The Billable Hour: When More Efficient Equals Less Revenue

From an agency standpoint, you want to hire and develop top end consultants.

The problem you face as a billable hour based agency is the more high end your consultants become, the more value they are able to generate in less time.

Let’s say a given task may take a beginner 6 hours to complete, a 10-year expert may be able to complete that same task in 1 hour at an even higher level of quality.

Which one is more valuable?

If we are billing by the hour (let's pick an arbitrary $150/hr blended rate) the beginner bills $900 for the work, while the expert bills $150 for the work.

“Wait,” you say, “but we will bill out the expert at a much higher rate to recoup some of those lost fees.”

Oh yeah? Will you? Are you really sure about that? Remember, if you are choosing the billable hour model, you often need to publish your rate card, often simplified using your "blended rate." You kind of locked yourself in to what you can charge.

So, how do agencies respond to this disconnect?

Well, the major levers they can pull are:

1. Raising their rates.
   As we become an agency with more and more seasoned experts, then we can simply raise our rates. Again, if you have locked in to the billable hour model, this often way easier said than done. The rate card is often sacred scripture and is hard to undo once set in stone but it is possible. With that said, make sure you play through the discussion you will need to have with your existing clients. "We are raising our rates on your contract." Why? Are we getting more work? You better be prepared to have a very clear answer on this that you can provide to your client other than, well we are losing money because we are getting the work done for you much quicker than before.
   

2. Fudge the numbers.
   You can start to recoup some of those lost fees by just rounding the numbers a bit more in your favor. If we make a practice that everything is rounded up, then we can get some of those lost fees back. You sent me an email asking for confirmation on something, great that took me 10 minutes, that gets rounded to 30 minutes. So technically, in any given hour, having enough micro-billable line items, we can ask our consultants to bill more than 1 hour for a given 1 workable hour. e.g. > 100% utilization. This is a gross way of doing business and i do not recommend this approach.
   

3. Lie.
   You can start to rationalize with yourself that the work REALLY is worth substantially more than the client is paying for it. Per the example above, the value to the client when the expert completed the work is "worth" much more than $150 so we will just bill them $600 (lying that even though the work took just 1 hour, we will say it took 4 hours because that gets us closer to the real value of the work). This happens, you may not want to believe me, but it does. As a client, this puts you in a very awkward position of constantly questioning wether your agency is over-billing you or not. Not a great relationship if we are being honest here. As an agency, it's much, much worse. You are knowingly putting yourself into some legal territory you don't want to be in. As an agency, often it's your reputation (more on this later) that allows you to attract new customers and raise your rates, if that reputation is destroyed because you were caught knowingly committing fraud, your business could be destroyed literally overnight.