Who benefits from hourly rates. #WYDK
There was a time when professionals charged for the cumulation of their work; a wall-painter would charge for the completed job, opposed to the hours it took to complete the job. If the job was sub-par the vendor would have to charge less. If a job took an unexpectedly long time, (contrary to today) the vendor would likely have to charge less. It wasn’t until the mid-20th century that organizations (like law firms and accounting firms) started paying skilled professionals a salary, while billing their clients an hourly rate for their services. Essentially making each employee a revenue stream. The more employees the firm has, the more revenue they could charge their clients. The hourly rate was always exponentially higher than the salary the skilled professional earned. (For instance, a lawyer may work 2000 hours in a year and charge $200/hr. This would represent $400,000 in revenue for the firm. The lawyer would usually get some fraction of that amount for their salary. According to Indeed, the average lawyer salary in Ontario is $88,874.)
Who benefits from hourly rates?
It seems like another lifetime, but once upon a time I was a project manager. This was back during a time when project managers filled in for any role the firm didn’t have resources for. So, some projects required me to be a quality assurance tester, others required me to be an accountant, others required me to be an account manager, others required me to define the user experience. Regardless of the roles I needed to adopt, I always had to deal with estimating, budgets, and reconciliation with hours each person spent on the project. Project managers worked together to ensure ‘resources’ were able to meet their productivity targets. When productivity was measured, and a number of firms didn’t measure productivity, it was a percentage of hours available vs billable hours.
So, here’s a scenario: I’m a designer that works at a typical product design shop. I’m currently 75% productive but I need to reach 80% to get a bonus. On a typical week, I have 35hrs available to work. My project manager assigns me 26–27hrs/week I’m able to bill to a client. I CAN get the work done in the time I’m given, but I really want to get a bonus. And design is so subjective, I know I can spend a few extra hours. So, I ask my project manager for an extra 2hrs a week for the term of the project. Now, I can average 28–29 hrs a week; and I get my bonus.
Now, who benefits from that scenario? Productivity, as described, incentivizes resources to spend as many billable hours as possible. It incentivizes managers to distribute as many billable hours as possible. It incentivizes organizations to bill their clients as many hours as they can get away with. And, with research and design, who’s to say my estimate was correct. If I say I need a few more hours; it’s a bad idea to refuse me. I mean, I could rush a discussion guide or a prototype, but would you want to risk it?
“$10,000 sounds like a lot of money but $100/hr is a reasonable rate and 3 weeks is a reasonable amount of time. So, I can sell $10,000 when it’s 100 hours.” — A prospective client
“$10,000 is a hard cost and we want to bill you against a retainer. They’ve retained 100 hrs of UX. Can you invoice us 100 hrs at $100?” — An agency that was trying hard to work with us
A better option
I’ve always wanted to do value-based billing; the more value we add the more we’re compensated. There are a few compensation models that would allow that to happen; one is “shared-profit” that would compensate our firm with a percentage of the profits from the product we helped create. The problem is there aren’t a lot of opportunities for that kind of compensation. Most organizations want to pay money for services.
While value-based billing is what I aspire to, when I designed the Hostile Sheep business model, I just wanted to remove the incentive to spend the max number of hours possible. So, I needed to get away from hourly rates. Instead, I decided to time-box every project and only work on a single project at a time. This allowed me to establish a weekly rate by taking our annual overhead, our annual salary expenses, a reasonable margin, and divide it by 50. (Assuming 2 vacation, non-billable weeks in a year.)
This structure allows our team to spend as many hours as we want. If a team member wants to stick around until midnight; have at it. If we had an hourly rate and a team member wanted to stay until midnight, it would need to be approved internally. It might even need to be approved by the client. So, there’s no incentive to work more; we incentive progress vs productivity.
At Hostile Sheep, I don’t want our team to think about anything except doing the best job they can possibly do. If it takes them 10hrs to do their best, great; if it takes them 2hrs to to their best, also great. I don’t hire people that will slack off or aren’t passionate about their work; so I haven’t had to deal with that mindset. But, generally, the quality of every deliverable we create is my responsibility. I’m the last set of eyes, the last set of hands, on everything we create. Thus, everything meets my personal high-standards. It’s been a great system that clients get used to pretty fast.
Conclusion
Hourly rates often incentivize the wrong thing. Once an hourly rate has been agreed upon; the vendor wants to bill as many hours as possible. In fact, most organizations that measure productivity reward employees that have lots of billable hours. Conversely, if an employee needs more time than available in the budget; they may need to cut corners.
And who can accurately estimate product builds anyway? No one accurately estimates anything in software design. Suggesting it would take 10hrs to design an application interface, is really just trowing spaghetti at the wall and seeing what sticks. I can design a pretty good application interface in an hour; the rest of the time I’m getting inspiration, thinking through user flows, reviewing content requirements, etc.
Instead of billing by the hour, at Hostile Sheep, we’ve established a weekly rate. Our projects are all time-boxed to fit in 1, 2, or 3 weeks. Since we only work on one project at a time, and the weekly rate includes our entire firm; everyone at Hostile Sheep is dedicated to a single clients project for at least one week. This means, we can get a lot done in a short period of time; most of our projects can be completed in 1 or 2 weeks.
While hourly rates can incentivize the wrong behaviour, Hostile Sheep incentivizes progress over productivity. We don’t want our employees artificially inflating their productivity numbers by over-charging our clients. We want our employees to get better; to improve themselves. Ultimately, I’m the last set of eyes and hands on everything we create; so quality is handled. And, what really matters is making our employees better; helping them improve their skillsets and develop new skillsets so they’ll continuously become more and more valuable to the team.
Hourly rates are the standard; what I’m trying at Hostile Sheep is different. We’ve had to walk away from work because some organizations prefer us to bill them time and materials. Time. Time may be the most insignificant thing we can bill them for. If we create something amazing, quickly; we get penalized. If we create something mediocre, slowly; we get rewarded. Our process isn’t quite value-based billing; but we think it’s better than hourly rates.
What do you think? Do you still use hourly rates? Why? Is it because it’s the way it’s always been done — or is there some value I’m missing? I get that most organizations are used to paying by the hour. I get that most organizations manage resources based on hours spent. I get that most organizations find it easier to sell hours than time-boxed deliverables. But, in terms of delivering the BEST possible research and experience design; is there any value in hourly rates?
