by Tim Williams
If a talented art director in your firm can design a brilliant logo in five minutes instead of five weeks, should you get paid less — or more — for it? In the flawed pay-by-the-hour system, the only way your firm could possibly capture the value you have created is for the art director to misrepresent the truth on her timesheet.
More to the point, is it more valuable or less valuable to your client to get their logo the next day instead of the next month? In most industries, speed to market is a considerable competitive advantage.
The asymmetrical world of speed and value
Viewed in the cold light of reason, effective work done faster has much more value to clients. Beyond the speed to market benefit, it also saves client executives valuable time in the back-and-forth with agencies. Contrast the talented, experienced designer who has the ability to produce brilliant solutions quickly with a less talented creative who will likely not only take longer to solve the problem, but will require more direction from supervisors, more trial and error effort, and more direct client feedback. Taking five weeks instead of five minutes for a stellar logo benefits no one.
In the upside-down world of the billable hour, both the buyer and seller of professional services suffer from its negative effects. In the case of the seller (the agency), the better, faster and smarter you are, the less you can charge for it.
In effect, you are penalised for being good.
And the buyer (the client) receives completed work at the last possible minute, because the agency wants to make sure they can bill for the allotted time. When the agency delivers early, instead of being happy about getting good work faster, some clients will actually inquire about receiving a credit, suspecting the agency didn’t spend “the estimated hours.” Talk about the perversion of incentives.
The wrong incentives produce the wrong behaviours
To make matters worse for the agency, when the inducement is to work the estimated hours instead of effectively solving the problem as quickly as possible, the agency suffers the effects of suboptimal productivity. Even if talented agency professionals could deliver faster, they have a senseless incentive to wait until the deadline so they can justify the hours on their timesheets. This works directly against the agency improving its productivity, and in fact, creates a situation where measuring true productivity is virtually impossible.
This system is worse for the client because they are often assigned junior talent who are almost guaranteed to need every estimated hour. A more experienced senior team could solve the problem faster and better, but the agency risks earning less revenue (even though senior people generally have higher hourly rates).
From a broad perspective, both parties would benefit from a smaller, faster, better agency team that charges for problems solved, not hours worked. Unfortunately, the decades-old hourly rate system has blinded both buyers and sellers to the true economics of the marketing services business.
First mover advantage
As Ignition has written many times before, it’s up to the seller to remedy this situation. Buyers continue to argue the fine points of the hourly rate system only because we taught them to do so. The hourly rate approach was proposed by the sellers, not imposed by the buyers. When agencies made the decision to trade the commission system for the billable hour, they had to persuade and educate their clients about this “new” approach, which agencies borrowed from the legal profession during the 1980s.
Agencies have the ability and the obligation to change to a different system once again, which will again require a few years of teaching and persuasion, but this happens all the time in all kinds of industries. Remember when we bought software on a disc in a shrink-wrapped box? Software companies re-educated us to a new way; we now license software, downloaded from the internet. Airline seats on a given flight used to be priced exactly the same. Today we all pay a different fare for a seat on the exact same flight because airlines have educated and persuaded us about their dynamic pricing system.
If you’d like to work in a world where professionals are rewarded for their expertise, not penalised, it’s up to you to make the first move.