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The Billable Hour Zombie: Why You Need to Act Now to Avoid an Attack on Your Business

By Jessika M. Ferm

Various factors seriously threaten the traditional hourly billing system-but some easy-to-implement strategies will help you realign.

The billable hour has been dead in the minds of your clients for a long time, but because your firm is built around the idea of making money in minute-by-minute increments, the billable hour continues to aimlessly wander the hallways of your office, devouring productivity and goodwill.

No doubt your firm expends tremendous time and effort managing timesheets. Elaborate and expensive IT systems have been created to track how each person is spending their time in order to bill clients, allocate resources and calculate revenues and bonuses. You negotiate with clients over just how long it should take to draft a simple letter or file a form. Or even worse, you lose clients without warning because they think another firm might complete the job faster—not better, just faster. Although these and other problems with the billable hour have been apparent for some time (back in 1987 the American Bar Association created the “Task Force on Alternative Billing Methods” and published several articles on the topic), the practice remains the core of most professional services firms’ fee-generation models.

Lately, however, major shifts in the environment have given hope that the day of the billable hour zombie may be ending. Three factors seriously threaten the traditional hourly billing system: (1) the current strain on the economy has created a buyers’ market for clients; (2) Generation X and Y decision makers will demand less-cumbersome systems and complimentary services; and (3) advanced technology will streamline numerous tasks, emphasizing quality of product over production time.

The Economy

The effects of the current economic upheaval will be felt for years to come. It is unlikely that we will soon go back to the days of impressive profit margins, casual corporate jet travel and inflated bonuses. With the exposure of widespread corporate mismanagement, clients have become cynical and are demanding that professional services firms justify the hourly rates of their employees. They are asking for the specific reasons someone is charging $150 per hour and why another is charging $495. “Because that’s what the market will bear” is no longer a viable response.

According to Mark Robertson and James Calloway, authors of Winning Alternatives to the Billable Hour (Third Edition, ABA, 2008), clients are more likely to comparison shop on hourly rates if they feel that the service provided is a fungible commodity or if the task seems routine and could be easily duplicated. During challenging times, clients will conduct rigorous cost-benefit analyses. If you have focused on generating revenue from billable hours and have missed the opportunity to emphasize the value and results of your services, you may find that you will be caught off guard as clients tighten their budgets.

Generation X and Y Decision Makers

Over the next couple of years, the very makeup of decision makers will change. Baby boomers will retire and a flood of Generation X and Y leaders will take over. When making decisions, they will rely less on loyalty and more on end results or proven track records from trusted sources. They are sometimes called the “Why” generations and will question everything from hourly rates to corporate management. They won’t accept answers like “That’s how it is done in this business” or “I can’t tell you how long that will take because it depends on a lot of external factors over which I have no control.” They grew up in a business climate where you could do anything (think the dot-com era, Napster and the iPhone) and could do it for free (think Google, Wikipedia, YouTube and the like).

Stating that your hourly rates have to cover overhead, training and business development simply won’t register. Their response may be: “Why don’t you just cut those expenses then?” Remember, they’ve converted old warehouses into office spaces and worked from home, and as long as they have access to WiFi, they can work anywhere. They conduct business using social media and networking such as Facebook, LinkedIn and A Small World. While golf club memberships and expensive dinners may have been powerful networking strategies for the boomers, you are more likely to find the next generations’ decision makers at casual dinner parties, at “under the radar” networking events and at the local coffee shop. To keep and develop these clients, you must frame your value in terms they understand. It’s about the end product—not the process. Sending a message about paying for your “time” rather than “the result” will not resonate, and you may find yourself with a slowly dissipating pipeline.

Advanced Technology

The advancement of technology makes us more efficient. Although this is good for productivity, it is detrimental to the traditional billable hour system. Remember that the new generations of decision makers are extremely tech-savvy and they expect that your firm uses technology effectively. If you have been focusing on billing per hour, you will have difficulty justifying charging $400 for a routine task that, because of technological advances, now takes 30 minutes to complete. Back when it took three hours to coordinate an appellate brief or produce a storyboard presentation, a three-hour bill was appropriate. When technology allows us to do the same task in 30 minutes, the traditional hourly billing system works against us. Not only does it affect the bottom line, but it can also reduce your value in the minds of your clients. The key is to show clients how, by having and effectively using technology, you help them meet their goals faster, more efficiently and with fewer challenges.

Strategies for Killing the Billable Hour Zombie

While it may seem daunting to consider changing from a traditional billing system to one with flexible options, these easy-to-implement strategies will get you aligned with the future of business.

Strategies related to the economy:

• Package routine services and promote them using all-inclusive pricing plans. While these services may have lower profit margins, they get the clients in the door and provide opportunities to market and promote other more “personal” services. The key is to position yourself and your firm as a resource so clients return for more complex challenges. By calculating the average hourly rate it takes to deliver specific services and creating all-inclusive pricing plans, clients will assume that you are efficient, know how to manage your time, and look out for their best interests. In this economy, the key is to show that your number one focus is serving your clients’ needs.

Strategies related to Generation X and Y decision makers:

• Change your billing language and focus on establishing client goals. Gen X and Y decision makers will want to know that you understand them (even if you can’t relate to their thinking or working philosophy). They will most likely respond positively to success-based pricing strategies or payments for meeting benchmarks. These decision makers tend to have specific goals in mind when hiring professional services firms. At the beginning of an engagement, ask the client to identify the goals, milestones and benchmarks. Ask questions like these: “What is your number one reason for retaining us?” “What milestone or benchmark will we need to meet for you to feel we are meeting your expectations?” “If we meet these milestones and benchmarks, do you agree to pay X?”

One of our professional services clients uses a success-based pricing structure where he and his clients agree that, if the results of his services meet their expectations, they pay X. If they feel the results were outstanding, they pay significantly more. If they are unhappy, they pay a minimum. They also use milestones and benchmarks to accurately evaluate the results. This success-based strategy allows our client to bill at an average rate of $495 (about 30 percent higher than his competitors). Of course, a success-based strategy only works when the service provider offers exceptional work, manages time effectively, and understands the importance of providing outstanding client services.

Strategies related to advanced technology:

• Conduct an audit of your current technology systems and show clients how you can help them meet their goals faster and more efficiently. Because the tech systems you created to be efficient work against the traditional billable hour model, you will find it difficult to charge the same rate for routine tasks that now take less time to complete. The trick is to refocus your clients’ attention on the value of your services rather than the time it takes to complete them. Conduct an audit of your systems and map out which routine services are made more efficient or effective, and meet your clients’ goals faster because of technology. Show your clients how they will benefit from the service and highlight the end result. You will find that most clients don’t care how long a task takes—they simply care about the results you are able to produce.

Now is the time to explore alternative billing strategies for your professional services firm. These tips and strategies will get you started and help transition your firm and your clients into a system that will create mutually beneficial partnerships for years to come.

About the Author

Jessika M. Ferm is an executive coach and President of J.Ferm, LLC, an international leadership development firm, and specializes in relieving management pains for professional services firms. She writes extensively on management and leadership topics and co-developed the “No Frills No Fluff ® Management Skills Program: Lawyer’s Edition,” which is tailored to assist lawyers and law firms in managing their time, clients and staff effectively. Visit the No Frills No Fluff ® Web site at www.nofrillsnofluff.com.