Hourly billing and risk adversion

This came up in a comment on my post about What kind of results can you guarantee?:

“If you practice value-based pricing, you better be awesome at predicting the future.”

I don’t have a link to the original source of this statement, but the statement itself captures an important sentiment. Every day we take risks in life and we don’t even know it. Business is no different. Everyday there are risks we neglect to take that could lead to substantial dividends in the future. Profit in business, just like life, comes from taking risks. Those risks could be extreme, or they could be minimal, or somewhere in between.

Simply being productive, as in the case of billing by the hour, is a minimal risk and therefore generates revenue but not much profit. The only way to increase profits with productivity is to scale the volume of the work you do. That’s not easy with services provided by humans. Impaired quality can lead to losses instead of profits, because the profit was marginal, it doesn’t take much of a swing for things to go south.

But what’s really unfortunate about focusing on cost and productivity in billing by the hour, you become very adverse to taking risks. I know, I’ve been in that situation. You’re so afraid of risk because you simply don’t take any substantial risks on a daily basis. At least not short term risks. Your customer shoulders not only the burden of making sure your work is potentially worthwhile, but also that the amount of time you’ll take won’t blow the cap on what makes things worthwhile. And I say at least not short term risks, because I believe billing by the hour inevitably drives away good customers for a myriad of reasons.

However, if you take risks in business, especially if you take reasonable risks. The risks you can’t afford NOT to take. Interesting things happen as you take incremental risks, you can quickly find yourself in a position to provide new services that you would never have dreamed of providing in an hourly model. Services that provide immense value and immense rewards.

In an hourly model it’s so common to focus on producing $100/hr. And if an opportunity comes along but your hourly reimbursement would drop below $100/hr, especially substantially below your rate, you’ll likely pass it up for the $100/hr. You do this because you see the tradeoff in productivity, it’s the first thing that comes to mind when you have the billing by the hour mindset. Second, you do this because margins are so thin you don’t have the reserves to invest either. Even if you see it as a potentially wise investment to make in yourself.

There are at least three things I’m doing this year, that if I weren’t focused on results and value for my customer, I wouldn’t know how I would ever justify doing them and how I’d ever have made the leap from what I was doing in the past to what I may be doing in the next month. I now help customers with education to invest in improving how they develop software to meet customer needs, I’m in the process of helping several customers with understanding and providing greater value to their customers, I’m partnering with customers to improve the work they do including changing the organization in addition to creating software that plays a part.

I’ve found that I focus on RESULTS and VALUE and don’t care about the means anymore. I don’t limit what I can do to simply being a software developer. Nor do I limit myself a year from now to the things I do now. This has opened many new doors to opportunities that provide way more value to my customers and also are way more fulfilling to me. I’ve had to take risks to get to where I am, substantial risks at times, but they were all risks that were risks I couldn’t afford NOT to take. And they were steps in a new direction, not leaps and bounds. I’m excited about taking more risks in the future and creating more value for my customers. All of this is possible because I focus on value, not time and cost.