If you’ve ever worked with a consultancy, the billing is usually pretty straightforward. The client comes to the consultant with a project. The consultant guesses how many hours that project will take. And if everyone is happy, the consultant goes about billing the client at an hourly rate.
And for some consultants, billing for time works great. It’s simple, it’s fast, it doesn’t require a lot of explaining. If you’re looking to get projects through the door, it can be amazing.
But after working in consulting for many years (most of which was spent billing for time), I’ve come to realize that, for my consultancy at least, billing for time just doesn’t work.
Let me explain:
One of my very first clients had us working on a project I was super stoked to be a part of. This project was going to be the shining light of my then meager portfolio.
The client came in, we scoped the project, then I sent him an estimate and our hourly rate. We got the green light and we were a go!
A couple weeks into development, the client came to me with a new idea, a new feature for the project. It wasn’t a feature I would have recommended, but whatever. More work equals more time equals more money. I said “OK.”
The next week a new feature was suggested. Then another. And another. And I said “yes” to all of them. Who was I to care what features this client wanted? All I was focused on was making more money off the client and keeping him happy.
By the time we wrapped the project, the scope had been changed so many times I didn’t even know where we had started. The product sucked, the client was disappointed in our less than stunning product, and my team was burned out. I tried to explain to the client that he suggested all of these features. He was the reason his product sucked. It’s not my fault!
But it was my fault. As a consultancy, your job is to do great work. Not create happy clients. Great work will always take care of the client. I knew this then, but still I strayed from my ideals. Why?
The reason that project backfired was because the incentives were in all the wrong places. When time equals money, everything turns into a run-out-the-clock operation. Want to add a cheesy 3D flash intro to your site? If we’re billing for time, screw it, let’s add two intros! I’ll make a killing of your site that no one will ever visit.
I said yes to all those unnecessary features because I wanted more money. And that’s OK. I should want more money. That’s what keeps my business going. Money isn’t the problem.
Time is the problem. So I changed the incentives. Instead of billing for time, we bill for value. If something creates $100,000 worth of value for you, but only took us three hours to make, do you care? Probably not. Conversely, if we spend 300 hours on something that doesn’t do anything for you, you’re not going to be very happy.
When you bill for value, the incentives are always on the product. It frees me and my team from any temptation to add unnecessary features (aka “feature creep”) and keeps us focused on delivering the best and most valuable product. Sure, the client might get frustrated in the short term if we say “no” to an idea, but they’re always happy in the long run. Because they love their incredible final product.
Value-based billing keeps all the incentives in the right places. The consultancy can keep their eyes on the product. And the client doesn’t have to worry about getting billed every time they call and talk to the consultant. How ridiculous is it that we sometime bill clients to talk to us! That’s definitely a problem. When we bill based on value, the client isn’t paying to talk to us, they’re paying for a kickass product.
Great product equals happy client. Never, ever the other way around.