Why we advise our client’s against fixed hourly & day rate agreements
Let’s start with a view of my personal goals and incentives as a consultant. What are they:
- provide value to my clients by helping them discover and address their challenges. This keystone goal facilitates:
- having a good relationship with the client, getting mutual satisfaction and enjoyment from the partnership – we have fun doing it.
- future business, they want me back and recommend my services to other potential clients.
- getting paid – inline with my clients perception of the value I am bringing to the individual situation.
- learning new things on the job, both client specific learnings (their product & process) and transferable learnings (life lessons and technical skills) – professional and personal growth.
Over the last decade, I have frequently experienced that a granular focus on time and tasks often gets in the way of these goals.
What’s wrong with fixed hourly/day rates
A fixed rate can incentivise the wrong behaviours, both my client and I will end up with too much focus on the less relevant aspects of the agreement.
When I have billed hourly, I am in a position where my primary and most visible incentive is time spent, rather than outcomes. My clients are incentivised to get the most out of my hours, it’s the one things that is easiest to discuss and manage . The paradox here is that the very reason they are hiring your is that they have a gap in expertise, so they are often not in the best position to decide on how your hours should be spent. This will work against the results that my client is trying to buy.
I am passionate and hardworking, and will often put in extra effort to satisfy my personal drive for understanding and finding the “best” approach, increasing the value I am offering – closing personal knowledge gaps around my client’s problem. In addition to this, many of the best and valuable ideas come when I am exercising, reading or taking a shower… not always well received entries on and hourly timesheet!
The monthly fee – a significant improvement
Many engagements have a genuinely undetermined scope, due to the complexity of interrelated challenges and the many unknowns to be discovered. In this situation, a monthly fee approach is my preferred way to go. A monthly retainer promotes a partnership, analogous to the way a healthy full-time employee relationship works. It also the provides adaptability leading to a more evolutionary approach to the engagement. All incentives now shift to the macro picture of value. The consultant is incentivised to use their expertise to focus on the initiatives that will realise the highest client impact in an effective manner, and I feel less requirement to ask for permission.
The client’s value equation shifts from a tedious and often defensive microanalysis of an hourly/daily time sheet, to a much more powerful question:
How much value did the consultant add to my business this month? The client should be regularly asking:
- Is the monthly fee worth the value my business if getting?
- Do I want to continue with this next month?
The client also gets predictability on the cost side of the equation and is encouraged to exercise their option to end the engagement if the value side of the equation does not stack-up.
An example of where and how hourly breaks down
Imagine my client uses a specific type of technology framework that I as a consultant have no direct experience with. We have also agreed that I am going to engage with the client’s delivery team to help them improve the development practices using this framework. To best achieve this goal, and have some credibility with the dev team, I wanted to spend say 2 hours researching and tinkering with this tool, so that I can see how it hangs together when compared to other frameworks I currently work with.
The question here is, is this chargeable hourly work? You probably have an intuitive answer to this in your head?
If your answer was yes, does your answer change if I said I was really enjoying the tinkering, so I did a few late night spikes and spent 12 hours on it? Still chargeable hourly work?
In this fictional scenario, under an hourly rate, I am not comfortable charging my client 12 hours for my late night learnings, yet I would not be happy charging them zero hours – so I am forced into my own value balancing act – How many hours do I charge? What am I happy with? What would my client be happy with?
This scenario illustrates the awkwardness of hourly. In my experience, at best one party, and at worst both, at some time will feel that the hourly value does not stack up for all tasks in a timesheet. A fair-priced monthly engagement goes a long way to addressing this issue by smoothing over the peaks and troughs on hourly cost equation and pushes the focus to overall value delivered and a macro view of the activities.
What about fixed price?
Fixed price confers the same benefits I have outlined above. I have previously done fixed price projects and am happy to consider them when the scope of the deliverables is known. However, my clients tend to exist in a world where the path is less defined, and the value I add is helping them navigate on a journey of discovery and execution.
As a consultant, I believe the value you are adding to an organisation should be significantly larger than the fee you are charging. If the perception of these numbers even come close to each other, I would advise any client to look at different options. When things are aligned well, and the value significantly outweighs the cost, it is in everyone’s best interests to focus on the areas where we can further maximise value. In contrast, there is little or even negative utility in putting tight scrutiny over hourly costs.