On Hourly Billing And Why It’s Broken

Hourly billing is an invention that to me is clearly broken. Why you ask? Simple. From the start it creates the wrong incentives for all parties. Let me explain.

All companies which bill by the hour would ideally want to bill the most time possible, because in that way they make more money. At the same time, the person who orders the job would rather that the company spends as little time as possible (time is after all here clearly money). Usually, this ends up with a disgruntled customer because they either receive a sub-par product or feel they are paying too much.

Another important argument against hourly billing is that you loose all comparability. This is something too many people apparently fail to realize. Decisions are often made just on the basis of hourly rates (where high = negative). Rarely is any consideration taken to the actual time it would take.

As such, companies offering low hourly rates (and subsequently need more time) are more often chosen over companies with higher hourly rates (putting aside for the moment that this may not be the type of client you want anyway). I see this frequently, and it happens to me at Bernskiold Media all the time. Yet I am sure we offer a far better service than many competitors.

For most industries, time isn’t really important either. How long it takes us to create a website or how long it takes a lawyer to draft some legal document is completely irrelevant. The end result is what matters and it is for the end result that we should be paying. If we make the company a hundred thousand dollars in sales with a few hours’ worth of work, how much compensation is then fair? At least considerably more than what standard hourly rates would be.

As you can see, hourly billing leads at the very least to a great conflict of interest. Ideally, all parties would be best of with work being completed as quickly as possible and have the greatest possible results. It is for the great results that you should be willing to pay.

A far better alternative would be ideally value-based pricing but also fixed sums. More on that next week.