In defense of the billable hour

The conventional wisdom in the agency world is to avoid charging clients by the hour.

Instead, agencies are looking for more creative ways to generate compensation that recognizes their “true value.”

In general, I agree that agencies shouldn’t use billable hours — most of the time.

Too often they lowball their hourly rates because they are afraid to talk about the value of the individual’s time and expertise.

They don’t bill for all of the hours worked because they are afraid of the client’s reaction.

And they allow the agency-client relationship to deteriorate over debates about how long certain tasks should take.

The problem is that most agencies aren’t very good at value-based or other creative pricing approaches either.

They end up over-servicing clients and eroding their own profitability.

If you ignore the cost of inputs (labor hours) by avoiding time-tracking and project-based budgeting/accountability, it becomes very easy for engagements to spin out of control (and out of profitability).

While billable hours are an imperfect solution, they can be quite effective at better managing profits. If you know that you are always billing more for someone’s time than it costs you, it’s a lot harder to run a deficit.

Charging by the billable hours also enforces discipline around time-tracking — which is core to project cost accounting in an agency.

The bottom line is that you shouldn’t float along with conventional wisdom and automatically rule out billable hours as a pricing model.

Even if you don’t bill every client and project by the hour, chances are there are situations where it may be your best option — and often better for the client, too.