I’ve touched on the subject of value-based fees in the past. In short, consultants or other professional service providers using such a pricing strategy charge fixed fee prices as opposed to billing by a unit of time. While there are many benefits that I have addressed in the past regarding value-based fees, one that I haven’t focused on much is performance.
First, let’s take a look at performance in a company that bases all fees on time spent by employees. By and large, most firms billing by the hour focus on the amount of billable hours as one of the key performance indicators (KPI). While some firms may break that data down into fees charged per project, type of project, client, type of client, which employees bill the most, etc., all such metrics lead to the same conclusions. Bill more hours!
A time-based billing approach dictates that growth can only occur, if more hours are worked.
Now, let’s take a look at performance in a company that bases all fees on value, or a fixed price. In this paradigm, there is a much greater burden upon company leadership (or personal performance, in the case of solo practitioners). The company’s growth still involves getting more work, but profitability depends much more upon actual job performance, not time spent. This impacts nearly every aspect of the firm’s operations:
- Workflow – With value-based or fixed-price fees, bottlenecks and inefficiencies in the internal processes (actually getting things done) stick out like a sore thumb.
- Profitability and Personal Performance – In a time-based billing scenario, the longer it takes someone to do something (as long as the client is willing to pay), the more revenue generated. Whether employees/contractors are salaried or hourly, doesn’t matter, as long as the time spent is billable. In a value-based billing system, the more that an employee/contractor produces in a given amount of time, the more profit there is.
- Technology – Companies operating on a time-based billing system could face reduced revenue if technology investments improve efficiency. At the value-based firm, new technologies can be evaluated and directly correlated to profitability.
- Customer/Client Service – If your company bills by the hour, let’s face it – your clients know that whenever they call you, they risk incurring additional costs. On the other hand, value-based fees create an incentive for clients to contact you. As anyone can plainly see, in business, customer service makes all the difference in the world. Don’t miss opportunities to communicate with clients and improve their situations because they are afraid of how much a simple phone call will cost them.
- Invoicing – Time-based invoices are a pain in the ass for everyone involved. Employees, almost universally, loathe completing time entry forms for invoicing. Conscientious employees want to make sure that what is charged on their behalf is accurate. Your clients’ accounts payable department has to read line-item after line-item prior to approving payment. This creates an unnecessary focus on the minutiae of your work product. In a value-based system, producing invoices is so straight forward that it could be handled by nearly anyone. The client receives a document that ideally reminds them of the value you provided – in other words, the ultimate outcome of the project, not how much time it took you to prepare a fax.
What’s The Point?
I’m not much into competitive/professional sports. (My favorite sports are Sumo wrestling and billiards – go figure.) Competitive sports are all about performance. My wife is a swimmer. She is not competitive, she swims because that is what she does. Nearly every day, she swims about 2 miles – she counts laps. It takes her about an hour, but she isn’t nearly as concerned with how long it takes to swim the 2 miles. Her concern is her actual performance – things like stroke, form, rhythm, breathing. A professional athlete, on the other hand, would be carefully analyzing specific key performance indicators. A slight alteration to a professional swimmer’s stroke, form, rhythm or breathing can be evaluated based on any change in lap times. Athletic performance is therefore clearly measurable. In fact, if it weren’t for all the key performance indicators in professional sports, entities like ESPN would probably be more like Entertainment Tonight or TMZ.
In business, key performance indicators drive intelligent business decisions. A slight alteration to workflows, carefully evaluated, provide clear evidence as to what works, and what doesn’t. Whereas billing based on units of time primarily reveal who the workaholics are at any company, a value-based approach reveals a wealth of possibilities for improving performance.
My wife has no aspirations of ever becoming a professional swimmer. It is a hobby, albeit one she is very passionate about.
A business is not a hobby. It is also not an endurance race.