Alternatives to the Billable Hour

Doug Sorocco had an interesting post about the billable hour in the rethink(ip) blog, and I agree with a good part of it. However, he makes it sound like the fixed fee is the billable hour cloaked in presold increments.

Personally, I am a big fan of the fixed fee, but I don’t treat it as a pres-old bunch of billable hours.

Doug is right that in the extreme case, the billable hour encourages the attorney to be lazy and slow. Conversely, the fixed fee can encourage the attorney to cut corners and deliver the minimum acceptable product. How do you find the happy medium?

Everybody finds their own way to do it, but here is my thinking.

One of the best jobs I ever had was when I was working as a contract engineer at Hewlett Packard. I was paid by the hour and would happily work overtime for time and a half. (I remember sitting in business class next to my HP boss on a trip to Tokyo, sipping a beer, when I leaned over to him and mentioned to him that I was getting time and a half for this. He, on the other hand, was missing two weekends “for the company.”)

The best part of the job was that I felt like I needed to deliver more value than I was getting paid. I went into work each day full of energy to crank out more work than anyone else because my job depended on it. I knew that I could be let go at any time, and that job security was only based on my day to day performance.

I view fixed fee arrangements the same way. I need to deliver more value to the client than what I get paid. If I don’t deliver the value, I am out of a job. I take that very seriously.

The worst part of the billable hour is that the client has a right and obligation to approve any work outside the agreed upon scope of work., and to refrain from paying for anything extra. For example, if the client approved only the drafting of a patent application, they may not approve a few extra hours to do a search, too. Or better yet, the client who is pinching every penny does not want to spend $500 of billable time discussing their long term strategies and getting to know the business prior to writing their first patent case.

Being extremely sensitive to client’s money, I am obligated to ask permission to deviate from the scope of work. I remember the horror of opening the bills from the patent attorney and seeing all kinds of extra charges that were never authorized or explained.

I look at the fixed fee as a contract to deliver more value than the price. It frees me to do “extra” things like spend time understanding the business, doing a quick search, explaining a strategy for a second or third time, or spending a few minutes answering a question. It also frees up time to get to know the people much better, since they are not shooing me out of the office because they hear the cash register ringing. These are things that add value to the end product than the cost, but look absurd when billed separately.

The second aspect of the fixed fee is that it encourages the client to take advantage of me by calling, asking questions, and using my time. While some might see this in a negative light, I see this as a tremendously positive time for me to deliver the value that they seek. In the end, I need to know that the client is content with the value of my product, and there is no better way than talking to them. The billable hour effectively squashes any type of long conversations with the client.

The way I run my practice is that I do not worry about how many hours I work. I enjoy the slow periods as much as the crunch time. I view each contact with the client as a way to demonstrate the value I provide. Like my contract stint at HP, if I can keep demonstrating the value, I can keep working this job.