rational decision, but hear me out on this one…
BTI Consulting Group’s 2017 Outlook & Client Service review found that the number of large companies using alternative fee arrangements has fallen from 79.3% of fees to 66.1% in the past five years. At the same time, the spend under AFAs has increased from $12.5B to $22.4B.
In other words, the companies using AFAs were large ones with big projects and big budgets and the resources for managing suppliers. On the other hand, smaller clients with smaller budgets seemed to be turning their back on them.
A better approach to AFAS….
OK, so I’ve just given you 5 reasons to use the billable hour but I’ll concede there are many times when value-based pricing or fixed fees are more appropriate.
My point is this… every firm should have a range of fee strategies in their toolkit, including time-based billing.
In fact, I recommend you keep talking about AFAs but that you shift the definition a bit. Instead of thinking ‘alternative fee arrangement’ think of the most ‘appropriate fee arrangement’.
Chances are you might find that the good old billable hour is simply the most appropriate way to charge your fees - one that keeps your client happy and leads to a better relationship between you both.
If you are a Partner or Senior Associate in a commercial law firm and want to find out more about developing your practice (including pricing) then you'll find the Practice Reboot program Joel Barolsky and I have put together very useful. More details here.