Thinking hourly is thinking small.
Take these scenarios as fodder for the No More Hourly Arsenal. When you think hourly, you:
- Are thinking in terms of your cost, not the value to your client.
- Lose perspective on the bigger picture and instead focus on getting things done within budget - not necessarily delivering butt-kicking results.
- Pay employees for existing inside your company, not for producing quality work.
- Can't scale your business because you are only charging for the work you perform.
Enough reasons to think bigger?
Here are my thoughts on how to escape the hourly rat race:
- Consider everything from the perspective of your client - They don't care how much time you put into your service. They care about results - quick turn-around, cost-effective, mind-bending creativity, effectiveness, a total solution, more profit, or whatever else your service provides for them. Repeat: They don't care about your time invested in delivering the solution. Price based on value delivered and forget about pricing on time. When you give a total price for a solution, you take on the risk of getting the project done profitably. Your client should not be penalized for your lack of training, poor processes, poor estimation ability, or any number of other factors. They should pay for the clearly defined solution you provide.
- Think in terms of deliverables, not hours spent working. If it takes 5 hours or 50 hours to produce something that you want, you still want that deliverable. Maybe it's a new brochure or a client deliverable that you need completed. You only care how much time it takes your employee/service provider to the extent that it costs you more or less. You honestly don't care how much time it takes them if it doesn't cost you any more. Right?
Start paying your employees and service providers based on output and not time spent, and see what happens to their productivity. Now they'll start thinking like a business owner instead of a worker. And they will deliver what you want based on your defined expectations. This also rewards those people who can get it done faster, because then they can move on to another revenue-generating project and make more money. Those who don't put in THEIR time to learn, will not earn as much as those who do. This is the best way to reward those who really want to excel, because it gives them the ability to make more and learn more and become the best in their skill.
For Clients
Depending on your industry, this may be more or less difficult to implement. If you are in professional services, for example, most clients are used to paying for hours, usually with an estimate on the front-end. Shifting from hourly to fixed fee can cause some confusion, but it ends up benefitting both parties. Your clients gets a fixed price that will not be exceeded, reducing her risk. You get to build in some margin for error, and the better you do at estimating the project, the more money you can make.
For Employees
This can get tricky. If you have staff that are producing specific deliverable for clients, it is much easier to make this transition than corporate workers who are doing IT support or HR benefits administration. HOWEVER - every single job you have in your company can be outsourced (whether it should be is a different discussion). Paying for performance will help your staff think in terms of being their own business owner - focusing them on profitability and ways to make more money - just the issue that most business owners struggle with in their staff. When you do shift employees to pay-for-performance (also called piece work), they will start to understand that getting more business for the company can help them make more money, that learning to do things more efficiently and effectively can make them more money, and that completing projects faster will make them more money.
The Big Catches
The biggest catches that most people find are: What about undefined time spent doing non-billable work, innovating, doing busy work, accountbaility, and going to meetings? Lets address each in turn:
Non-Billable Work
How much non-billable work do you want people to do? You probably expect people to improve their area of responsibility - better processes, tools, and capabilities. To do this requires some time. How much would you pay an outside vendor to do these things for you/ What is it really worth? What you're paying now? This is not always an easy question to answer. If you had people stop doing non billable work, what would happen to your company? It depends on your fluff factor, or the amount of stupid stuff your staff has to do to keep you happy, as well as the undefined work that people do. Both are fluff. If you pay only for deliverables,
Innovation
Do you pay for innovation? If so, how do you define a return on the investment? If you have highly skilled workers, you may want to pay them for time to think and play and create. Nothing wrong with that. Just realize that you need to direct that time toward innovations that can make a difference in your company.
Busy Work
People will not want to do busy work any more. This actually helps your company by forcing the removal of non-productive work, and gets the company more streamlined.
Accountability
This system requires accountablity. For a manager to clearly define and set a value for the expected outcome of each portion of work. That non-client time is defined, valued, and agreed upon in advance. This takes time, but over time, it becomes easy and standardized. You will then know exactly what is happening in your company, and will only pay for those things that make a difference.
Meetings
Meetings are a part of business, and should be considered part of each billable project. If your employee was a contractor, you would pay them for that effort anyway. The cool part about paying for meetings is that everyone quickly starts seeing the cost of meeting. If you pay an employee $20 an hour now, pay them $20 for a meeting and see how quickly they want to get the meeting closed out and move on to other paying project work. When you have 5 people in a meeting, there is a significant cost now, and paying for attendance per meeting will help you make that even more real - reducing non-productive meetings and focusing attention. This can have both positive and negative side effects, both of which can be managed with thoughtful action.
Is This for All Employees?
No, not necessarily. For front-line production employees, this enables them to make more money as they produce faster and better. Managers require time in the seat, but can also get paid for defined deliverables of creating new programs, managing well-delivered projects, and other managerial tasks.
Is This for All Companies?
No. Retail requires staff to be on the floor or at the cash register, and must be paid hourly. Think responsibly about how to make this work, and if it appropriate for your business.
An Alternate Reality
I have laid out an alternate reality. One which many companies are using to dominate their markets in profitability, aligned action, and employee engagement. Which also helps grow their client base and create raving fans.
Will you dismiss this because it's different? Will you dismiss it because it takes some big thinking? Or will you choose to consider it and talk with Big Think about how you can turn your business into a super-charged profit-making machine? Your choice.
