Why Fixed Fee Billing is Just Dumb for IT Consulting Firms

  • Apr 07,2017
GENEMARKS4
Guest blog post by Gene Marks

We’re excited to host our first guest blog post from Gene Marks. Gene is an active consultant for growing businesses. He’s an expert in process and technology. And, he’s a columnist for Inc. Magazine, Forbes and Entrepreneur.com (among other things).

While we have tons of firms who use BigTime’s fixed-fee billing capabilities, Gene reminds us that value-billing isn’t for everyone. He’s an expert on helping small businesses grow. Maybe you should hear him out.

There’s a Better Way to do Your Invoicing

My company sells and implements customer relationship management (CRM) systems and we have about 600 active clients. We bill for our services hourly. For years, experts and pundits urged me to change the way we invoice. They tell me that we would make more money if our projects were fixed price.  I’ve tried this a number of times and here’s my conclusion: they’re wrong. Fixed fee billing is just dumb if you’re an IT consultancy as I am.  Here are three reasons why.

For Starters, It’s Just Not Realistic

To implement a CRM system, we usually provide services. They include things like planning, setup, customization, migration of data, training and other things. What’s most important to our clients?  Cost, of course.  When a client asks me how much something will cost and I say $10,000 (for example) they immediately start doing that calculation in their heads that every small business owner does. “Let’s see, that guy is probably about $200 an hour, so $10,000 hours means it’s going to take him 50 hours.”

Then, they always do the same thing. “50 hours! That’s crazy! There’s no way this takes 50 hours!” Then they ask me to break down my services hourly. It always happens. Every business owner knows that all issues come down to time and money. We live in a per hour world. We go around thinking that the other guy is making too much money and there’s no way that guy is going to make too much money off me!  We want to really know that the time spent has been spent as efficiently as possible. For my clients, a fixed fee contract leaves too much to the imagination. We live in a big data, information age. They want to know details before they pay.

Secondly, You’re Assuming All the Risk

If you do sell a fixed price project then your customer is going to expect that…it is fixed price. Period. So if something goes amiss, or if the information has not been fully disclosed at the onset or if your customer stumbles halfway through or if a snowstorm delays the job (and all of these things have pretty much happened to me just this week) then guess who has to eat the time? Right…you. To me, getting the job done, on time and under budget and leaving with a happy client is enough of a gamble when you take into account all the variables.

Here’s what happens to businesses that do fixed priced projects: half of them turn out better than expected and half of them don’t. When things even out over the long term they made about as much money as if they just billed by the hour. So why lose sleep?

Finally, There are Better Ways to Invoice for Your Projects

Here’s what we do.  We sell blocks of time.  It’s worked really well for us over the past decade and this methodology is used by firms in many industries from technology to insurance to accounting to legal to construction.  Everything is billed at an hourly rate but services aren’t performed unless a block is on account. Once a block is paid in we bill our time against it in 15-minute increments.  We have a minimum block (four hours) for any client, regardless of size.  Blocks never expire. Frequently, I’ll let our services go slightly over a block but we’ll immediately bill for a new block of time plus the overage. Some clients have grumbled at first, but they soon learn that they have more control this way than a typical T&M billing arrangement. They can stop work at any time by not buying in a block. For us, we get paid up front which is a huge cash flow boost. To me, selling blocks is like a compromise between straight billing for time and materials and a fixed fee contract. It’s a much better solution.

Why? Because fixed fee billing is dumb.

BigTime Software delivers real-time, metrics-driven time tracking, billing and project management for more than 2,000 professional firms, tracking over $2 billion (USD) worth of billable time each year. To keep up with product updates, industry-relevant trends, and our time billing research studies, subscribe to our blog.