7 Curses Of Hourly Billing For Any Business

Paying vendors by the hour is the default in many sectors, and that is often a bad thing. Learn how an hourly billing setup can cost you far more than you realize, and what you can do to fix it.

Paying for time works well for babysitters, factory workers, and a few other cases. Yet, for companies buying services it is the source of many troubles. And there ARE options – probably more than you realize.
First let’s look at what I call the Seven Curses of the standard Hourly billing arrangement.
CURSE #1: HOURLY BILLING REWARDS INEFFICENCY
Very simply, if the job ends up taking longer… it costs more. If the vendor has an hour that’s not so productive, they still bill you the full amount.
CURSE #2: HOURLY BILLING PUNISHES INNOVATION
It is important to really think this through. For a services firm that charges by the hour, working smarter at their craft and saving time has an immediate negative impact on their revenues.
That may be short-sighted, but most companies manage to the short term.
The next pair of curses are more subtle.
CURSE #3: IT DILUTES FOCUS
CURSE #4: IT PROMOTES MEDIOCRITY
[Metaphor of buying a washing machine at a bike store.]
That sounds absurd, but that essentially happens every day when consultants brought in for one specific problem extend their scope to other areas. What’s happening is the purchase is moving from a solution basis to a relationship basis. There are benefits to trust and history. Yet, in many cases the premise of being paid for time – rather than solutions – turns focused experts into wandering figure-outers, who get the job because they’re smart and trusted, but end up learning on the client’s nickel and may or may not do the best-quality work.
CURSE #5: IT STRAINS RELATIONSHIPS
When your lawyer asks how your weekend was… do you sometimes wonder if the meter is running? It’s harder to build a working friendship when you’re always on the clock.
CURSE #6: IT ENABLES PROCRASTINATION
It’s interesting to me that the expression “buying time” means to delay a decision. There is a cost to holding your options, and that cost gets high if you are literally buying time by paying for vendor resources while you wait.
Finally, a huge curse: CURSE #7: IT PUTS ALL THE RISK ON THE BUYER
In another video we discuss Buying Resources versus Buying Results. Paying for time is buying resources. You implicitly retain the expertise and you certainly bear the risk.
Not every hourly billing arrangement ends in catastrophe, but I want to suggest this law of the universe:
YOU CANNOT OUTRUN YOUR ECONOMIC STRUCTURE.
It’s like swimming against the current or fighting gravity… you can fake it for a while…
but if the vendor’s bill has hours and rates on it, then they are in the business of selling hours. They more they sell, the more they make.
So how, then, do you escape these curses? 
This spells out other ways to engage with your vendors, and also includes tactics to use when you are paying by the hour.
It’s a one-pager, it’s FREE, and you can find it at Buying Excellence.com.
Our vision is to improve buying decisions at every company for more surplus all around.
Want more information on how to deal with vendors to get the best possible price for your business? Here are some great articles to check out:
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