BL&T No. 191: Taking Steps Away from Hourly Engagements

Borrowed

"Any time you are doing something, you are either adding value to your business, adding value to your customers, adding value to both, or wasting resources."

From "The Primes: How Any Group Can Solve Any Problem" by Chris McGoff [Book]

Learned

Today, our (new) landscaper came out to do the usual Spring clean up. About halfway through, they informed us they were taking longer than planned and asked if it was okay to continue work, aka charge for more hours. I wasn't happy, but I felt stuck. I didn't want to pay more, but I needed the job done.

At Barrel, we've actually come to appreciate our hourly engagements with clients. Although once challenging to sell, they're now the bulk of our ongoing engagements.

Here's how it works: clients pay for a set number of hours per month, we collaborate to prioritize initiatives, and each month, we burn down on those hours. If we need more time, we either issue a change order or adjust priorities. This approach offers flexibility to clients, allows us to deliver on their outcomes, and ensures we get paid for each hour worked, which (in theory) means good margins and no overages.

Opinions on charging by the hour in agencies vary, with many suggesting value-based pricing—a model where the agency is paid based on the value it delivers. While I admire the concept of value-based pricing, I find it impractical as a standard pricing model for every client and project. In conversations when a value-based model isn't a good fit, we go the hourly route or work toward a project approach that meets budget requirements and maintains margins.

Either way, understanding what the client values is still critical when designing the engagement. Do they value specific performance metrics? Speed? Price? In-house team collaboration? Documentation?

All said, I've begun questioning the hourly approach to ongoing work, but not for the reasons most critics cite.

Here's why, based on some recent experiences:

• When clients sign an ongoing hourly engagement, they're buying hours, not deliverables, milestones, or work streams, which can lead to misalignment on how time will be used. Recently, we had a situation with a client who needed more rounds of revisions, leading to additional hours. They thought they paid for the outcome so the rounds should be "in scope." They didn't want to pay for the extra time, which wasn't minimal. We compromised and continued working, but I felt like my landscaper and hated it.
  
• We frequently work with Directors of E-commerce or E-commerce Managers who report to someone else managing the budget. This can create a fixation on hours and requests for more detailed breakdowns, even when we share detailed reports. Some clients want to see this in different formats, adding another layer of work to our account managers. Regardless, this setup leads to the client scrutinizing who is on calls and questioning where every hour goes. If we're not careful, we sound like we're nickel-and-diming over an hour here and there, but it adds up.
  
• If something takes longer than initially agreed upon with the client, and there is nothing the client did to impact the estimate, we typically provide that time as a courtesy. Why hold on to hourly billing if we're not charging the client for the extra time anyway?
  
• When discussing strategy with a client and proactively presenting new ideas, they often get pushed aside in favor of more immediate priorities or website support work. While there's much more we could be doing for some of our clients, the focus always returns to how many hours they have. This makes it challenging to expand accounts with new services and further help the client because there are no hours left to allocate.
  
• In a recent project, the client shared how our latest designs felt constrained by the site structure. I assured them this wasn't the case. After following up with the team, I learned that we were trying to keep new designs as close to the existing modules as possible to keep work efficient because they knew this client was sensitive about hours. Enough said...

With all this in mind, we're exploring new ways to structure our engagements, removing hours from the equation. We're starting by breaking down our services into different workstreams and finding alternative ways to provide clients with a hassle-free experience. Fortunately, we have a wealth of historical data to draw upon, giving us a good idea of how much time each service typically requires.

The key will be to aim for at least a six-month commitment, enough time to add real value. While we'll still manage hours internally, we won't stress if we go over a bit one month because we know we'll make it up in subsequent months. There's more to how we'll structure these engagements to be sure we maintain our margins, but that's a topic for another post.

Hourly engagements will likely have a place for complex projects or those with unknown requirements, but when it comes to ongoing work, I'm excited about creating a new future.

Thought

Where are my engagements creating friction for the client?