Any person that sells both hours and offers services on a fixed price basis has a mixed mindset.
And it doesn’t work. People are trained to think in terms of hours or results, it’s mutually exclusive.
When people are billing hours in the month as well as having some projects on a fixed price they will still think in terms of hours. And it hurts them and hurts their clients.
Here is why…
A person billing by the hour will, well, obviously track their hours in order to bill. They see the value is in the time they put into a job. And, to be fair, it may have a tremendous value and be worth a lot to the client.
Nevertheless, their mind is focused on time, on hours, not as much on outcomes or systems.
Who pays for the inefficiencies in these cases? The client does, as long as they are willing to pay you for your hours and you can convince them of the value.
One big challenge for the client is the “not knowing” what the bill will be. They can only hope and pray that there won’t be a lot of problems and that the bill will be reasonable.
How the 2 Mindsets Approach a Mess
Let’s look at an example of two professionals – each about to tackle a huge, messy project that will result in an ongoing maintenance contract.
The fellow billing by the hour we will name George. He may be quite happy, and stress-free. The mess is not his fault and as long as he can bill all (or most) of his time to clean up the mess, he is going to make a lot of money.
The other professional, we will call her Anne, is the one only working on a Fixed Fee. She is much more stressed in the beginning. However, she is completely systems focused. She is driven to get the mess cleaned up as fast as possible. The more systems she puts in place the more the systems she implements will work profitably for her. The client will love it too because everything is humming along now.
Remember, her client signed up for a fixed fee maintenance contract and it will serve her to ensure that everything is running really, really smoothly.
How about her client, what is in it for them?
A lot! For the client they get a project that order has been brought into place from chaos, from a mess. It will make their lives much easier and they get a company running like a Swiss clock.
Anne may make more profit on her maintenance contract by having to put in less hours – later on. So, she is motivated in the beginning to get all the systems in place so that she can rely on the smoothly working systems.
For George, if he operates on an hourly basis, he will make more profit when the system functions poorly. He will have to be called on more frequently to fix what gets broken. He will not be motivated to think “systems”.
What Do Clients Really Buy?
Does the client get ripped off when you are putting in less time after having invested heavily to systematize the project for your client?
No! The systems benefit them first and foremost not the service provider. Imagine a server system that is humming along like a well-oiled machine, and you pay a fixed fee for maintenance, the fact that little maintenance is required means it is running perfectly. Isn’t that better than a “break-and-fix” approach?
Most of us are comfortable paying insurance and would rather not have a claim, right?
No one buys hours, they may pay you for your hours because that is what you billed them, but they pay for the results they are looking for.
A Mixed Mindset Will Muddle You
You cannot have an hourly mindset and a fixed price mindset. It is one or the other. You have to make a choice.
Why? Because the person who is looking ahead at the month and has clients paying him by the hour for ½ the month and one or two Fixed Fee engagements for the balance of the month will be of two minds.
They will simply take the Fixed Fee and divide by their standard billing rate and give those many hours and usually no more.
So, the client still gets hours, not results.
They must be all in.
Another situation where it doesn’t work – and I have seen a professional colleague make this huge mistake (against my advice) – is when you have a Fixed Price Agreement with your client, and you make the big mistake of paying your people by the hour.
Yikes! What happens is that your Team will log a lot of extra hours. They cannot help it; it is built into their mindset. They will log the hours needed to do the work. Their mindset is not on efficiencies and systems. It is fixated on the process not the results.
The lady in this example would then treat the Fixed Price Agreement as a “flexible” arrangement and go back to her clients and charge them an excess fee beyond the “fixed” price.
Her clients were livid and most ditched her.
You see, it doesn’t work to have two mindsets here.
Who Doesn’t a Fixed Price Work For?
There are situations where a Fixed Fee does not work. It is when you have a client who refuses, for whatever reason, to cooperate with you in having a systems approach internally.
What happens is that the chaos gets loaded onto you and your Fixed Fee becomes unmanageable.
So, client selection is critically important.
Some business owners are really, really addicted to disorder, perhaps it gives them an adrenal rush, or they really don’t want to change their old habits. Again, a Fixed Fee for these types of businesses does not work.
Also, work that just cannot be systematized may not be a good candidate for a fixed fee.
That said, don’t rule it out too quickly! In the old days, ALL car repair shops charged by the hour. Now, pretty much ALL car repair shops charge on fixed fees with certain things included in a package.
Remember this dear reader in closing – a Fixed Fee mindset is a powerful, systems-driven, results-focused mindset that can only be good for business – your business!
Thanks for reading…