15 Ways Consultants Rip Themselves Off Through Charging Hourly Fees

Do you know that the man who commissioned the Mona Lisa refused it? That man was just one of the millions of people who know the price of everything and the value of nothing. He reminds me of consultants who think they get well paid when they sell their expertise through competitive hourly fees. Actually, it's just the complete opposite. They get underpaid and overworked. And on the top of all that, their clients often regard them as outsourced labourers and fungible vendors, not respected industry experts. And this belief keeps these consultants locked up in their self-created pricing prisons from which many never escape. So, in order to earn more, they use the only tool in their tool bags: Selling more hours. The average Canadian consultant bills out 1,140 hours per year. But creating 1,140 billable hours requires 50-60 hours of work each week. So, now multiply 1,140 by your hourly rate, and what you are staring at is the absolute maximum you can earn. Nothing more. Not even a sausage. The Per-Diem Prison As I write these words, most consultancies use the time-based fee-setting method. The problem is that this approach of getting paid for services is seriously flawed. Most of all, it’s unethical. Buyers need effective solutions but sellers make their money by being ineffective and dragging out their time. But there are other problems too. But let’s start with a survey on the consulting profession, conducted by the Professional Consultant. 76 consulting practices were analysed in depth with the following results: <ul> <li>Those working exclusively on a time-based fee basis had 87% lower profits than those who worked on a fixed-fee.</li> <li>When profits and salary were added together, the time-based fee group had profits and salary that were 95% lower than their fixed fee colleagues.</li> <li>For those consultants using time-based fees, profits were 32% lower, and profits and salaries 36% lower than the consultants using both time-based and fixed fees.</li> </ul> And these fixed fees are estimated on the amount of work to be performed. That is, you are higher paid than with time-based fees, but you are still getting compensated as an “outsourced labourer” for the manual labour you perform. How to Avoid Becoming Karl Marx’s Victim In order to stop worrying about your fees, you must stop thinking about your fees as compensation for your manual labour and the poundage of deliverables you create. This approach self-centred and leaves clients out in the cold. It also makes your services comparable. Also, your clients don’t care about the sweat on your brow and other elements you put into your work. The only reason they focus on elapsed time and poundage of deliverables is because that is what they have learnt through the conventional wisdom of task (labour)-based pricing incorrectly established by the faithful followers of Karl Marx and his labour theory of value that states... “A commodity has a value, because it is a crystallisation of social labour. The greatness of its value, or its relative value, depends upon the greater or less amount of that social substance contained in it; that is to say, on the relative mass of labour necessary for its production.  The relative values of commodities are, therefore, determined by the respective quantities or amounts of labour, worked up, realised, fixed in them.” And having grown up in communist Hungary, for 27 years I saw how miserably the labour theory of value flopped again and again, leaving all communist countries in deep economic yoghurt. The funny thing is that in spite of the economic disaster he created, good ol’ Karl is still regarded as one of the greatest economists ever walked the Earth. Hm. And being obsessed with Marx’s idea of value based on labour, many consultants sell their expertise piecemeal on an hourly basis, ripping themselves off with every new engagement. So, let’s take a closer look at 18 common ways of how hourly fees can present a serious danger for service professionals. But hourly pricing is not only financially limiting and emotionally degrading to sellers but it’s unethical to clients. The more ineffective and incompetent service professionals are, the more they can charge. And that’s ridiculous. 1.  Hourly fees inflict an artificial upper limit on your earning potential. There are only so many hours you can charge, and if your want to earn more, you have to put in more work 2.  Hourly fees make your income subject to “going” or “competitive” rates. You can’t exceed them, unless if you pump in more time. However, making more money by working harder is not an evidence of high level of intelligence and creativity. 3.  Hourly fees position you as an expense, an impediment. Clients do everything in their power to minimise the scope of your work, so they have to pay as little as possible. 4.  Hourly fees damage your market positioning as a premium service provider and positions you as a low-budget alternative. In turn you attract low-level buyers with lots of price objections. 5.  Hourly fees encourage simple problem solving, the reinstatement of the status quo. Since the scope of your work is shrunk to the bare minimum, you can hardly ever engage in true innovation. 6.  Hourly fees put you on the opposite side of the table from your clients. Clients want solutions to their problems in a short time, but you want to sell more time to make more money. You have an incentive to be ineffective, unproductive and incompetent. There is a clear conflict of interest. You make money when you sell a task, regardless of whether or not that task contributes to results. 7.  Hourly fees force your clients to make too many budgetary decisions, and create too many yes/no situations. 8.  Hourly fees position you as a fungible vendor, so you work FOR clients in superior-subordinate relationships, as opposed to working WITH clients in peer-to-peer relationships. You become an overhead, and smart buyers want to cut overheads. 9.  Hourly fees don’t require clients to fully commit to the project, because they know they can pull the plug at any time. Also, the majority of hourly fees - apart from a small downpayment - are usually paid after completion, which means that you end up financing the project until final payment. 10. When charging hourly fees, clients can give you various reasons to suspend or even unexpectedly stop the project in order to save money for other priorities. 11. If conditions change in clients’ organisations, professionals charging hourly rates are the first to be kicked out. 12. Hourly fees lock you into a “commodity trap”. You are just one of the crowd who performs certain tasks and activities at competitve rates. There is a world of difference between “running a sales workshop” and “helping clients to increase sales by 25%”. 13. In hourly-priced engagements clients may drag you into “strategic corner-cutting” to finish the project in fewer hours in order to save money on you, but it can also jeopardise your reputation. Even if the client causes the project to get botched up, it’s linked to your name. 14. When charging hourly fees, you get your payment as you perform your tasks. Just like a dolphin in the aquarium: Do one somersault and get one herring. Dolphins never get a truckload of herrings in advance. The same goes to your payment. It is virtually impossible to command full payment in advance when you are paid for tasks based on time. 15. Hourly fees make you take your focus away from creating value because you try to calculate whether or not you can sell enough hours to cover your expenses and make a little profit too. On Summary The value of your solutions is always substantially higher than you could charge on an hourly basis. It also makes you focus on the outcome and that is what you communicate to buyers. The more buyers hear you talk about value to them, the more valuable your contribution becomes regardless of expended time. Hourly fees jeopardise your income potential and brand in the eye of your target market. If your value to your clients is just a matter of how many hours of manual labour you perform, then your service is perceived as a commodity and you are regarded as a fungible vendor not a trusted and respected expert. If you have a choice between being paid for elapsed time and for what your solutions are truly worth, why would you chose the former? 2009-04-12T05:09:22Z

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15 hidden dangers of charging hourly or any other kind of time-based fees for professional services. As service professionals, we want to be treated as trusted advisors, but hourly fees position us as fungible vendors.

15 Ways Consultants Rip Themselves Off Through Charging Hourly Fees

2009-04-12T21:59:49Z