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Edition 385 – Hourly Rate Stupidity

I was having a conversation with a professional recently about their business and, invariably, the discussion came around to hourly rates. It’s the new financial year and, as part of their annual budget process, they’ve just increased the hourly rates their fee earners charge.

The headline hourly rate, which some businesses disclose in their terms of engagement, is not the problem in this business. It’s the actual recovery rate that is a major problem. When we crunched some numbers a couple of months back, their recovery rate was only 52% of the average charge rate. 52% is, frankly, appalling if, for no other reason, it’s telling me that the level of waste in this business is 48% of the total potential revenue. Can you imagine if Apple threw out 48% of all the product they manufactured? They’d be broke before the week was out.

I have a major philosophical objection to the use of hourly rate for two reasons:

  1. If, as the service provider, I wanted to manipulate the situation to my advantage, and I was charging by hourly rate, why wouldn’t I take longer to do the job? More hours = higher fees = happier adviser bank account; alternately,
  2. If I’m proficient at what I do, or I have a particular skill that is of value to someone, and I can solve a problem in an hour for a client, do I charge the client 1 hour, or do I charge for the 35 years that it took me to develop the skills so that I could solve those types of problems in an hour.

Once, our fabulous plumber, Glenn, was sorting out a major issue for us at home that involved some outside excavation work. I explained the problem and, given I break out in hives when I’m anywhere near tools, I left Glenn to his own devices. After 45 minutes, I wandered around to see how he was getting on, but couldn’t find him. There was a huge pile of soil on the grass and it wasn’t until I peered into the hole in the ground that I saw Glenn, at the bottom, digging the hole with a shovel. My first two reactions were to tell him:

  1. He’s incredible to have dug a hole, by hand, that he can stand inside of in under an hour; and.
  2. He’s mad, because he could own a machine that would do that for him.

As I expected, Glenn only charged me 45 minutes for digging the hole. The fact that it would have taken me all day, and that was what the value was to me, simply escaped him. As did the fact that if he did own a machine, he would have charged me for use of the machine, floating it to and from our home and also for his time – all of which I’d have been happy to pay for.

Too many businesses, and I don’t just mean professional service providers, charge using an hourly rate. If that’s you in your business, you’re just like Glenn – you’re mad! You are suffering from a lack of self respect if you don’t believe you can charge more than the number of hours you’re on the job for, multiplied by an hourly rate. You are achieving a result for the client and that is how you should be charging – for a result, not for hours on the job.

This Week’s Tip

“If you drag out the time on a job, and charge by the hour, you’re acting unethically towards the client. 
If you solve the client’s problem, or improve their situation, and only charge by the hour,
you’re acting disrespectfully towards yourself.”