Death of the Billable Hour – Three Things PSOs Should Know
I think it may be time to gather around and say a few words about the billable hour and its timely demise. Once a standard practice — started by lawyers and meant to create a “really good way to keep people busy”– experts now estimate the average billable consultant spends 10-12 percent of their time updating and billing time. Let’s face it, in technology services and enterprise IT, it’s not difficult to see how that can eat up your margins quickly. However, the good news is that all of that is changing. The nature of contractual customer relationships is transforming to adopt a “subscription-based” economy, easing the misalignment of clients wanting fewer billable hours and consultants and IT delivery organizations wanting more hours.
1. Incentivize Innovation
What most of our services industry clients want is innovation. Unfortunately with hours measured, professional services traditionally are more motivated to be billable, not innovative. They are profitable when they are repeatable, scalable and on to the next. To incentivize innovation for providers and their clients, it is key to create a business structure for expert services that rewards results and outputs. The billable hour’s systems work when activities can be measured against KPIs in each industry, rather than “busyness” and “utilization”. The only job security in a billable model is finding more errors. In fact you could say that the interest of the firm and the interest of the customer are at direct odds. The issue really comes to light when being innovative and streamlining processes puts fewer hours on the books.
2. Fixed-Fee Future
A lot of services industry PMO leaders are shepherding their organizations to the fixed-fee concept because it builds trust with customers. It’s more predictable (hello, cash flow!) and promotes a culture of accountability. To help make this this cultural change without alarming finance executives and other stakeholders, who are more used to measuring success in units of time, start by changing how statements of work (SOWs) are written, and creating a more prescriptive solution. With this approach, you may find that your sales teams are relieved to be presented with sale-able product lists to present to prospects that shortens the sales cycle instead of spending tons of time doing discovery that no longer makes much sense.
3. Utilize Technology
A smart way to adapt is to utilize, professional service automation solutions. The right product offering for all professional services can help by creating templated packages to forecast against; more alignment with development teams; and as a result create internal harmony among internal services teams (like those supporting Enterprise IT). Once your resources realize that they are incentivized to perform the same way that their clients or internal stakeholders are, everyone will be on the same team, aligned behind impactful SLAs that measure what matters—strategic effectiveness against business goals.
As we pay tribute to the death of the billable hour, it’s safe to say that after uncovering how and why its’ time had come, and it is unlikely many of us will experience a guilty conscience when the fixed-fee contract wins the day.