Tick, tock, tick, tock….Does that sound determine your living?  If you’re a professional services provider, it doesn’t have to. 

Hourly based billings

Hourly billing is simply a client paying for an hour’s worth of effort, with the expectation of some service being performed.  The positive aspects of this method are that an hour is a tangible, well understood measure on which to base billing. If provider is new to an area this method of billing shifts the risk from the service provider to the client.  On the negative side, there may be an ethical issue as the provider may be incented to bill more hours than are necessary to perform the service, and since it’s not tied to outcomes, it makes it hard for client to see the value in what they are paying for.  Unhappy clients may shop around for a better deal.  The provider’s quality of life may be diminished living a life tied to the clock. Their earnings are also capped by the number of hours that can be billed in a year. 

So what’s a professional services provider to do?

Charging based on value provided

One option is charging based on an estimate of the value that the service creates for the client, keeping in mind the cost of providing the service and what the market will bear.  An example of this method might be as follows. A lawyer specializing in privacy law is asked by his client to draw up a privacy statement.  If the lawyer, who has done many before alters an existing statement and bills as if it was  drafted from scratch, it would be unethical.  However if the engagement letter described a desired outcome (the privacy statement) for a specific price, no conflict would exist.

The benefits of choosing value-based billing are that the client sees a clear link between the cost and the outcome (the privacy statement).  The lawyer’s job satisfaction increases because he can focus on the more interesting aspects of his practice instead of drafting everything from scratch, but he still gets paid as if he was.   

There are cautions though.  The lawyer needs a good understanding of what the job will entail to price it correctly, including the ability to mine the firm’s financial and statistical systems  to gain a good understanding of the costs and pricing norms for the services offered.  That’s where I come in.  This information must then be specified in the engagement letter.

Other pricing methods

There are still more options. What if the lawyer took it a step further and commoditized his privacy statement service by offering an easy to use template for sale.  This would allow him to market his services to a wider audience, perhaps to small businesses that don’t require a highly customized product.  Taking it even a step further, he can add a notice in the template offering customization services for further fee.

Other professional service providers may prefer to offer subscription-based services.  Still others may provide services in return for an equity share, perhaps to start ups that are lacking in cash flow but rich in potential.

The possibilities are only limited by your imagination!  Figure out what the customer needs, and charge for it.

In this posting I’ve talked about what hourly billing is really paying for, and offered other suggestions as to how a service provider might bill to free them from the clock. 

Tick tock, tick tock….not so confining anymore.