By Tim Williams
Viewing entries in
Pricing Strategy
If you agree that time-based billing is a suboptimal way to capture the value you create, consider the implications of machine learning. Will you be sending your clients an invoice for the five seconds it took for artificial intelligence to review an elaborate contract, prepare a complex tax return, or produce multiple versions of a digital ad campaign?
We are what we measure. In life and in business, it’s human nature to align our behavior with the metrics by which we are judged. So if the key measurement in our firm is billable time, guess what kind of internal behavior we’ll get?
It’s human nature to dislike uncertainty. Your flight is delayed, but for how long? If the information on the departures monitor just says “Delayed,” our sense of malaise is high. But if it reads “Delayed by 35 minutes,” this precision makes us feel less concerned. Similarly, when searching for a restaurant that can serve us in time to make an 8:00 p.m. concert, most of us would gladly pay a little more for an eating establishment that guarantees delivery of our meal in time to enjoy it.
The work and solutions provided by your firm have likely created millions of dollars of value for your clients. How much of that value have you captured?
If you’ve ever watched an episode of the television series Mad Men, you have no doubt noticed that advertising executive Don Draper and his colleagues were quite well paid. They worked in large, well-appointed offices and entertained the clients with lavish dinners. While the narrative behind this Emmy Award winning show is fictional, the story it tells about the nature of the agency business in the 1960s is true to life. That’s because most agencies in the Golden Age of Advertising were very healthy, profitable businesses.
The constant forecasting and recasting of revenue is a colossal waste of time in most professional service organizations. No doubt every firm needs a periodic estimate of expected income and expenses, and the closer the estimate is to the actuals, the better. But the time devoted by senior professionals to the relentless forecasting process in most firms doesn't yield the expected incremental value. As the Scottish proverb goes, “You don’t make sheep fatter by weighing them more often.”
Most conversations between buyers and sellers start with the wrong question. Buyers are likely to prematurely ask “How much?” Your job is to postpone the answer and ask a beautiful question…
If you work in the world of professional services — advertising, law, accounting, architecture, etc. — it’s more than likely your firm is missing a critical element in its business model. Without it, you're dealing with self-inflicted roadblocks to your long-term financial success…
No doubt you’ve heard a friend in business say something like, “That’s fine for Apple or BMW, but we’re selling a commodity.” Even if your friend works for a grain processing company, that’s a remarkably misguided statement. And if you work in professional services, it unconscionable to believe that what you do is difficult to distinguish…
What do effective pricing and agile development have in common? Quite a lot, it seems. Especially in the world of professional services, where most firms are stuck in an industrial age model of adding up their hours (costs) and calling it a price.
The hue and cry raised by agencies today as they deal with the professional buyers of their services is louder than ever. With each new business win, a short-lived celebration is soon tempered by the demands from client procurement managers who not only seek to negotiate lower pricing (which is their job), but increasingly endeavor to dictate to agencies exactly how they should sell, package and price their services.
Most professional firms walk into pricing discussions armed with an understanding and defense of their costs (spreadsheets populated with people and estimated hours) but have spent virtually no time or energy comprehending the value they’re about to create for their client. It’s little wonder that the senior executives at most professional firms are easy prey for the tactics of professional buyers in compensation and contract negotiations.
As marketers continue to trim budgets and cut costs, agencies are struggling to grow their revenues and improve their margins. The reaction of most firms is to attempt to do a better job of estimating, recording and billing for the agency's time. That is not the answer.
LinkedIn Article by Tim Williams
January 31, 2017
Is it possible to run a successful professional service firm without billing for the hours recorded on timesheets? Apparently so, as thousands of the most successful ones have already abandoned the idea of selling inputs and instead focus on outputs and outcomes.
But even those professionals who concede that time-based billing is a suboptimal way to capture value fret that without timesheet data, they’ll lose the essential information they need to run their business. Given that time tracking has become so ubiquitous in professional firms, most professional managers have been brought up to believe it’s the only tool they have to manage their resources and profitability.
Indeed, because time reports look so precise and scientific, they create the illusion of providing crucial metrics. But the reality is timesheets tell you almost nothing about the measurements that really matter in knowledge work. And if you accept (as most informed managers do) that timesheets are notoriously inaccurate, their true utility is marginal at best. (Not to mention the many negative effects time tracking produces in terms of internal motivation and misalignment of economic interests with clients, but that’s another story.)
To illustrate what timesheets do and don’t tell you, take the following 10-question quiz:
Timesheets are an effective measurement of:
Now let's analyze these questions one at a time.
False. Even if timesheets were accurate (which we know they're not), adding up time spent on a project does not provide what a cost accountant would consider an actual cost. In economic terms, time is not a cost. Salaries are a cost. Rent is a cost. Office supplies are a cost. Time is not a cost. In knowledge work, time is a constraint.
False. Hopefully, no explanation is needed here. It would be dead wrong to conclude that “more time” on a project necessarily means better quality.
False. If client satisfaction is correlated to time spent in any way, it would only be in a negative sense. What do clients want? Fewer billable hours. What do firms want? More billable hours.
False. Timesheets tell you nothing about the degree of completion on a project. No matter that 5 hours were estimated for the discovery phase and 4.5 of them have already been spent; the responsible party may just be getting started.
False. Internal collaboration is desirable, but timesheets will never tell you if it’s happening. Indeed, they are likely to hide it, given the economic disincentive for too many people to “spend time” on a project, or meet together in a conference room to solve a problem.
False. Ask a project management professional in an engineering firm what it means to manage the scope of a project and they will say nothing about hours. A project is “in scope” if deadlines are being met, hard costs are within budget, and the client hasn’t requested changes or additions beyond the original Scope of Work — period — and hours logged don’t give you the answers to any of those questions. If the exercise of monitoring time “overages” tells you anything (remember, timesheets aren’t accurate), it would be that either the firm is poor at estimating or the project team is poor at time management — not whether the project is staying within the agreed-upon scope.
False. Timesheets tell you nothing about individual or team performance, and provide no basis for helping teams or individuals improve their professional effectiveness.
False. As a manager, can you rely on timesheets to help gauge whether deadlines are being met? Does a timesheet tell you if the firm is keeping its promises to clients? Or if associates are honoring their commitments to one another? Does a time report help you know when the company is truly over capacity, or does it mostly reflect internal perceptions of being busy?
False. Nothing in the time tracking system even attempts to measure the thing professional services firms get hired for in the first place: effectiveness.
True. In the final analysis, this is really the only accurate (and dubiously useful) information provided by the timesheet system. What proportion of your staff is willing to do as they’re told and submit a regular timesheet? If you’re looking for a leading indicator of obedience, you might as well ask them all to wear non-matching socks and see who’s willing to comply.
Of the measurements above that most professionals would agree are vital to success, what kind of tools do we have to measure them? For many firms, the answer is almost none. Instead, we keep peering through the wrong end of the telescope, looking for ever more precise ways of measuring the wrong thing.
If you want your clients to start hiring and paying you based on the right things — your talent, expertise, and effectiveness — instead of having the lowest hourly rate, keep in mind the insightful observation of behaviorist Dan Ariely: “You are what you measure.”
Here lies the billable hour. It died a slow and predictable death, brought about by natural causes. The billable hour would have turned 100 in just a few years. Born in 1919, it is the offspring of Boston lawyer Reginald Heber Smith, who was hoping his creation would help him diagnose and correct certain ills in his firm.
