Billing for Value Instead of Time
Not all hours are created equal.
An increasingly rare thing happened to me today. I had a great Twitter exchange with(who writes the excellent ) and (who writes the awesome ). What we discussed was the billable hour, which might not sound that interesting, but which drives an amazing amount of psychology and behavior at most businesses that engage in knowledge work. Certainly, for my company (The Launch Company) it has been the backbone of our revenue for years.
But as long as we have engaged with it, we have also been working hard to ditch it.
Billable Hours Are Awful 🧮😭
That’s because billing hours is awful. I truly believe that it’s bad for the client, and I know that it can be just as bad for your business as well. I think a lot of other people know this, too. Despite that, though, almost everyone from engineers to lawyers to creatives bill by the hour. Why?
1. It creates the illusion of work
I think this is the biggest thing. You turn on the Harvest app or your iPhone timer and all of the sudden you’re doing real work. But as Kelly pointed out on Twitter, “how do you factor in contemplation time?”
The truth is, you really can’t. Trust me, I’ve tried. How much is an “ideation hour” worth? To my clients, at least, about zero. But they’re wrong! Having space to think and ideate is what makes us so good at our jobs. Without that, we’re just another engineering consulting firm turning out mediocre results.
By confining the hours you bill to the hours that you’re effectively creating product for them (and not just sending fluffy emails, ahem, *my lawyer*) they can justify it to their boss, and their boss, and so on up through the corporate chain. Which brings me to my next point.
2. It’s easy to sell to others
Usually, your client has to justify your work to someone above them. A pool of hours for a set price is a pretty easy, low friction way to do that. Plus, they can budget for how long the project should take, plug you into it, and get buy in from everyone. Easy peasy. But, as I will touch on later, there are better ways.
3. Misery loves company
The last big reason is that your client is also likely chained to the clock and either can’t see another way to do things, or worse, thinks you should be chained too!
They’re Bad for Everyone 🙅♂️⚙️
But building and running a business this way (or working for one) is bad for both you, your team, and your clients in the long run. Here’s why.
1. Encourages “crank turning”
Crank turning is the worst! And it’s the baseline of every law firm and agency in the country. You are only as valuable as the hours you bill, and you’d better do enough of them to cover your cost as well as your percentage of the company overhead which includes freeloaders like me! This leads to all sorts of invisible overworking because to hit those targets (while also doing things like commuting, showering, and having a life outside of work) means that you’re working a lot more ‘soft hours’ around the billable ones. Go read this depressing PDF from Yale Law to get an idea of what I mean.
It also encourages inefficiency on your part. Did you come up with a really cool, clever way to do something in half the time? Great, you just cost the company money. Adios! No, instead you have to push things onward and onward. This leads to a lot of the things that (rightfully) give clients a bad name.
2. Limited to linear growth
If you’re committed to the crank turning way of life, you’re now limited to linear, 1:1 growth. You can only grow if you add another head and get them billing. As you grow, it often becomes challenging to replicate quality across all fronts, which makes you tax your key people even more. This leads to burn out and turn over in key positions, which makes you less billable!
This is bad for the client because they risk losing the people that made the project valuable in the first place. It also stinks for them because often the consultant’s management will focus on adding as many people to the project as possible, since growing work with an existing client is always easier than finding new clients. Finally, charging them for time only is a race to the bottom in quality.
3. Sisyphus or Boxer, your pick
Ultimately, your team feels like they have no way out. They are Sispyhus pushing the billable boulder up the hill, or Boxer the horse turning the crank until they die. Pick whichever image you prefer.
This leads to feeling low value, and like the work can’t never change. As mentioned before, the team is also disincentivized to find clever ways to do things if they save time. If you work for a very unscrupulous employer, they may even encourage you to find no solution at all and continue walking in circles for as long as the client will let you.
Another way is possible 🧘☮️
So, there’s gotta be another way, right? Of course there is, and it’s no secret. Package up your knowledge work offerings and offer them as products. This is common for coaches and other experts who have recently begun offering courses, which frees their calendar and scales their earnings. Books are another way we package and scale knowledge easily.
This approach works more widely than one might assume at first blush. For instance, at Launch Co. we have designed so many launch and test sites over the years for so many different types of rockets that we can find common elements and shared threads between them to leverage for new work.
This lets us move faster, bring more clients on board for roughly the same amount of effort, and deliver better value to each of them because we are solution-oriented rather than time-oriented.
Another really cool side-effect for us has been that our knowledge products have been turning into physical products. Our repeatable designs for launch site modules are now becoming physical modules we can lease or sell to clients, letting us diversify beyond knowledge work into more hardware.
Getting People on Board
Still, it can be hard to get clients on board. It’s different, and they’re often stuck on the old way. Also, because value-based projects require bigger amounts of money to be committed up front, it can be hard to get them to buy-in or receive approval from their management.
To combat this, we do a few things. First, we work hard to educate them by showing them what it would cost to do it themselves by hiring interally, or to hire other time-based experts. In this way, we compare our efforts well, show the savings, and let our speed be part of the value we deliver.
Second, we tie everything to milestones. In our industry, we can conveniently do that at the 30%, 60%, and 90% design reviews. You can easily come up with your own milestones, too.
Finally, we also employ a hybrid approach. This is useful for those projects where requirements are murky or threatening to change. We work the first part by the hour until we can get to a firm set of requirements we can bid. Now, both we and the client are aligned to get to that milestone quickly.
The upsides are huge. Our team gets more rest between projects and more space to innovate. They are encouraged to keep growing and to do things faster/better while documenting their work the entire way to pave the road for future projects. They are also focused on automating the parts of their jobs that don’t add value to the project, while also getting to drop time tracking.
Finally, it frees our company from the mindset of long hours. The last two summers we have experimented with the four-day work week to ensure that our team gets out into the awesome Alaska summers. As we continue to transition to more fixed-price projects, we are looking at how we can make that change permanent. All of this adds up to a happier team, happier clients, and better work being done all around.
Oh, and if I can be helpful in helping you brainstorm on how you can make your business more profitable for less time, let me know!