It's About Time! Or Is It? Why It Makes More Sense to Pay for Solutions than Hours.
I once heard a very wise friend of mine say to an employee: "Your job isn't to save us money, it's to make us money." I bring this up because more and more I believe there has to be a better way to pay for professional services than the time-honored but inherently flawed hourly rate.
Whether the service provider is a lawyer, an accounting firm or a marketing agency, the issue is the same. When one pays for services based on an hourly rate, the provider effectively is entitled to more compensation by being inefficient than efficient. The client is paying for time, not value.
In fairness, most professional service providers are very conscientious about providing real value to their clients and not running up time for the sake of generating more income. But in the current climate of increased concern for accountability and return on investment, wouldn't it make more sense to pay for value received rather than hours incurred? Ten minutes spent coming up with an idea that can generate thousands of dollars of income for the client is clearly more beneficial than expending multiple hours doing basic tasks.
The problem, of course, is determining a fair and equitable formula for value-based compensation. Let's use marketing services as an example. We may come up with an incredibly powerful campaign or new marketing strategy for a client. In theory, receiving compensation that is performance based looks like a win-win situation. But let's say the client does not have effective sales people, or the capacity to handle a big uptick in business, or has other quality control or infrastructure issues which end up being an impediment to realizing the full potential of the marketing program. There are simply too many variables over which the service provider has no control and thus can't be held accountable for the end results. Conversely, the performance of the marketing firm could be mediocre, but unexpected variables suddenly create an environment where sales go through the roof. In that case, the service provider really doesn't deserve performance-based compensation.
For sure, there are many sticking points inherent in negotiating a fair compensation system. But the conversation seems worth having. For example, can we determine specific performance indicators which are less susceptible to extenuating circumstances? How about the number of leads generated or a percentage increase in leads? Can we assign a value to those leads? If so, there may be the basis for a mutually acceptable value-based compensation formula. Another set of metrics could involve establishing the lifetime value of a customer. If one knows what that value is, an increase in the customer base effectively translates to long-term revenue potential.
Because of all the potential variables involved, pursuing the course of value-based compensation is no easy task. In some cases, it may prove to be impossible. But, again, it is well worth the conversation. I believe our greatest value to our clients is in the ideas we bring to them and our ability to execute those ideas for maximum impact. Advertising agency consultant, Tim Williams, says using hour rates "is the wrong measurement; like sticking a yardstick in an oven to determine the temperature. The value of an advertising idea can only be measured by the outcomes it creates in the marketplace."
Thanks, Tim. We couldn't have said it better ourselves.
(Note: If this premise is of interest to any current or prospective clients, Villing & Company would be pleased to explore the potential opportunities. Again, it can be a difficult process and is not achievable in all circumstances, but we believe the concept has great potential value for all parties involved.)
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