Hourly Rates are Ethically Indefensible

Charging and paying by the hour for knowledge work creates an ethical conflict between the buyer’s best interests and the provider’s best interests.

Buyers engage knowledge work providers to achieve a desired outcome as soon as possible, given quality requirements.

Providers offer their knowledge work to help buyers achieve their desired outcome. Hours are a perishable commodity. Once an hour is gone, there is no way to generate revenue from it.  Therefore there is pressure to maximize the number of hours sold in any given work period, even if this delays the benefits to the buyer.

These interests are on parallel tracks and will never intersect.

Both buyers and providers have to own the conflict in order to resolve it to the benefit of both parties.

  • Buyers can achieve their end results by paying a fixed fee to get their desired outcome(s).
  • Sellers can increase their total revenue by being compensated for the outcomes they generate, not the input of hours.

Buyers

Buyers need to view fixed fee projects as buying outcomes rather than inputs. Too often buyers mistakenly hold to the belief that buying time ensures accountability. “We’ll know for sure if the provider was actually working if they submit time sheets.”

There is absolutely NO guarantee that time equals productive work in any knowledge work field. This is easier to understand when contrasted to manufacturing. In a manufacturing setting an assembly line or process is set up to perform X number of steps, in sequence, in a fixed period of time. This performance can be accounted for. Knowledge work has value because it comes from all the provider’s expertise and experience, which the provider sorts through and delivers as needed. Hours are never a contributing factor.

Providers

Providers have to do the hard work of connecting their knowledge to outcomes. They need to sharpen their project definition skills to write project plans or statements of work that are outcome oriented, not input based. They must continuously evaluate the quality of their project plans and use each analysis to inform the next one.

Work Together

Buyers and providers who work together on a fixed fee basis facilitate the exchange of information and the resolution of questions. Every project based on knowledge work generates its own unique set of questions or problems that have to be handled as they arise.

Buyers often have questions about progress; ask for advice; need their fears addressed; provide new information. If they are paying hourly, each need or interaction gets filtered through the question “What will this cost?” Or a staff person who doesn’t have the authority to spend money makes a request to someone with authority which causes delays or maybe a refusal.

Providers may be able to charge for each call or question but feel they are being petty or ‘nickel-and-diming’ their client. The project gets delayed or requires re-work or simply ends up being of poor quality, all because both parties avoided asking and answering questions.

Fixed Fees are Eminently Defensible

Buyers need to work with providers to clearly articulate the outcome(s). Providers with expertise and experience—they do what they do, everyday—need to take the lead on this conversation. Buyers should expect that, rather than telling the providers what services they want or how they want those services delivered. There are likely various ways to achieve an outcome. Buyers need to know their desired outcome and ask providers for the best way to get there.

An Effective Project Plan

Buyers and providers need to include the following in their fixed fee project plan:

  • Outcome(s) to be achieved. These may be quantitative, qualitative or a combination.
  • Period of performance. Incorporate specific dates.
  • Touch points for progress. The provider should state some specific dates on which they and the buyer will meet to review progress towards the outcome.
  • Pre-completion review. Select a specific date several days in advance of the end of the period of performance. Review all progress to date and note anything else that needs to be done to deliver on time and completely. This would be the final opportunity for minor revisions.
  • Delivery date. Clearly describe the format of delivery up front, as well who receives it. The buyer is responsible for meeting with the provider on this date.

Responsibilities

Both buyer and provider have to ensure that the project moves forward as planned. A responsibility section of your project plan spells out each party’s roles.

Buyers will:

  • Provide relevant information and data immediately upon request
  • Ensure that decision-makers are accessible and responsive in a timely manner
  • Notify the provider of any external changes that will have an impact on the project.
  • Meet agreed upon deadlines

Providers will:

  • Communicate with the designated people in the buyer’s office
  • Adhere to the agreed upon schedule
  • Request additional information as soon as it’s needed
  • Meet the goals of each touch-point

Terms and Conditions

This section of the project plan delineates the fixed fee and payment terms. Let me be extremely clear about payment terms: they are the purview of the provider, who is offering their services. The buyer cannot impose their payment policies on the provider and expect the project to go forward. I always think about how you can’t buy anything today without paying upon purchase—except for knowledge work. Try buying a car or groceries or a home or office without paying upon signing the purchase agreement. Knowledge work requires the same payment process.

Payment should never be contingent on the buyer’s actions, such as a final review or “acceptance.” This is too easy for the buyer to postpone or avoid altogether. Knowledge work is done through the period of performance and that is what the buyer is compensating. To hold off “acceptance” means the buyer is extending the payment period for their own benefit.

No provider should accept this and no self-respecting buyer should demand it.

The only defensible way to do business with knowledge work providers is for the parties to agree to a well-written project plan with a fixed fee.

How I Arrived at this Thinking

When I founded my consulting practice in 2000, everywhere I turned, I was told that charging by the hour was the only way to run your business. Soon I began to work with Alan Weiss, the author of the 25-year best seller Million Dollar Consulting. Alan tirelessly reminds the knowledge work professionals in his communities of the ethical conflict inherent in charging by the hour for their work. It took me several years and then one day I just switched to fixed fees. In the 12 years since, not one serious buyer has rejected my project plans with fixed fee approach.

Clients rave about my attentiveness and the high quality of my work as I help them pursue revenue growth. I’ve worked on nearly 500 projects with clients who collectively added $20 billion to their topline revenue. As one long-time, high-revenue generating client always says “When we need you, you are here.”

When will you embrace fixed-fee project plans, either as buyer or provider? The time is right, right now.

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