Does Hourly Billing Hurt Your Bottom Line? « Charting The Course

Does Hourly Billing Hurt Your Bottom Line? « Charting The Course

July 29, 2010 by ulluccilaw

While it’s an article of faith for most lawyers, we are not fans of billing our clients by the hour. We come right out and say it on our firm website: billing by the hour makes clients worried about calling their lawyer and makes lawyers less efficient. Since that is not the kind of relationship we want with our clients, we avoid billing by the hour wherever we can.

Now it’s easy, and fun, to bash lawyers. But, what about all the other businesses that charge by the hour? What about web designers and freelance engineers, or business consultants? Does the same reasoning apply to non-lawyers? “6 Reasons to Stop Charging by the Hour,” an article in yesterday’s Small Business Trends, strongly argues that hourly billing is a bad practice that all businesses should curtail or eliminate.

Some of the author’s reasons match ours: hourly billing erodes the lines of communication and rewards inefficiency. But there were a few other reasons we didn’t touch on:

1. It Limits Your Income Potential: If you bill by the hour, your income will never be greater than the number of hours in the day (unless you raise your rates, which comes with its own backlash).

2. It Creates a Negative Cash Flow Cycle: You have to work the hours before you can send a bill, meaning it could be months between the time you perform the work and time you get paid.

3. It Adversely Affects Your Business’ Valuation: Since an hourly billing business’ profits are nothing more than the hours worked by its employees, the business itself has no predictable future profits. The employees, not the business, have future value. This makes sales, mergers and financing transactions more difficult.

To be fair, there are plenty of folks out there who are hourly billing adherents. We just don’t think their arguments make much sense. What do you think?

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