Hourly billing is nuts (again) (part 2)

There are a few more things about hourly rates which are problematic.

1. It’s a fact that some people work faster than others. Making a decision based on an hourly rate without also assessing the speed at which the provider works doesn’t make sense. Yes, £250 per hour is a lot cheaper than £400 per hour, but if Provider A takes 2 hours whereas Provider B only takes 1 hour, Provider B at £400 per hour is 20% cheaper. The slower the person you are working with, the more you will pay. Does that sound like a sensible arrangement for a buyer?

2. Equally, as a supplier, the more efficient you become, the less money you make. Does that sound like a sensible business model for a supplier?

3. Downstream costs are also an important factor. Lawyers are a lot like dentists (but with no anaesthetic). One dentist may have a lower hourly rate than another, but if the more expensive dentist avoids downstream problems, the more expensive dentist is actually cheaper.

So if hourly rates are not a good option, what’s the best alternative? In most scenarios, a fixed price works.

• It’s predictable for both buyer and seller.

• The seller is incentivised to ensure that they are efficient.

• It encourages both buyer and seller to think about the desired outcome. Hourly rates encourage a lack of thought about outcome: fixed prices tend to have the opposite effect. The buyer needs to think: I’m paying X for Y. Is Y the outcome I really want? And for the seller: I’m getting X for Y. Can I make a decent margin given the costs of producing Y?

24 September 2024