shouldn't be undertaken at rates that can't be countenanced. Something is not better than nothing. Some things are worse than nothing because they cost you money.
Billable hours, and the formulas on which the more methodical base them, are pernicious and insidious dampeners of profit. Moreover, the need to be competitive on such a commodity ultimately forces downward pressure on all time unit rates. So in the tactical application—fees based on time for the project—the consultant will suffer from continuing downward pressure when played off on others offering the same commodity pricing, and in the strategic sense—using time units to create a year's living expenses—there will never be enough hours or a high enough rate to dramatically improve income.
Aside from their tactical and strategic failures, time-based fees are great!
WHY LAWYERS AND CPAS DO SO POORLY
The problem with professions that use time-and-materials charges is that the practitioners have no real appreciation for their own value and hence cannot adequately (or dramatically) convey their value to the client. Let's look at some cases in point.
Attorneys
Lawyers have finally understood that their ultimate worth is not in their activity but in their results. Therefore, contingency fees have begun to proliferate. It's not uncommon for a law firm to take 30 percent or 40 percent (or even more in some conditions) of the total client settlement.
The problem is that the attorneys often take this, as they say at the craps tables in Las Vegas, as “betting on the come.” This means that if they lose the case, they not only fail to collect any fee but are also out their legitimate legal expenses. This is high-stakes gambling, and it leads to at least four ethical quandaries:
1 Pushing the case beyond the plaintiff's patience or commitment, because, in for a dime in for a dollar, it's cheaper to invest more on the hope of a possible victory than to simply abandon all prior investment
2 Avoiding early settlements in the hope of hitting the jackpot of a huge jury decision or a more favorable last-minute settlement in the face of a damaging trial
3 Taking on cases of questionable legal merit or suing parties not really at fault but who have deep pockets and wealthy insurers
4 Desperate legal tactics to try to save a case at the last minute
Most contingency cases are settled out of court to reduce expenses, and most personal injury lawyers won't touch a case they don't think is a sure thing. However, the American justice system, based on the English Common Law8 was never envisioned to have the lawyers as involved in the cases as plaintiffs, which they are when the share in the proceeds.
There isn't one profession using time units or percentages as billing bases that can match the potential fees of consultant using value-based frees. Not one.
Attorneys are locked into a terrible billing system that does not represent their true value to their clients (which is why they wind up billing $8.40 for duplicating and postage, so desperate are they to recoup costs).
Even on a more modest basis, effective and legally tight wills, estates, divorces, house closings, partnership agreements, and the myriad of other business aspects that lawyers undertake are worth a great deal to the beneficiary of such expertise. How much? Well, far more than a couple of hundred dollars an hour, that's for sure.
In one class-action lawsuit against a Fortune 500 company for some kind of minor technical charges, the lawyers collected millions in fees, and each member of the class action suit received $2.85.
The Chief Justice of the Supreme Court of Western Australia, having read the first editions of this book, wrote to tell me that he thought it was inevitable that the legal profession would have to turn to value-based fees. That was a decade ago.
Accountants
Since these folks are fixated on neat boxes and clear rates as a professional pathology, it's not surprising that they cheat themselves out of their fair remuneration.
These are people who balance books, save tax dollars, highlight areas of enhanced profitability, set up effective retirement plans, provide investment advice, and generally help you exhaust every legal nook and cranny to keep your money where it belongs—in your own pocket. For the glory of providing this value, they charge under $100 an hour. An accountant with less than 20 years of experience in the United States in 2020 averaged $70,000.9
CPAs don't get it (although more and more financial planners are beginning to). They see their value as tasks performed, which are tightly tied to and choreographed by time involved. They even have fee schedules for their various tasks, on the assumption that they can pretty accurately forecast the amount of hours needed for each task. And they probably can, which is neither here nor there.
I love the people who do my taxes and financial planning, who may have saved me hundreds of thousands over the years (and kept me out of jail in the bargain). But I'm glad they don't read my books—because if they did and decided to change the billing basis, I'd have no choice but to go along.
I'd have to pay more. I have no fear about printing this here. I'm sure they will never read it!
Search Firms
I include these folks because they think they're smart and believe they've devised a billing basis that overcomes time units: a percentage of first-year compensation. (And some of these firms are contingency firms, not retainer firms, meaning they don't get paid unless they produce.)
I ask you to simply consider this: a search firm placed Lou Gerstner at IBM when that company was severely suffering. During his tenure, CEO Gerstner increased the stock price, improved the value of the company, gained market share, boosted both revenues and profitability, found new sources of lucrative business (for example, IBM consulting services), and provided a host of other important improvements. His net contribution to IBM's well-being is in the billions of dollars.
And how was the foxy search firm paid that placed him at IBM? It received about a third of his first-year total compensation. Let's say that was as much as $500,000, which I doubt. Even so, is a half-million fair compensation for a consulting firm that produced billions of dollars in improvement? I wouldn't accept it. It seems to me that $100 million or so is reasonable and cheap at twice the price.
CASE STUDY: ARTHUR ANDERSON
Back in the pre-Accenture days when Arthur Anderson had a consulting division, I was hired to help it's placement practice convert to value-based fees. The partner in charge was highly amenable, and so were his people.
At one point we finally landed a huge account for over $400,000 with a value-based fee. The company's accountants refused to post the business, and insisted on hourly fees that could fit inside their “standard boxes” on the spread sheets. Using the old hourly billing, the sale could only be justified at $157,000. The managing partner asked what he should do.
I told him to go to his boss, the managing partner, and ask if he'd prefer $157,000 in neat boxes, or a messy $400,000 with a lot of footnotes all over
