In groups of agency professionals around the world I have often asked the question, “What do clients really buy from your agency?” Their answers usually include things like “Solutions to marketing problems,” “Insights and innovation,” “Expertise,” and “Successful marketplace outcomes.” Not a single person has ever said “Time.” Because deep down inside we all understand that clients don’t really buy our time. Time is just a means to an end, not the end in itself.
So here’s a game-changing resolution for your firm: commit to bill for what clients really buy. Instead of billing for time, bill in other creative ways that are tied to the value you create rather than the costs you incur.
For inspiration, consider the consequences of continuing down the path of the increasingly discredited hourly rate system. Over the years, my colleagues and I have developed the following list:
- The hourly rate focuses on efforts, inputs, hours, costs, activities, rather than outputs, results, and marketplace value. It assumes the client is buying an activity rather than an outcome.
- The hourly rate misaligns the interests of agencies and clients. Clients want their agencies to spend less time, whereas the firm makes more money by spending more time.
- The hourly rate places all of the risk on the client. This is why most clients don’t really view agencies as true “partners.” The nature of partnership is shared risk.
- The hourly rate fosters a production mentality instead of spirit of invention and entrepreneurial problem solving.
- The hourly rate encourages hoarding “estimated time” and produces a disincentive for people to delegate work and responsibilities.
- The hourly rate creates a system in which as the agency gets more effective and efficient on a client’s business, it actually earns less money instead of more.
- The hourly rate works against making more progressive use of technology to get work done faster.
- The hourly rate commoditizes the firm’s intellectual capital and expertise, as if an hour from one person or firm is as valuable as any other.
- The hourly rate places an artificial ceiling on a firm’s income, since there are only so many hours in a day. This amounts to a self-imposed limit on agency profitability.
- The hourly rate creates a large bureaucracy centered around collecting, policing, reporting, analyzing, transferring, and managing time. There are much better uses of the firm’s time and resources.
- The hourly rate diminishes quality of life for associates of the firm. No one became a professional to bill the most hours, but rather to achieve something important.
- The hourly rate looks in the wrong place for value. Value is created out in the marketplace, not inside the four walls of the firm. For pricing cues, agency should look outside, not inside the organization.
- The hourly rate is based on the cost to the agency rather than value to client. Clients don’t buy your costs.
- The hourly rate discourages collaboration and integration, because account managers are constantly worried about going “over estimate” on an assignment.
- The hourly rate puts the emphasis on efficiency instead of effectiveness. No client hires an agency just to be efficient.
Ultimately, the main problem with hourly billing is that it keeps agency professionals trapped in the illusion that what they sell is time. Clients don’t buy the time of the people working on their business any more than you buy the time of the mechanics who work on your car. As buyers of services, what we’re buying is a successful outcome – the solution to a problem.
So consider making this the year that your agency really does move to a new level of success by changing your paradigm about what you really sell and what clients really buy. If you do, you’ll join the growing ranks of innovative firms who are realizing greater profits and professional satisfaction by burying the billable hour.