Another argument against hourly billing
Mike McLaughlin continues his great tips with Tip #8: Get Paid What You’re Worth. Here’s just a bit of what Mike has to say:
Want to know the fastest way to earn less than an entry-level consultant in a medium to large consulting firm?
Start your own consulting business and charge by the hour.
According to a recent study by Kennedy Information, Inc., the average salary offered to consultants from top business schools will hit $109,000 this year, and that will be accompanied by five-figure signing bonuses and annual bonuses ranging from $5,000 to $30,000. The total, first year compensation package for a newly-minted consultant could reach over $150,000.
An independent practitioner charging an hourly rate would have to work awfully hard to match that newbie's salary.
Not to be tedious, but do the math: There are 261 days in a year--once you subtract the weekends. If you take a month off for vacations, holidays, and the like, you're starting from a base of 230 billable days, give or take a few.
Research shows that firm owners will burn about 110 days a year on non-billable activities like marketing, administration, education and traveling, leaving about 120 days of billable time.
Assuming you're able to bill for 70% of those 120 days at $2,000 a day, and your overhead is a measly 20% of revenue, your annual, pre-tax earnings would be roughly $135,000. Not a bad day's pay, but you're carrying all of the business risk, and making less than an inexperienced consultant.
Mike is right-on, and goes on to make the argument in favor of charging based upon value instead of time.
Solo lawyers face the same dilemma. Using Mike’s math, you’d still have to bill ten hours each day at $200.00 per hour to make the $135K he suggests. This is why there aren’t many solos making the kind of money new grads from top law schools make their first year in practice. Part of the problem is that solos tend to devalue their own services, setting their hourly rates far below their big firm colleagues because they feel compelled to compete on price. The marketplace also discounts the experience and expertise someone working out of a storefront can bring to a complicated transaction.
So why don’t we all move away from hourly billing? Some of our clients demand it, but the more pervasive reason is that while lawyers are thirsting for information on how to move away from hourly billing, so few are willing to take the risk (and spend the time) to incorporate value pricing into their practices.
One solution: Approach five of your best clients (ones that really like what you do) and ask them how they’d feel about “beta testing” your new value pricing packages. Ask them what they’d want from you and how much they’d be prepared to pay. Agree to limit the “test” for 90 days or so, and meet with them regularly to evaluate how things are working.
Alternatively, if you have a practice with non-repeating clients, offer a value pricing alternative to every 10th client and see how it goes.
Remember, unless you try to change the way you charge for your services, you’ll be tied to your timer as long as you practice.