Two good reasons why time-tracking and billing for time is stupid
Thanks to Ed Kless, raconteur and self-described iconoclast, I had the pleasure of reading a great summary of the Insanity of Time-tracking. You can read it yourself here.
The article sums up nicely why billing by the hour and even time-tracking itself is backwards and should be completely eliminated.
For me, it boils down to two main points:
1. Why should seasoned, experienced, knowledgeable professionals get paid less than rookies? Think about it. A task that took you 20 hours to accomplish (most likely poorly at that) in your early years probably takes you a fraction of the time to accomplish (in a more polished way) as you build more experience through the years.
2. Why should a customer be forced to care about whether a junior or a senior person is doing the work and the time it takes for each? The only reason is because the time and billing method forces them to care. The junior person might take longer than the senior person but the billing rate for the junior is only 2/3rd of the senior person so I carry the one, multiply by x and …
STOP! The customer wants results – not math. Remember: people buy 3/4″ holes, not 3/4″ drill bits.
By perpetuating the time and billing dogma, the ultimate irony is that we create a world of inefficiency where people waste their time worrying about time. My recommendations:
- Focus on the stuff that really matters: end results, deliverables, time frames and, ultimately, value.
- Align the project goals with the customer’s goals – don’t sweat if you are over or under hours on individual task. Are you effectively making progress towards the end result?
- Discuss how effective you were in the end (not how efficient by micro-analyzing hours on a spreadsheet).
Please realize that I’m not talking about abdicating proper project management. In fact, this approach underlines the importance of proper project management – it just isn’t done by putting timesheets under a magnifying glass. We’ll cover that in a future article.
For now, give it some thought. I’ve given you two good reasons why time tracking and billing should be eliminated and there are all sorts of other reasons to explore but … I’ve run out of time.
Robert Wood
Wayne Schulz
Peter Wolf
Well done, Peter!
First, veterans get paid a lot more than rookies. If you bill hourly and you aren’t raising your rates, you are devaluing your skills as you get better. As you build more experience through the years, you should also be raising your hourly rates.
Second, clients do like to see hours broken down. They need to know they are paying one rate for something advanced and a lower rate for something like meetings and project management.
Third, I think people are afraid to bill hourly because they don’t want to tell the client it’s going to take longer than they originally estimated, even if the overage is the client’s fault. Grow a pair and tell your client it’s going to cost them more. Billing hourly makes it really easy to do this.
Fourth, projects usually change from the time they start to the time they finish. Flat bids mean having to first spec out the project and then do change orders or find some other way to bill the client if the spec changes. Or you lose money. Your call. Billing hourly alleviates this.
I’ve got more reasons here:
http://www.myintervals.com/blog/2008/03/04/7-reasons-you-should-charge-by-the-hour/
I’ve read your article before John and I feel that most of your points are based in fear. If there is an honest discussion with clients up-front before projects start, focus can immediately be applied to the end results. From there, an experienced service firm can use their expertise to apply valid pricing options that works for everyone.
Let’s break down your points one-by-one (because I’m anal retentive that way):
1. Veterans get paid a lot more than rookies so you need to raise your rates. This is pure poppy-cock from a customer-centric standpoint. Customers don’t care about your costs – they care about their results. If you can’t serve a customer at a price point that makes sense to them, you need to change something internally or find a new market to serve. Imagine if Google came out and said “gee – electricity rates are going up so we need to charge a penny per search.” No one would be using their service for long.
2. Clients do like to see hours broken down. If this is true, I think this is an excercise in massochism. It’s like eating a great meal at a restaurant and then asking to see the itemized bill for ingredients and labor. Do we ask to know how many hours it took to build our iPads, our TV’s, our cars? No – we care about the end result.
3. People are afraid to bill hourly because they don’t want to tell the client it’s going to take longer than they originally estimated, even if the overage is the clients fault. Very interesting. First – if you have the expertise, you should be able to properly scope and define the project and pricing for the customer. If you go over in that case, man up and take your lumps. It’s extremely self-serving to go back to the client and say “oops – due to my poor planning, you need to pay more”.
And if the client asks for a change (the word “fault” really doesn’t apply – it’s their project and their perogative to change it), provide a Change Request detailing the impact to budget, deliverables and timeframe. Could not be easier. No different than asking for service on your car or building a house. If I ask for changes, I expect to pay more.
4. Projects usually change from the time they start to the time they finish. Yes – I agree. Again – that’s what Change Requests are for. Not sure why that would be a problem in a healthy, professional relationship.
BTW – we aren’t discussing “flat bids” here. We are discussing value pricing. I can define the same scope and provide three different pricing options – off hours work, weeknight work or weekday (business interruption). This is not flat bid stuff here. It’s pricing to the customer’s circumstances and desires.
I understand that a lot of firms are beholden to the almighty timesheet and billable hours but by perpetuating an outdated dogma you aren’t doing service to your clients, yourself or the professional service industry.
As a recent FoF attendee…Ed Kless and Ron Baker made me a believer. Once you have been set free…the billable hour just seems ridiculous.
@John – In my experience, the ONLY reason a customer would want to see a breakdown of their time is because WE (knowledge workers) TRAINED them to care. I almost left public accounting because I ABHOR AND LOATHE AND DESPISE entering time. Such a WASTE of time.
Although I do understand your position…you have to toot the billable hour horn because Intervals was born from a paper time sheet. Stick to your guns and at least go out shootin’ in a blaze of glory.
Timesheets in trash = increased revenue, increased profit, increased customer satisfaction. And ultimately more time for breakfast with Peter Wolf.
It works, including the breakfast part.
Sold!
You had me at “Timesheets in trash”
Hourly billing in my experience means there’s no need to do any advance work to understand the problem or to propose a realistic solution.
Does hourly billing work? Sure. It has for years.
It’s like constantly using antibiotics to treat a cold instead of proper nutrition.
Over time the body becomes resistant to drugs. We think what we need is stronger antibiotics – when what really need it to take care of ourselves.
Hourly billing bred a category of customer conditioned to look at one thing — and that’s the hour/rate.
I see 5 to 8 inquiries a week from people on the web.
They all have a very similar story about how they received surprised bills from consultants, how they despise hourly billing at too high rates, how their consultant never is in contact with them.
They agree wholeheartedly with a fixed fee agreement. I mean enthusiastically agree as if it’s going to save their company……
But — and this is always shocking to me — 90% of them ask before they hang up the phone:
- So what is your rate?
- How long do you think it will take?
And VERY few call back.
It shows how ingrained it is in our society. They realize it doesn’t make sense but it’s the fall back position.
I spent a lot of years doing flat bids and it just did not work. I work in web design and development, and a web site project is incredibly difficult to scope out before the bid is submitted. This is especially true when building custom web-based apps for clients. The scope inevitably changes as the project takes shape because neither us or the client could fully envision the finished product. Hourly billing allows for that change in scope. Also, the client will often times argue that what they are asking for is not a change or an addition, but falls within the original scope. I could do like you said and “take my lumps,” but losing money sucks. I’ve heard people say that with flat bidding you win some and you lose some on the profit. Well, I’d rather win.
When we do hourly billing, we give the client an estimate, just like a mechanic would do. Because until we dive in, we don’t know what’s going on under the hood, or inside the clients mind. When the project goes well, we come in under a 5% margin of error on our original estimate. When the client throws in a lot of surprises, we are compensated for that, too. When it comes to estimating, we know what we are extremely accurate because we honed our estimating skills with hourly billing. Any time a project goes over that 5% margin of error, it’s due to the client changing the scope or introducing a variable late in the game, such as a third-party vendor.
Hourly billing requires a strong client relationship. It requires trust. Clients come to us because they want the relationship. A flat bid encourages them to seek out the lowest bidder. That’s not the type of client we want. We’ve been doing hourly billing for 11 years. Not out of fear, but out of experience.
The restaurant analogy doesn’t really work here, because no, no one wants to see the cost of ingredients. But they do want to see the bill broken down by what they ordered, the number of dishes, drinks, etc. You don’t sign the check until you’ve looked it over to make sure you only paid for what you ordered.
I’m not saying flat bidding is wrong. I’ve seen it work for some people. But it didn’t work for us, and I would argue that if you are getting into web design and development work, flat bidding is going to hurt you in the long run.
John – You don’t really have trust with your clients, you have a co-dependency where the client’s pocket book is in your hands. Most of your arguments are based on your needs as the professional firm.
When you buy things, do you care about the vendor’s costs or problems? No – you want results. And some of your comments directly imply an attitude of you vs your customers – particularly statements like “I’d rather win”. Wow… that comment left me shaking my head.
I don’t really think you are grasping the concept of value pricing. It’s not a fixed bid with an hour cap.
And, yes – a client with a value priced proposal can definitely shop it around but so can a client with a “range of hours” estimate. I agree that those are not the ideal clients, but a value priced proposal is harder to shop though because alternatives offered are not related solely to how long tasks will take.
There will always be someone willing to do the same work cheaper but can they add your expertise and your creativity and understanding of the customer?
Sorry I’m not explaining it clearly enough. I will say that it seems that you have a dog in this hunt so I’m not sure you would be open to even the most eloquent and persuasive arguments anyway.
Peter, I completely get where you are coming from. And I’m not trying to say that time tracking is for everyone. But I would not say that either method is “stupid.” Or that anyone using time tracking is doing so out of fear. That’s an over generalization, to which you are entitled, after all, it’s your blog. What I am trying to get across is that there are plenty of use cases where time tracking is extremely beneficial, including value based proposals.
One of the best tools for doing value based proposals is time tracking. By tracking time internally, you will know how you came out at the end of the project. You will also know how long it took. Over time, your ability to complete projects faster will be measured in a quantifiable manner. This information is great when booking clients. How long will the project take? Let’s check the data. How many projects can I push through in a month? Again, let’s check the data.
It’s not so much an us vs them as it is a us with them. By “I’d rather win” I mean that I’d rather profit on this project than not profit. And if I can ensure that I will profit and that the client is going to be happy, why not do both?
To throw out time tracking altogether because it’s “stupid,” well, that also has me shaking my head.
John,
To be honest, the whole concept of tracking time loses the focus on where you need to be which is delivering results for your customers. The idea that tracking time makes you better able to manage your business means that you manage by metrics – not by skill. One factor that is vital is to have the right culture in your business – removing the fire blanket that is time based billing (or even time recording) means that your staff will not feel constantly under pressure to justify their existence based on time spent.
Removing timesheets means that they justify their existence based on outcomes and delilverables – this is far more positive and it enables them the time to think – something a timesheet model disincentivises.
The constant focus on “measurables” with regard to project timeframes etc is a furphy in many respects as it’s highlighting something that has absolutely nothing to do with the quality of the work or the outcomes achieved.
Having an agreed price with the customer actually creates the opportunity for them to interact with you more – sure there are highlighted “out of scope” works that come up – but they usually come from the customer! How good is that?
As for hourly rates – how do you set them? Bet they’re based on “the guy up the road” or something else scientific. Maybe 3-4 times salary cost? All arbitrary and ineffective.
Regarding “let’s check the data” – I see “paralysis by analysis”.
Matthew summed up my points perfectly. Unfortunately John, I categorically disagree with most of the statements that you make particularly “One of the best tools for doing value based proposals is time tracking”.
No – time tracking is a diversion from focusing on value. We all become good at the things we focus on.
Focusing on time tracking makes you good at time-tracking. Period.
Focusing on delivering value makes you good at delivering value. Period.
I recommend “Positioning for Professionals” by Tim Williams or nearly any book by Ron Baker for more information. Or check out http://www.verasage.com or http://www.edkless.com if you prefer web-based resources.