Steve Davies Online

Some time ago, a law firm that I work with negotiated an agreement on behalf of a client with a major company that was hiring brokers.  There was considerable ramp-up time in reading the contract, dealing with the company’s lawyers and identifying the areas where they were flexible and the areas where they were not.   

For the cleint, billing by the hour was an appropriate way to deal with the engagement, but what is the case when a second person wants the same service?  It is obviously going to take a lot less time because there’s no need to read the agreement in depth and the negotiations will take less time because my client already knows what can be accomplished in the negotiation. 

The question that we discussed was whether he should bill the second client only for the time he actually spent on his case or whether he could bill for the amount of time that it would have taken had he not already possessed the knowledge.  If you think about it, this is a universal issue for anybody who works with their mind as experience means that things can be accomplished a lot more quickly. 

It all goes back to the apocryphal story about the plumber who came to fix a blockage in a pipe.  He arrived, assessed the situation, got out a wrench and hit the pipe.  The blockage was cleared and he presented a bill for $150.  The homeowner was outraged and said, “You only took a moment to do that and you’re not entitled to bill me $150”.  The plumber took out a pen and changed the invoice to say: 

·         Hitting pipe with wrench                     $10

·         Knowing where to hit the pipe          $140 

This whole area obviously raises some significant ethical questions because if I am billing by the hour then it is clearly wrong to falsify the amount of time spent and to bill for time that I really didn’t actually spend.  However, if I have built up the experience over a lifetime in business then why should the client get the benefit of my additional knowledge without paying for it? 

This is obviously partly solved by higher billing rates for partners, but it is very difficult to cross the divide from billing by the hour to billing based on value.  Let’s suppose that I spend an hour a week with a client but during that hour I give him knowledge that is worth $1,000,000 to him.  What should I be paid? 

Obviously, so much depends on what is negotiated up front and this is a difficult conversation to have, especially for lawyers and accountants.  It is a minefield and I had a client once who was an accountant who felt that because the advice he had given on a particular matter was valuable he was entitled to something and asked for a piece of the money that his client made.  Far from agreeing, the client simply fired him and hired a new accountant. 

The area of  value-based fees is a difficult and complex one that I will examine it in more depth elsewhere, but the point of this article is that in every business there are some elements where you can bill for your expertise independent of the time it actually takes you.  The best way to accomplish this is through flat fee billing for specific projects where you know exactly how long it is going to take you and this was the way in which my client handled the employment contract situation. 

Look in your business to see what areas you could apply this approach to and you may be surprised at what you find.  First and foremost, stop thinking of your time as a commodity because it comes built in with the fabric of who you are and what you know. Sometimes you should either bill at a much higher rate or find a way to bill for the time benefit that your experience is delivering to the client.