This is a hard one for me. I love automating processes and figuring out sophisticated systems to handle them. While automation is usually a good thing, it should be done at the right time in order to actually be more efficient. There are a couple of snags that you run into when trying to do this too quickly.

First of all you might not know your process fully. You need to give the process time to develop naturally and make changes and be flexible to allow yourself to find the ideal (or at least good enough one) process. It is a fatal mistake to not design processes that allow for flexibility. A good process should take care of the majority of cases, but you should be able to deviate from it if necessary.

Secondly there are major costs to automation up front. Developing systems and setting up the automation usually requires a considerable investment of both time and money. While having those orders be automatically done correctly in your book keeping automatically, or having your time management system, CRM and payroll be automatically in sync sure is nice, it takes some setting up. You need to stay realistic and ask yourself at one point in time you actually save resources by doing this, instead of doing a less sophisticated automated system.

While I’m the first to appreciate a smooth process and a cool automated system it is important to actually take a moment and think things through before adding one. Often the costs of doing so far exceeds the benefits, at least in the beginning. Everything just doesn’t have to be scalable in extreme from the start.

Last week I wrote a bit about hourly billing and some reasons why I find it broken and unsustainable (there are many more). It was (quite rightly) pointed out to me by Jonas that I should offer some good alternatives too. So today I want to take a moment and do just that: Value Based Pricing and Project Based Pricing.

Let’s begin with Value Based Pricing. It’s idea is simple and builds on the idea that you should get paid for the value you create and not specifically for the time you spend on the project. Putting it simply, if you increase sales by $100,000, it might be reasonable to base your compensation on that figure.

The advantages should be obvious. Such a model will have you earn more money, while still in fact being just. There exist downsides too though. Most importantly, for smaller projects this is not as viable a method as the value really does not mirror a fair price. It does also put more pressure on you to deliver value increases to the client. This I wouldn’t however consider a necessary downside, but rather something you should be doing anyway.

With Project Based Pricing we are approaching a cross-section of hourly billing and value based pricing. Instead of billing by the hour, we create a project and sum it on its whole. What this allows you to do is better account for your expertise while not having it factor into an hourly price.

As mentioned last week, if I do something twice as fast as the next developer, but have an hourly rate at double the price, this hourly rate is going to seem less appealing (even though it really shouldn’t). With a project price, this becomes a little less transparent, at the benefit of a more just competition. You can also partly account for the overall value of the service you are providing in this way, which you cannot do in the same way in an hourly fee.

The downside of pricing full projects is of course that they may change in scope, or may be hard to precisely pinpoint. Over time and as you gain more experience, your estimates here should get much better. From my own experiences I know that some projects may come in slightly over and others slightly under in workload.

Since these fees still do base a market value of the services, I would however still suggest that these are just for both client and service provider. Both now have the same interest: Getting the project completed as quickly as possible.

I should say that we at Bernskiold Media use a combination of these. It does depend on the project at hand. While we quote project based fees for most website projects, sometimes it just isn’t feasible and we are forced to bill by the hour in some cases, even though it is fairly rare.

What are your experiences?

Hourly billing is an invention that to me is clearly broken. Why you ask? Simple. From the start it creates the wrong incentives for all parties. Let me explain.

All companies which bill by the hour would ideally want to bill the most time possible, because in that way they make more money. At the same time, the person who orders the job would rather that the company spends as little time as possible (time is after all here clearly money). Usually, this ends up with a disgruntled customer because they either receive a sub-par product or feel they are paying too much.

Another important argument against hourly billing is that you loose all comparability. This is something too many people apparently fail to realize. Decisions are often made just on the basis of hourly rates (where high = negative). Rarely is any consideration taken to the actual time it would take.

As such, companies offering low hourly rates (and subsequently need more time) are more often chosen over companies with higher hourly rates (putting aside for the moment that this may not be the type of client you want anyway). I see this frequently, and it happens to me at Bernskiold Media all the time. Yet I am sure we offer a far better service than many competitors.

For most industries, time isn’t really important either. How long it takes us to create a website or how long it takes a lawyer to draft some legal document is completely irrelevant. The end result is what matters and it is for the end result that we should be paying. If we make the company a hundred thousand dollars in sales with a few¬†hours’ worth of work, how much compensation is then fair? At least considerably more than what standard hourly rates would be.

As you can see, hourly billing leads at the very least to a great conflict of interest. Ideally, all parties would be best of with work being completed as quickly as possible and have the greatest possible results. It is for the great results that you should be willing to pay.

A far better alternative would be ideally value-based pricing but also fixed sums. More on that next week.

One of my favorite weekly routines is doing “Sunday Night Planning”. This is one of many things I have picked up from the good people at Manager Tools/Career Tools that truly does make a difference.

What it means is that I spend a short time every Sunday evening to review the coming week. What are the important items that need to be taken care of the coming week? Which projects need your utmost attention? What are your main goals?

Having taken care of these items you start your Monday morning in a much more controlled and calm way. When most people are scrambling to get to grips with the week, you are already on your way towards the first goal. And the best thing is that it doesn’t take much time.

On Criticizing Ideas

Today we place a high value on brainstorming. In many workplaces the process of coming up with ideas which can under no circumstances be criticized is almost regarded as a holy institution. This has never sat well with me.

It is not that I don’t think there is value in coming up with new ideas. There is. However, what there is not is a need for ideas which immediately have flaws. As much merit there is to coming up with new things, having to come up with something viable is even more important.

While some will argue that there is always time to refine later, I still think we allow too many highly flawed ideas to go unquestioned for no good reason.

By criticizing an idea you are allowed to quickly iterate on it, using shared knowledge to either reach a better spin on it, or reject it for good reasons. The added bonus to me is that you also learn a lot from this process and quickly evolve and learn.

It’s a hard balance. Just coming up with something, and coming up with something good and viable. We should drop our fear of just criticism and love of limitless praise to everyone’s benefit.