The Lunacy of Hourly Billing
Over the past couple of weeks I had the opportunity to chat socially with an attorney and an accountant, at two different events. One knew me, the other did not. We wound up discussing hourly billing practices, and after a great deal of wine, here is a summary of what they told me about the practices of their firms which are enforced by senior partners.
• Never charge a “round hour.” Instead of charging for an hour, charge for 1.2 hours. No one will ever question two-tenths, and they add up considerably over the course of a year.
• If a client calls to question a bill or statement, that is billable time.
• If you are researching anything that can pertain to several clients, charge each client separately for the entire time. It is never to be pro-rated or apportioned.
• At any kind of social event, whether a planned lunch or a common political fund-raiser, ask some work-related questions and charge part of the time you were there to the client’s account. The client being charged need not even be present.
• If you take colleagues to lunch, discuss several clients, and charge the lunch and the time separately to each client.
• Bring a colleague into the discussions whenever possible to build additional hours.
• Even when work is done by lower level people, it should always be reviewed by you at your higher hourly rate.
I could go on, but you get the point. I’m not claiming that every professional services firm charging hourly rates is this unethical, but some are. It’s a shame that this kind of creativity couldn’t be invested in better service for the client or quicker results, but then, there wouldn’t be as many hours to bill. This is the lunacy of hourly billing.
Please feel free to make a comment reporting the abuses you’ve found or experienced. Here’s my favorite: When I was chair of the Newport International Film Festival, our bank mistakenly sent statements to an accounting firm with which we had no connection. The firm forwarded them to us, with an invoice for $125 representing the time it took to “handle, review, and take appropriate action” to get the papers to us.
I told them to sue us, and find a good attorney who charges by the hour.
© Alan Weiss 2011. All rights reserved.
Why aren’t attorneys, who can pass a bar exam, smart enough to bill more ethically and effectively?
I think it is hard for attorneys and for accountants (as for many consultants) to actualy name/define the value they add. They often think passing a bar exam or obtaining some grade should be enough to justify these billing practices. And let’s be honest, an attorney will only tell you about the risks you can encounter in a certain project. They never tell you how to mitigate those risks in any other way then not doing the project. Or let them restructure it in such a way with contracts and penalties and such so that the project is squashed anyway. Accountants are the same. Their core business just isn’t law; it’s financials. And for the large part of the consultants I encounter (in the Netherlands) it’s the same.
I think it’s self fulfilling prophecy. Attorney’s, accountants and most consultants
(1) are not thinking on behalf of their clients but on behalf of their expertise (IT, strategic, HR, procurement, etc.), so they always come up with some solution already performed by hundreds of others as if client problems are always the same everywhere
(2) are not innovative enough
(3) are thus performing contract labour, becoming commodities performing the same activities any inhouse lawyer, financial or other skilled labouror.
I am myself a legal, public administration and public procurement consultant. I however only charge by the hour if, and only if, a client asks me to. And if I know he/she wants me to because of organisational difficulties he/she could encounter. We then agree to a fee in person, which I offer on paper in an hourly rate for an extended period of time.
I am living proof. There is no excuse for legal professionals that keep billing by the hour.
Because, ‘…intellect doesn’t always correlate to common sense.’
This is unbelievable…I wouldn’t be able to go to bed at night knowing I was charging my clients so unethically!
I laugh when I hear all the excuses why charging by the hour is the best way. I typically keep my mouth shut – even if I may bring up the subject – because it’s typically not worth the effort to try to convince someone otherwise.
And you know what? I have no problems going to bed at night because I know I am providing a dramatic ROI for my clients and I am equitably compensated for doing so.
I learned 30 years ago that you can’t become wealthy working for someone else or charging by time units. I made a lot of dumb mistakes, but these were two principles that atoned for most of them!
Our attorneys were taking way too long, and way too much money, to prepare a regulatory filing. I called another attorney for a second opinion, and he said, off the top of his head, “You’re exempt.” He rattled off the law and the grounds for exemption.
We reported this to our primary attorneys, who then researched the issue. They determined that they were wrong initially, but billed us for both their initial research, their preparation of the unneeded filing, as well as their subsequent research showing that the the filing was not needed.
We refused to pay, and they “granted” us a waiver of the fee.
Our second opinion attorney is now our primary attorney. He refused to bill us for the initial phone call, because it was just five minutes.
Hourly billing is such a trap!
I know a high flying training firm whose people also bill themselves as “performance consultants”. A few years ago I was in on one of their development days and they were bemoaning their focus on “billable hours” and how they needed to “get back to focusing on providing a premier service for clients”. I then witnessed them recycle 2-3 year old training manuals as “premier” and charge clients $350 an hour to come up with “the lego team building challenge”, plus pay through the nose for delivery. Oddly enough(!) they wondered why they didn’t have more influence with clients – they were a commodity. They’re still in the same quandary today.
I’ve also seen senior lawyers rip off their own staff by putting their own hours ahead of the juniors’ when the juniors require a little assistance.
When one of my brothers was practising law, he frequently would not charge clients for a few minutes of phone call or checking up on something. He was a very productive partner in a national law firm – clients loved him and brought more work, because he tried to treat them ethically.
Alan, you’ve really convinced me over the years that value-based is best. I had a client earlier this year ask for hourly rates for a little project that they thought the “committee” would have a tough time adopting all at once. I argued them out of it and came up with a compromise (still not a full project fee) because I could see how the people in the company would be forced to ask for permission every time they wanted to ask a question. They still haven’t gone for it and I’m happy with that because, although I would be paid well, I’d rather be doing a better job than a piecemeal one with poor results for everyone. Plus, in the long run, it would cost them more to get it done right. Value-based really is more ethical.
I’m fully committed to project plans with fixed fees that are focused on outcomes for the client. Yet there are people in my clients’ firms who think they’re somehow going to be cheated if they don’t pay by the hour. This is typically driven by the internal finance departments or complaince officers who overrule the business development managers who are eager to engage me and are thrilled with a fixed price.
We ALWAYS make an initial offer of our services a a value-based offering.
In the past two years, however, with one exception, customers refuse to accept the offer and want to have it in hours.
Even the one customer that accepted, wanted to see an estimate in hours – because all our competitors gave their quote in hours.
What’s particularly interesting about this is that we always have a very large, provable ROI for our work. And, we always deal with financial types. But, rules are rules – and companies buy consulting, at least in IT, by the hour.
Good points, Cary and Susan. I think it’s a question of better educating customers and client. When people are comfortable looking at hours worked, it’s because there’s a lack of trust.
So how do you deal with a client that absolutely demands hourly rates? Do you turn the business away after you’ve done everything you can on your end to convince them otherwise? Since I don’t bill by the hour, I don’t even know what my hourly rate would be!
See the way I handle this problem in my post.
You say, “Hourly rates aren’t fair to you with a meter constantly running, and you having to make an investment decision every time you might want to call me.”
You always have to show what’s in the other person’s best interests.
Lisa Earle McLeod
Billing your time turns you into a day laborer who cares more about punching the clock than doing great work. It becomes about you, when it should be about them.
It’s soul sucking, which might explain a few accountants and lawyers I know.
I didn’t attend school, study, take risks, and acquire talents to track six-minute intervals and work 60 hours a week.
Thanks Alan, that is one of the best lines you’ve said in a while, I’ve added it to my Filofax’s Quotations page. Indeed, one should always strive to know one’s own worth because no one else would, and know better than chasing fractions of time or other absurdities.
Related to this, I remember you sent the Australian Justice Ministry [?] a copy of your book “Value-Based Fees” and he wrote you back. I wish you’d market this to IT consulting companies in Australia. There is so much bad education in this regards that I am yet to see an IT consulting firm in Sydney who truly embraces VBFs. You know of any? 🙂
Here’s my favorite – I have a client that wants us to state an hourly rate, but they pay fixed cost per project.
To me, if you demand that I quote an hourly rate, then your on the hook for however many hours it takes. If you’re going to pay fixed cost per project (which I prefer), then I’m not tracking or estimating hours.
I received some world class advice from a therapist once, which I’ve used for 25 years to great success in my work. He charged $110 for the 55-minute session. Therapists have no idea how to charge.
Most people who are in love with their work—reporters, firefighters, police, therapists, consultants, doctors, etc.—are either grossly underpaid or don’t know how to charge. They’re afraid of not being able to engage in their passion.
Valued based is a good concept. However, at consulting companies, some just do it the wrong way. To be more accurate, being unethical just to meet the target. There are IT sales rep and project manager who do not understand the product and what is involved, in fact they don’t really care, but just want to charge the customers as much as possible.
A senior manager and I was talking to a client on loading budget into the BI product. 5 columns of data and the senior manager wanted to charge 8 hours for 1 hour job. In addition, the client is going to prepare the data ready for upload. We should not charged by hour, but, for God sake, I don’t think charging excessively is the right way for value based billing.
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