Disadvantages of Hourly Billing

BY RONALD J. BAKER

Editor's note: This is a Web-exclusive exhibit for " Pricing on Purpose: How to Implement Value Pricing in Your Firm ."

  • Hourly billing misaligns the interests of the CPA and the client—the client wants work done effectively, whereas the CPA firm wants to log more hours.
  • It does not focus on what clients buy. Clients buy value, not hours.
  • It focuses on efforts, inputs, hours, costs and activities, rather than outputs, results and value.
  • It places the transaction risk on the client.
  • It fosters a production mentality, not an entrepreneurial spirit.
  • It transmits no useful information as to value, project management, the effectiveness of CPAs or the future behavior of clients.
  • It encourages the hoarding of hours and decreases delegation, leading to surgeons piercing ears.
  • It penalizes technological advances, reducing a firm’s revenue if it performs work more effectively.
  • It commoditizes the firm’s intellectual capital into one inadequate hourly rate, denying a firm the opportunity to differentiate itself from the competition.
  • It does not take into account the risk the firm is assuming working for clients. Risk is not priced by the hour. Actuaries have an axiom: There are no such things as bad risks, only bad premiums.
  • It places an artificial ceiling on a firm’s net income, since there are only so many hours in a day—indeed, a lifetime.
  • It creates bureaucracy. The maintenance of time and billing programs consumes 7% to 10% of a firm’s gross revenue. These resources are better spent pricing on purpose—by establishing a pricing cartel, appointing a CVO, pricing all work upfront, performing adequate project management, as well as After Action Reviews.
  • It does not set prices upfront, violating the laws of economics and consumer psychology. Customers want to compare value to price before they buy, not after.
  • It diminishes the quality of life. No one became a CPA to bill the most hours, but rather to help people. Knowledge workers resent having to account for every six minutes of their day, as if their leaders do not trust them to do the work and the right thing.

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