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The Billable Hour: The Looniest of Tunes
But, speaking about the billable hourů..
Many years ago, I suggested to my oldest daughter, then recently out of school, that she should start thinking about paying me back for all the loans I had given her over the years. I really wasn't serious.
Kelly immediately took out her checkbook, the one with Kelly Dawn Willard written officially on the cover, scribbled off a check and handed it to me. It was for $1 million. She really wasn't serious.
At $10,000 an hour, no, I am not really serious either, but I might as well be. As a crisis consultant, I can save a client millions, or at least they think I should be able to accomplish this. As an experienced media consultant, I can keep a high profile client from stepping into every pile of dog muck on the media sidewalk. As a senior consultant on marketing issues, I can help bring a worthy product to market. As a relatively creative guy, I can script a commercial that will sell millions of better mousetraps.
The reason I can do all this is because I am a professional at what I do. I am certainly not the only one, merely one player in a cast of hundreds of thousands around the globe. At times, that fictional $10,000 per hour is not nearly adequate for advice given, a crucial meeting set up, a silver bullet strategy put forward, or a brief written. At other times, if one were to reduce that amount by two zeros, making it a total of $100, it might be excessively high, and I should even return change. It all has to do with value offered, and, in this regard, none of us bats 1,000.
This is why the hourly billing rate for business professionals is the looniest scheme ever conceived in the corporate world, even more nonsensical than the overly dressed annual report, big human resources departments, and five-week vacations. Billable hours should be applied to ladies of the night and cotton mill workers, not service professionals. The billable hour is a standard - perhaps only one standard - by which people who actually get dirt beneath their fingers should be paid, people such as automobile factory workers and hired hands in the field. For people such as you and me, it is an outdated concept that encourages fraud and discourages value. Yet, it is the universal standard for judging worth. A lawyer, an accountant, a management consultant, a PR specialist - you name it - most often will quote an hourly rate, as if it were really relevant to a client's situation or problem. It is not. It is merely dumbing down value.
Value is where the rubber meets the road. One is not creative in hourly increments. One manufactures widgets in hourly increments. One rents bowling shoes in hourly increments. One pays babysitters in hourly increments. One rarely thinks - unless that person is indeed a slow thinker - in hourly increments. It's virtually impossible. Try it sometimes.
I take a daily walk of about 45 minutes, and to entertain myself on these sojourns I tackle either a creative assignment relating to my company's expansion plans, or a client problem. Generally, I am not that far into this jaunt when I come upon an idea, and flesh it out within the next couple of moments. Do I bill for 45 minutes? An hour? No, I bill by the value of the idea. And that is an agreed upon value.
When those thunderbolts strike from the shower nozzle while you're lathering your hair with Irish Breeze, do you reach for a pencil and write down two minutes on behalf of the client. By putting an hourly value on ideas, those same ideas are cheapened, because they are based on a form of institutionalized fraud. It is benevolent fraud-one that most certainly could not be proven --but fraud just the same, no matter what profession.
The fact is I do bill out at $450 an hour, or at least that is what's listed when I am specifically asked to submit an hourly rate, and have miserably failed to explain about value billing. During a meeting with Coca-Cola executives, I was asked my hourly rate, back when $450 an hour was a lot of money. They looked astonished. "Oh, don't worry," I said. "I've never billed more than 10 minutes at that rate." Then I went on to explain how little relevance my billing by the hour had to their specific problem. It was not a lecture, but I believe it was instructive. We settled on a retainer that was fair to both sides.
The Important Meeting
When I first joined a public relations company in Washington, D.C., I was asked to set up a meeting with a U.S. senator who could be important on health care legislation. The client, as I recall, was Randall Tobias, then chairman of the board of the pharmaceutical giant Eli Lilly. It was not a difficult assignment, for I had worked for this particular senator, and knew all of his current top staff, including his administrative assistant.
The call, with pleasantries, took 15 minutes. The call back confirming the appointment took perhaps another 15 minutes. I spent an hour mulling over the points that I thought important to make in the meeting and perhaps another hour briefing the company chairman before his meeting with the Senator. The meeting with the senator, which I also attended, took another hour, and then Randall and I - by now I feel I can call him Randall - had a post meeting of maybe 30 minutes.
So, I give you the following multiple-choice quiz. If you get the right answer, you have my permission to take $20 out of your company's petty cash for a lunch at Big Daddy's Barbecue in Cut-and-Shoot, Texas. If you get it wrong, you have to memorize Bill Clinton's autobiography or the Koran, which ever is shorter.
1.) Mr. PR man, you should have billed the client for 4 hours at your then rate of $300 per hour (okay, the $10,000 was a stretch)"? ______
Finished? Put your pencils down.
It appears that Big Daddy is going to sell a lot of barbecue tonight. Most all of you, I am reasonably confident, went for No. 5, the weasel-like but most correct answer. However, I see you are still scratching your heads over what Randy (see how informal we have become) should pay on behalf of Eli Lilly.
Let's look at the ingredients in this porcupine pie.
First, not everyone can set up a meeting with an influential senator. Not everyone is on a first name/drinking buddy basis with the Senator's top staff. Not everyone can sit down with a chairman of the board of a major company and offer sound strategic advice. Not everyone has 30-years experience giving advice at the highest levels, to CEOs, senators, governors and a prime minister or two. Add to this, the vote on the Senate floor that the client is interested in is fast approaching. If the legislation, which the client opposes, passes, it will mean a loss of millions upon millions of dollars for the client's company. The senator being approached is considered an expert on the issue, and very much a factor in determining how the final legislation is shaped.
Well, in that case, of course, the meeting was worth at least the cost of a new Lexus, probably more. However, billing situations are rarely this cut and dried. They are more complicated than a soap opera love affair.
For example, in this particular case, no matter how well the arguments were formed, the senator had already indicated he favored the President's position, which was contrary to that of the client. The meeting was more a Hail Mary pass. However, in the final analysis the threatening legislation imploded, disappeared in a poof like a pair of magician's doves. Moreover, the client was thankful he had, in fact, been introduced to an influential senator, and he could tell his board he made the case against the legislation before a key lawmaker. In fact, he had sat down with a Rockefeller in this instance; the name itself had some star power.
So, how much should be charged?
There is no exact formula, but there is what I would like to refer to as partnership billing. This is not a touchy-feely short of relationship, but hard-nosed reality regarding worth. It is the recognition on both sides that there was value given and value received. There is often a general feeling that money will be made because of this counseling; or, in the least, a crisis avoided.
As I recall, we billed a minor league $5,000 in 1993 dollars, but the number of actual hours involved had very little to do with the equation. This, as nearly all of my billing, was based on value, perceived value, real value, potential or future value -- value is the key word. Even when specifically requested to bill by the hour, I mentally and later physically reduce the number hours if they did not result in one of the value paradigms. On the other hand, I have not hesitated to boost the value of an hour when the result was spectacular. In the latter case, an agreement needs to be signed in blood before hand, or else the client's definition of spectacular might be Fourth of July Fireworks when you were only thinking of the occasional crack of a cherry bomb.
So, the magic formula: Fee = Perceived value + Real value + Potential value. Now you're probably going to ask me the square root of 349,292; right?
But the Fact Remains
However, the fact remains that the majority of professional service organizations still use the hourly rate as the basic factor in determining value, even while professing otherwise. I can't think of any such service, with the possible exception of clerical, that can be judged by minute time increments, particularly when brainpower comes into play. The great big silverback realizes that hourly billing, while a historical concept, has grown musty. It should be the old, wooden tennis racquet in the garage, the one without strings that has Poncho Gonzalez written on it.
Some time ago, I introduced into our office/client relationships what I call the "Value Contract", even writing about it in an earlier book. It is a semi-official paper, and I introduce it at the beginning of a client relationship. (copy of contract certificate)
Before joining an international organization, I had never billed by the hour, but primarily this was simply due to the nature of the clients in the portfolio of a relatively small advertising and PR agency. Then, I spent one year in the pressure cooker of time billing, a situation that, among other things, generated unneeded anxiety, benign but semi-fraudulent exaggeration of time sheets, low morale, and, in some cases, what I call a manager's tax on each account. I think it also caused small pox, but I haven't been able to prove it.
As a director of a department in this agency, I began to ask myself, does the billable hour system encourage or discourage debate and confrontation between the service provider and the client when the bill lands on the client's doorstep, even if a detailed billing letter is attached. This is where the rubber meets the road, quite often resulting in a fender bender; or, in some cases, a full-scale head-on collision with multiple fatalities. It all didn't seem to make sense, primarily because basic communication was nearly non-existent. Hours upon hours stacked up. The billing letter attempted, sometimes creatively, to justify the time. There were massive internal controls put into place to track billable time against administration time against new business time. The latter two components were important, but paled in comparison to chargeable hours. The result was nearly always client sticker shock. People thought of the agency as very good, but very, very expensive. They should have thought of the agency as very good, and giving value for money. The priorities were skewed.
Okay, I know you couldn't wait to ask the question: What is a manager's tax?
In the consulting world, this is the time - perhaps only an hour or two on each client each month - the manager of a department might add to an invoice to bulk up his own billing level. Since he or she is the overall supervisor, even though very little if any brainpower went into the client, there is the feeling that an hour or two can be justified. You think it doesn't happen in your organization -- or to your organization. Get real.
I have seen an employee be much more creative and spend more time on filling out a time sheet than on writing a strategic plan for a client. I have seen hundreds of hours charged off at the end of a month because what the employee reasonably put down on a time sheet was too much for the account to bear in reality. When you have five people on an account, and each one knows his or her job depends on the number of hours billed, the pressure to aggressively rack up billable hours is enormous. Often times the hours are much greater than the client's budget.
When I have had the opportunity to eschew time sheets for anything other than keeping charge of certain legal requirements on federal contracts, I have seen morale, productivity, and billings go up. Take it from papa, billing by the hour is all rather Disney World masquerading as MBA finance world. It simply isn't -- or shouldn't be -- the real world.
The Value Contract
Some say, quite justifiably, that the Value Contract I devised is simply another public relations tool, and really isn't all that new. What of it? That's the business I am in, and where else is good PR needed more than with client relationships. It is a tool to promote comity, and comity in business and this is what this book is all about.
The Value Contract is a formal compact between our company and clients whereby compensation is not based on time - not even a hint of it - but on quantitative and qualitative benchmarks built into the front end of an agreement. In my view, this encourages evaluation upon task completion, as well as consultation throughout the process. It helps build a closer relationship between client and company. If this doesn't happen, maybe you need to go to extra-strength mouthwash.
The benchmarks, among many others, can be sales goals achieved or tasks successfully completed, depending on the nature of the business. In the case of a PR agency, it might be the number of press showing up for an event, the number of stories generated, and the impact of those stories. The important factors are the formal compact at the beginning, the on-going review during the process, and finally, the evaluation of the performance at the end. This builds trust, stronger relationships, and rock solid golfing partners.
However, when it comes strictly to strategic counsel - that which we believe among our services holds the most value - the marker can never be numbers of press releases placed, interviews set up, etc. The Value Contract model suggests that such fees be agreed to on a monthly basis and that they be frequently re-evaluated. Strategic advice by the hour holds even less relevance to the billable hour than does account management.
Time, one should remember, is really not that relevant to the client. He or she just wants the job done, and done well. If the client doesn't want to pay for value -- and primarily is interested in checking off a list or pushing down hourly rates - then seek another client.
Billable hours are not always the problem of the professional service provider. Quite often it is the client that first asks what billing rates are of a particular company, as if they actually mean something. This is sort of like asking for a hammer, when you haven't the foggiest idea what a nail is. It makes the flat earth society seem sane and reasonable.
I am currently working on a major issue for an international client. I suggested a beginning monthly fee based on what I believed would be the effort, talent and resources necessary to do a good job, and then a lesser retainer fee after the initial 30 days. The suggested beginning fee was $10,000 with subsequent months being $5,000 subject to evaluation every three months. Whether they felt it was too high, or thought they were being cautious, the U.S. based company suggested my team bill by the hour, and submit an hourly accounting each week. This was interesting, I thought, but paid little attention to it, with the exception of keeping track of hours and dutifully turning them in each Friday evening.
After the first month, the hourly bill was about $14,000, or $4,000 more than I had recommended as the initial fee. However, when I looked at the work done, which was considerable but in some instances duplicative, I marked it down and submitted an invoice for slightly less than $10,000, the amount I had originally quoted.
("What, you idiot!" That's my accountant talking.)
Did I cheat myself by leaving $4,000 on the table? Carried to a semi-logical conclusion, can this value billing lead to bankruptcy? I don't think so. We made a fair profit on the first month, and the client got a fair deal. We established a relationship up front that my company was willing to have a kinder, gentler approach to billing, and that our eyes didn't glaze over with dollar signs at the sight of a well-heeled international company. We saw them as a valued client and not as a mark at the blackjack table. That was six years ago. We still represent this company.
One important aspect of value billing is that it presupposes an attitude. It suggests to the client that the professional firm is not merely going through the motions, but is going to charge San Juan Hill screaming like a banshee. In other words, the company will work hard to win for the client.
There is a quote that I pull out of the hopper from time to time by an old, dead English friend named Dr. Samuel Johnson. It goes: "Nothing will ever be attempted if all possible objections must first be overcome." A small plastic card with that quote, which is on the back of a replica of my University of Florida diploma, has been with me for nearly 40 years. I have never had the occasion to show proof of my meager education at that party school, but the quote has come in handy hundreds of times. It is, in essence, the underpinning of value, meaning to succeed spectacularly, even when the odds are not in your favor or that of your client.
What About Contingency Fees?
Finally, there are many ways to measure success, and if the contingency is not clearly defined, it can lead to serious problems. We once represented a large agriculture and chemical company, and were able to obtain for that company a pilot project in Eastern Europe for growing genetically modified food. While we got a bite at the apple, we didn't win the whole apple. While the client could have come back a year later, and probably secured a better deal on top of the pilot project, it choose, injudiciously, to pull out of the country altogether. We felt we had succeeded miraculously given the climate of the times surrounding genetically modified foods in Europe. The client felt we had failed miserably. While a contingency fee was not involved in this particular case-we generally shy away from them - I use the story here to demonstrate the problem when goals are not clearly defined.
On the other hand, success fees-as oppose to contingency fees-can have that added incentive. It gives a professional firm the backbone to take on a long shot from time-to-time, knowing that basic costs will be covered, and that a pot of gold waits if there is success. Don't, however, base the success fee on an unreasonable objective. Our firm once took on client who was willing to pay 20 per cent extra if a certain piece of legislation passed with 75 per cent of the Parliament supporting it. It passed overwhelmingly, but still missed the goal by two votes.