Billing and Paying by The Hour Versus Results Makes No Sense to Me

We are in the process of hiring a new Team Member, and in interviewing her about her current work situation it struck me how great people get penalized in many businesses.

This person is paid by the hour, and she is efficient, so her boss keeps loading her up with more and more work. Sound familiar?

Without sounding like we are tooting our horn too much, that is the polar opposite of how we have structured our business.

At our firm, we do not bill hours, nor pay by the hour.

What I tell people is this…

Results versus Hours

We will pay you a fixed fee. In the beginning it may take you “x” number of hours to complete your work in order to give our client awesome results, based on our deliverables.

However, over time you will get more and more efficient. And when you are more efficient, you have essentially given yourself a raise!

How does that work?

Because we do not then say, “ok, you now have more time each week, I will give you more work, and no more fee or salary”.

We say this, “when you are efficient the gain accrues to you, not me. You can do one of two things – ask for more work, and we will pay you for it, or you can work part-time and use that time to spend with your family, or to simply do what you want to do with your time”.

For people addicted to “process” our system does not work. People that like mucking around in the minutiae of things and get paid regardless do not like getting paid by results.

On the other hand, people that are really effective and results-driven get burnt out by employers that just work them harder!

The same holds true for how you charge for your services in your business…

Hours versus Fixed Fee

Billing by the hour versus a Fixed Fee is often (not always) unfair to the customer.

Let’s take a car dealership for example.

In the old days, most car repair companies charged by the hour. And, you’d take your car in, and then sweat it out, waiting for that dreaded call!

You know, the call that comes 2-3 days later, “Mr. Holland, in changing your oil, we discovered a little transmission leak, so we took your whole transmission apart. In fact, it is in pieces on the shop floor. And we need to rebuild it. I am sorry to tell you that it will cost about $3,000”.

So much for a planned $60 oil change!

And, then the bills comes in at $4,000 because it took longer to fix than they thought.

And what incentive does the shop have to go fast? None.

In fact, there is an unconscious disincentive.

Now, flip that story around to how most car repair companies work now.

They offer a package – oil change, check the tires, rotate the tires, check all your fluid levels, and so on.

The fee is Fixed.

Now, if the mechanic working on your car is super-efficient and does it all in 1 hour, and the effective rate he charges goes up, does that matter to you?

Well, it shouldn’t. After all you are not buying hours, you are buying results, in this case an oil change and checkup.

Piece Work Pay versus Hourly Pay

Coming back to our payment terms for the shop mechanic. They would be best to pay that mechanic by piece work, a percentage of the fixed fee.

In that way, your mechanic can benefit from his/her own effectiveness!

And that is fair.

Here’s another example in our own industry – outsourced monthly bookkeeping and controllership services.

We often see cases where people have problems in their accounting department due to older, inefficient legacy-based accounting software and systems.

And, because most business owners do not have accounting as their first level of skill, they often try to solve problems by hiring more people.

Over time, when this bloat starts to happen, the accounting department grows out of control and the problems actually worsen.

What we tell our clients is this – “we are the best conversion specialists you could ever hire to bring your accounting software and systems into the 21st Century, and here’s why…”

We will be power-users of the system, once done, and when we are on a Fixed Fee that is often very tight (saving our clients significant amounts of money compared to doing it in-house), we are highly motivated to implement systems that are super efficient.

And those efficiencies benefit every user of the system. For example, business owners can drill into the accounts, and see all source documents attached to each transaction, without having to go through paper files. Order entry people love the simplicity of the screens and how easy it is to create invoices on-the-fly.

If someone charges by the hour, what incentive is there to be efficient?

And ethically, I believe it is unfair for any business to have to pay for inefficient processes. The risk gets loaded onto them.

No One Buys Hours

It is wrong thinking to ever ask someone how much they charge by the hour.

Why, you may be asking?

Because it all depends on a lot of factors.

Firstly, take the example of a great lawyer who charges you $500 an hour and knows how to solve your legal problem because she’s the best, and will get the work done inside 2 hours.

Compare that to a $100 an hour lawyer that will fumble around on your case for a few weeks.

Obviously, we can all agree the first is better.

Another example is trying to compare a plumber who gives a fixed fee to deal with your plumbing problem.

And, you want to compare that to an hourly rate, thinking you will get a better deal.

The first thing to note is that the risk of inefficiencies is with the plumber, not you.

Part of what you paid for with the fixed fee is certainty and peace of mind.

It is possible you may have paid more. Maybe you could have hired a plumber who charges by the hour and he was in and out quickly.

However, you have no certainty. It could go longer, and you may end up paying much more than the Fixed Fee.

And if that plumber who gives the fixed fee is super efficient and fixes the problem in 15 minutes, should you be upset?

Nooooo, because, again, you got the result you were looking for – fixed plumbing.

Also, the plumber, if he’s really good at business, will bundle an unconditional guarantee into his fixed fee, such that if anything related to this problem arises again in the next 90 days, she/he will come back and fix it for no extra charge (or something along that line).

In Summary

To close, this reminds me of a joke I heard a long time ago…

A fellow had a laptop that stopped functioning. He called the computer repair shop, and they gave him a fixed fee to come to his home and fix the laptop.

The price seemed fair, and he agreed.

The computer technician came, pushed two-three keys, and said, there you go, all fixed!

And, the fellow, slightly irritated at having to pay the fixed service charge of $250, says, “wow, that is like a $1,000 charge-out rate you just billed me. That’s expensive!”

And, the technician responds, “not at all sir, it took me 25 years of experience to know what buttons to push”.

Thanks for reading…