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Flat Cost Versus Billable Hours

Robot ThinkingWe Sooners are known for first to fight or aid for wars and disasters. Given the auspicious start for our state, we’re also a bold and stubborn lot that unfortunately trails the nation in business trends and technology. For over 30 years, our firm has provided flat cost professional services for IT. This decision was obviously a business strategy and my former partner often said “I’ve made enough mistakes in business that would have paid for dozens of  college degrees”. (By the way, I’m proud to report that he is neither dead or estranged and was simply bought out on amicable terms in 2003.)

While most of the industry eliminated the billable hour over a decade ago, much of the state channel still utilize billable hours which are bad for customers because it is fraught with conflict, deception, and poor performance. The conflict is often heated before, during, and after projects for rate and number of hours.  Critical tasks may be shortened or eliminated imposing significant risk and costing additional time resulting in significant overage – which leads to the main deception of padding hours to start or milking tasks during. When you pay by the hour, the only incentive is to stick around and bill more hours. Forget about thoroughness, prevention of future problems, or anything relating to efficiency and quality.

Flat cost is a win-win for customers and professional managed services firms. Customers know what they’re paying and service providers leverage their expertise and assume all of the risk for the unforeseen and lengthier than expected engagements. However, we occasionally still have prospects ask things like “How can I compare without hours?”

And there it is: a descriptive list of tasks/outcomes, estimated due date, and total cost. Now you compare approach, credibility, and repeat wins. No it’s not fair to startups or one-man-shows with their journeyman approach of rate and hours, desperate hope of impressing with the 10 page brochure website, and BB logo everywhere even though no focus on consumers. Comparison is done on business criteria rather than the sales person who was liked the most, along with the hourly company the CFO feels is easiest to renegotiate or delay payment based upon too many hours.

Obviously, the more physical or smaller the task may make time and charges a better fit. However, for the viability of a business, achieving goals with smooth operation is often a much more valued criteria than simply cost. Again, we sometimes hear “You obviously started with hours so why not show them?”

So it’s MBA 101 and anyone doing pricing knows cost-plus is easy to understand and manipulate, but also a novice business approach that has diminishing growth potential leading to eventual bankruptcy. It comes down to business savvy and motivation. If we haven’t proven our worth upfront and will not make a required margin, then it’s not a fit for either us or the customer. Our personnel are not paid by the hour, so the only motivation is providing good service and not dragging out every task to make the weekly hourly bonus.

I recently approached a customer and pointed out a potential risk issue, but more importantly where they could save $100 – $200 per month going forward. It was a fairly simple two sentence quote with the work done over the weekend for a nominal cost less than a PC. The customer balked and said it was too high. It was an impending risk point and a great customer, so I recommended I show them how to do it. We spent about an hour in a remote session having them drive and do the task. Our team still had some minor work to do afterward, total cost to the customer was zero, and the customer had reduced recurring cost going forward.

So Monday comes and the customer sends an e-mail stating it didn’t take very long and maybe we should look at an hourly rate going forward. Somewhat rebuffed I called back and explained that my 25 years of experience was leveraged to train them exactly what to do and that our team still had cleanup tasks. Also, where did I go wrong with zero cost and less going forward?

Such is business life with no good deed going unpunished. It’s a good lesson to never get complacent and always over emphasize value, no matter all the previous wins. So what is your take on flat cost versus hourly?

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