When was the last time your business had a great need for seven and a half billable hours of someone’s time? If you are looking for someone to keep you company on a boring day, paying by the hour might make sense. If you need a security guard to stand a post, then paying by the hour makes sense. However, if you are engaging a professional, is hourly billing the best solution for you or for them? Nobody wants to buy hours. Rather, they want to find a solution. But, if that solution equates to a blank check, then stalled purchase decisions should not be a surprise.
Jack Quarles, CEO of Buying Excellence, recently released a video on the 7 Curses of Hourly Billing. Keep in mind that whereas I help companies become successful in sales and business development side, Jack helps companies make smarter purchasing decisions. As you will gather from his articles and videos, unlike the stereotypes in the purchasing industry, Jack guides his clients through the complicated process of ensuring they attain the best value for their investments. In fact, in most cases, Jack will point out that the cheapest vendor rarely offers the best value.
Where you have uncertainty, hourly billing makes sense. A litigator representing you in a legal matter may spend more or less time depending on not only the case, but specifically how adversarial the opponent might be. So, even if it seems like an open and shut case, the opposition could drag things on forever just to drive up your costs. Fixed fees would not be appropriate in that case.
However, if you are looking for a trademark or other intellectual property (IP) filing, it might be a bit more predictable. Antigone Peyton at Cloudigy Law offers many of their IP-related services on a fixed-fee basis. As a client of their services, you’d be pleased that they don’t drag projects on forever. Rather, they share a common goal with their client to work as efficiently and effectively as possible.
As Quarles points out in his video, hourly billing punishes innovation and rewards a lack of productivity. The more efficient the vendor, the less money they make on hourly billing. But, the fixed-fee vendor benefits when they work efficiently and get things right on the first pass (oh – so does the client).
To perform services on a fixed fee basis, the client and the service provider need to have a great deal of comfort between them. Regrettably, purchasing departments often overlook the value of open dialogs. In procurements with federal agencies and large companies, the contract officers often assume that everything that the vendor needs to know is in the RFP. Unfortunately, that is rarely true.
When delivering workshops and keynotes, I ask “When the client sends an RFP with their needs, is it more common that they got it exactly right, or more common that the requirements need to be modified before the project begins.” 100% of the more than 1,000 participants confirmed what you already know… that the needs change as the vendor asks questions and together the vendor and client discover their real needs. Without a dialog, rest assured that the project is likely to cost more, take longer, and generate much more anxiety on all sides of the transaction.
If you are on the purchasing side, feel free to share the questions and answers with all parties. But, be sure to make note of which vendor asked the great question to uncover a real need. It’s likely that they have the ability to ask other intelligent questions that might serve your needs throughout the project.
If you are buying or selling commodity items, then the notion of purchasing to meet a specification is fine. If you simply need warm bodies to show up, or you need help and cannot clearly define the project or goals, then hourly billing might be fine. However, both the vendor and the client win when you can agree on a transaction based on value and deliverables that are not measured in hours.
Next time I will address how to deliver fixed-fee proposals on complex projects.