I just received a bill from my lawyer today in which he itemized his time spent on my file last month. He spent four-tenths of an hour on an e-mail to a colleague and one-tenth of an hour leaving me a voice mail.
I have found billing by the hour to be a liability in trying to build a sellable business. Years ago I owned a small design studio that charged by the hour. We had $750,000 in revenue, of which more than 20 percent was flowing to the bottom line, yet the business was worthless because we were simply four people hawking hours.
Billing by the hour reinforces that your firm is just a collection of people and, therefore, that future profits (what acquirers pay for) are contingent on your sticking around. That’s one of the reasons firms that bill by the hour rarely get acquired, and if they do, their owners are bound to sign on for a torturous three- to five-year earn-out, the equivalent of selling their ownership status in return for a glorified job.
Not only does billing by the hour undermine your ability to be acquired; it has a number of nasty side effects while you’re building your business. Billing by the hour:
- Makes customers hesitate before calling you for advice (Wouldn’t you rather be the go-to person for your clients?);
- Creates a negative cash flow cycle because you have to know how many hours were worked before sending a bill;
- Forces employees to fill out time sheets, making them feel as though they work in a sausage factory (No offense to the sausage workers of the world);
- Leaves your customers feeling “nickel and dimed”;
- Provides a disincentive for your employees to work quickly and efficiently, ultimately peopling your company with a bloated and slow-moving set of clock watchers.
The alternative to billing by the hour is to pick a few things you’re really good at-and that your customers ask for-and to come up with a standard formula and a standard price for delivering them. Don’t think it would work in your business? The practice of law is arguably the most addicted to billing by the hour, yet a Toronto-based lawyer named Jane Harvey has a standard set of services for which she charges a flat rate.
Are you still tied to charging by the hour?More in: Small Business Growth