by Tim Williams, Ignition Consulting Group
If your firm sells hours, how do your clients know if they're paying for "busy fools" or "eureka moments?"
This is the provocative question raised by David Meikle in How to Buy a Gorilla. The billable hour, while arguably an easy thing to track, is not an easy thing to value.
Consider the example of an art director we’ll call Jed who arrives at work Monday morning, slightly hung over from the weekend, and spends his morning — 9:00 to 12:00 — alternating between working on a design for a new logo, responding to various text messages from colleagues, taking a call from a friend on his mobile, and sneaking several peeks at his Facebook feed. He logs three “billable” hours on his timesheet.
Elsewhere in the same office, another young art director named Jennifer has been thinking about the design of new website all weekend, having drawn inspiration from a visit to a museum featuring the work of a famously talented typographer. This time on Sunday was “off the clock,” but it armed her with the flash of insight she applied on Monday morning to a stunning new homepage design, which she prototyped in 30 minutes.
In which of the above examples did the value received by the client equal the hours that were recorded on timesheets? Neither. Jed’s client will be overpaying, while Jennifer’s client will be getting a bargain. The only way to remedy this inequitable situation is for the agency to charge for what clients really buy:
not inputs, but outputs or outcomes.
As long as agencies send out invoices based on recorded hours, it’s virtually impossible to distinguish between time spent by middling plodders and proficient geniuses. Distracted muddlers and breakthrough brains.
Useful or Useless?
In a recent Admap article, British adman Malcolm White draws attention to the philosophy of 19th-century designer William Morris (the originator of the Arts and Crafts movement), who divided work into two different classes: “Useful Work vs. Useless Toil.” Surely there’s a certain amount of useless toil that happens every hour of every day in professional service firms across the world. Nonetheless, most of it is recorded as client-related time because of the intense internal pressure to be "billable."
Would it be even more accurate to say billing by the hour is unethical? My answer is yes. The typical “billable hour” spent by today's professionals is sliced up into micro-chunks of multitasking and task switching, accompanied by near-constant interruptions enabled by the open office environment and the audio/visual notifications emanating from their digital devices (computer, phone, and tablet) that are the constant companions of the modern knowledge worker.
Anomaly, Advertising Age’s current “Agency of the Year,” supports this view in their visionary statement of pricing principles: “Pricing based on value is more honest than time-based billing, not less.”
Defending the Indefensible
The defense of most firms that are mired in billing by the hour is that their clients insist on this pricing method. But that’s only because we taught them this system after the demise of full media commissions. And we keep feeding this system without realizing the tide has actually turned. MediaPost reports that it’s primary agencies, not marketers, who are defending the hourly rate. Increasingly, client organizations would prefer an approach that better aligns economic incentives. In fact, now that they understand the deleterious effects of paying for inputs instead of outputs, many informed marketers say they would even prefer commissions over labor-based fees.
A study sponsored by the Association of National Advertisers (ANA) reports that a clear majority of marketers intend to review their business within the next twelve months, and compensation issues are an underlying reason. Ignition’s view is that this untenable trend is spurred by the distrust created by a compensation system that rewards agencies for activity instead of effectiveness.
These changing client attitudes transcend the advertising business and now permeate law, accounting, and other professions. A recent headline in Australia’s well-regarded Financial Review characterizes these changing client attitudes succinctly:
“Companies want lawyers to kill the billable hour.”
Agency executives break into a nervous sweat when they contemplate a remuneration approach that’s not based on billing time. But the solution is much simpler than they contemplate. Starting tomorrow, every firm that wants to improve their margins, align employee behavior with client expectations, increase client trust, and simplify their internal operations can do so by charging a fixed price for a fixed scope. Building on this basic first step, firms can then innovate different pricing approaches tailored to different opportunities, eventually building a diversified portfolio of compensation approaches that can form the foundation of a sustainable economic future.