Words of wisdom

How To Calculate The Real Cost of Services

As an attorney who has worked on both sides of the table (firm-side and client-side), I have become highly sensitive to attorney billing practices – or for that matter, billing practices for any professional service.  Far too often, I have seen a client, myself included, select a service provider based on cost—because that provider offered a lower per unit rate.  However, after engaging service providers in various industries to provide services, based on rate as well as other factors, I have come to learn that the lowest rate does not always represent the best price or quality, and can be more expensive in the long term.

 To help make sure others do not make the same mistakes I have, I hope that this list of cost considerations beyond the “hourly rate” helps you find the most effective providers for your business.

1.  The cost of speed
Some people simply work faster and more efficiently than others.  If Provider A is billing $1,000/hour and Provider B is billing at $250/hour, you would think that Provider B would be less expensive.  If Provider A had the experience and expertise to deliver the service 5 times faster than Provider B, (s)he is not only less expensive, but also more effective in a shorter time frame.

2.  The cost of learning
At many service organizations, monthly quotas and bonus structures incent individuals to bill every minute of their time.  But, should you really be charged for the time it takes for them to learn the basics of your industry? Or, if they are being paid for their expert advice, should you be paying for the time it takes them to become an expert?  Not all time should be billable – make sure the rules of engagement are clear ahead of time.  Otherwise, the costs can add up quickly. 

3.  The cost of mistakes
If a provider makes a mistake, you should not be billed for the time it takes to fix it.  Period.  Otherwise, you are literally paying for their mistakes. 

4.  The cost of your time
Each of the above scenarios are focused on the time that the provider spends on a project.  What about your time?  Every minute you spend reviewing work, fixing mistakes, and teaching them about your industry or your business is time lost for you.  How much is your time worth?

5.  The cost of inferior work
Perhaps the greatest cost is the lost opportunity cost that can result from inferior work.  At the end of the day, ROI is the most important measure.  If (using the previous example), Provider A can deliver a product that is 5 times more effective than Provider B, then Provider A is the better choice (assuming hours billed are equal).  Quality of service is difficult to gauge before choosing a provider, and should be the most important factor in the selection of a service provider.  References or personal recommendations can help.

I hope that the few minutes you took to read this article saves you exponentially more time in the future.  Have a great day.


One thought on “How To Calculate The Real Cost of Services

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s