Cost vs. Value: The problem with the Hourly Rate

One of my most frequently asked questions is “how much do you charge per hour?” My response, that I work on a per-project or retainer basis, is usually met with skepticism. I have spent most of my career in and around law firms where the billable hour is king, and many people habitually tie the hourly rate to their estimation of value. However, I find that charging hourly rates creates an unnecessary barrier between myself and my client, disincentivizes me to provide the most efficient service, and causes unpredictable billing for my clients.

In fact, I’m not alone. More and more professionals are advocating a move away from charging an hourly rate. Here are just a few of the most commonly cited reasons.

Charging an Hourly Rate Creates a Conflict of Interest

As Richard Susskind pointed out in his 2008 book The End of Lawyers? hourly billing causes an inherent conflict of interest, in which a law firm’s motivation “will always tend to be to spend more rather than less time on the work, where the clients will prefer precisely the contrary”. It creates an inherent competition between the needs of the client and the needs of the professional who is working with them.

Hourly Rates Hamper Efficiency

In nearly every industry, hourly billing runs in opposition to:

• Investing resources in technology, tools, and processes that complete the work faster and more efficiently.
• Highly skilled, highly trained professionals completing work more quickly than a newcomer.
• Professionals and consultants proactively solving problems that haven’t yet arisen.

It is counter-intuitive that expertise and process improvements would earn a professional less money, rather than more.

An Hourly Rate Reduces Communication

An hourly rate may make cause a client to hesitate to make a phone call, reach out with a question, or give thorough, honest feedback. Concerns about cost and overruns can constrain communication and keep both parties from being truly satisfied with the outcome.

Hourly Rates Increase Record Keeping

Not only is it time-consuming and cumbersome to track and bill by the hour, but it’s also often inaccurate and can lead to disagreements. It may take longer to record the time spent answering a text or an email than it took to actually reply. Also, hourly billing opens the door to clients and freelancers debating how long a task actually took, or how long it should have taken.

In order for clients and professionals to work together productively over the long term, it’s imperative that we establish trust and healthy communication. The constant sense that the “meter is running” can impede that process. In other words, hourly billing can often actually be an obstacle toward building truly productive, collaborative relationships with my clients. In freelancing, in consulting, and in the legal field, hourly billing causes a structural problem that puts us in competition instead of in collaboration.

What is the Solution to Hourly Billing?

The hourly rate issue isn’t a new one. The issue always comes down to whether the amount of time on a task is equivalent to the value that it creates. The simple fact is that in a knowledge economy, we can no longer equate the value of an outcome with the time it took to achieve it. Moving toward value-based pricing allows professionals to utilize all their expertise to the client’s greatest advantage, without worrying that they are either jeopardizing their income or creating billing confusion for a client. It also allows clients to have pricing and billing models that best make sense for the outcomes they are trying to achieve and a clear connection to the true value of those outcomes. Better yet, it allows both parties to have greater trust and mutual understanding, and create a sense of shared goals rather than competing ones.

Contact me for more information about how we can work together to grow your business.