The Billable Hour Zombie: Why You Need to Act Now to Prevent an Attack on Your Business
Billable hour has been dead on your clients’ minds for a long time, but because your business is built on the idea of making money in minute-by-minute increments, billable hour continues to wander aimlessly through the halls of your office, devouring productivity and goodwill.
No doubt your company spends a lot of time and effort managing timesheets. Complex and expensive IT systems have been built to track how each person spends their time billing clients, allocating resources, and calculating income and bonuses. You negotiate with clients how long it should take to write a simple letter or submit a form. Or even worse, you lose clients without warning because they think another company could complete the job faster. Not better, just faster. Although these and other problems with billable time have been apparent for some time (in 1987, the American Bar Association created the “Alternate Billing Methods Working Group” and published several articles on the subject), the practice remains at the core. of most professionals. Fee generation models for service companies.
Lately, however, the big changes in the environment give us hope that the day of the billable hour zombie is coming to an end. Three factors seriously threaten the traditional hourly billing system: (1) The current stress in the economy has created a buyer’s market for customers, (2) Generation X and Y decision makers will demand less cumbersome systems and services complementary; and (3) Advanced technology will streamline numerous tasks, emphasizing product quality over production time.
The economy
The effects of our current economic turmoil will be felt for years to come. It is unlikely that we will return to the days of impressive profit margins, casual travel on corporate jets and inflated bonuses anytime soon. With the exposure of widespread corporate mismanagement, clients have grown cynical and are demanding that professional service firms justify their employees’ hourly rates. They are asking for the specific reasons why someone charges $150 per hour and why someone else charges $495. Answer: “Because that’s what the market will bear” is no longer a viable answer.
According to Robertson and Calloway, authors of Winning Alternatives to Billable Hour, customers are more likely to shop around for hourly prices if they consider the service provided to be a fungible asset or if the task seems routine and could easily be duplicated. During difficult times, clients will perform rigorous cost/benefit analysis. If you’ve been focused on generating revenue from billable hours and missed an opportunity to emphasize the value and results of your services, you may be caught off guard when clients tighten their budgets.
Generation X and Y decision makers
Over the next two years, the very composition of decision makers will change. The Baby Boomers will retire and a flood of Generation X (born between 1961 and 1981) and Y leaders (born between 1982 and 2001) will take over. When making decisions, they will rely less on loyalty and more on bottom line or proven track records from trusted sources. They are sometimes called the “why” generations and will question everything from hourly rates to corporate governance. They won’t accept answers like: “That’s how it’s done in this business” or “I can’t tell you how long it will take because it depends on many external factors that I have no control over.” They grew up in a business climate where you could do anything (think Dot-Com era, Napster, and the iPhone) and you could do it for free (think Google, Wikipedia, YouTube, etc.).
Saying your hourly rates should cover overhead, training and business development just won’t register. Your response may be, “Then why don’t you cut those expenses?” Remember, they converted old warehouses into office spaces, worked from home, and as long as they have WiFi access, they can work anywhere. They conduct business using social media and networks like Facebook, LinkedIn, and A Small World. While golf club memberships and expensive dinner parties may have been powerful networking strategies for Boomers, you’re more likely to find the next-generation decision-makers at potlucks, “under the radar” networking events. and at the local coffee shop. To keep and develop these customers, you need to frame your value in terms they understand. It is about the final product, not the process. Sending the message that you are paying for your “time” instead of “the result” will not resonate and you may find yourself with a slowly dissipating pipe.
Advanced technology
The advancement of technology makes us more efficient. While this is good for productivity, it is detrimental to the traditional billable hour system. Remember that the new generation of decision makers are extremely tech-savvy and expect your business to have and use technology effectively. If you’ve focused on billing by the hour, you’ll have a hard time justifying charging $500 for a mundane task that, due to technological advances, now takes 30 minutes to complete. Back when it took three hours to coordinate an appeal brief or produce a storyboard presentation, a 3 hour bill was appropriate. When technology allows us to produce the same task in 30 minutes, the traditional hourly billing system works against us. Not only does it affect the bottom line, but it can also reduce your value in the minds of your customers. The key is to show clients how having and using technology effectively helps them achieve their goals faster, more efficiently, and with fewer challenges.
Strategies to kill the billable hour zombie:
While it may seem daunting to consider switching from a traditional billing system to one with flexible options, these easy-to-implement strategies will align you with the future of business.
Strategies related to the economy:
- Bundle routine services and promote them using all-inclusive pricing plans. While these services may have lower profit margins, they attract customers and provide opportunities to market and promote other, more “personal” services. The key is to position yourself and your company as a resource for customers to come back for more complex challenges. By calculating the average hourly rate needed to provide specific services and creating all-inclusive pricing plans, clients will assume you’re efficient, know how to manage your time, and look out for their best interests. In this economy, the key is to demonstrate that your number one focus is serving the needs of your customers.
Strategies Related to Generation X and Y Decision Makers:
- Change your billable hour language and focus on setting client goals. The decision makers at X and Y will want to know that you understand them (even if you can’t relate to their way of thinking or their philosophy of work). They are most likely to respond positively to success-based pricing strategies or payments for meeting benchmarks. These decision makers tend to have specific goals in mind when they hire professional service firms. At the beginning of an engagement, ask the client to identify goals, milestones, and benchmarks. Ask questions like: “What is your number one reason for hiring us?” “What milestone or benchmark will we need to reach for you to feel like we are meeting your expectations?” “If we meet these milestones and benchmarks, do you agree to pay X?”
- One of our professional services clients uses a success-based pricing structure in which he and the client agree that if the results of their services meet their expectations, they pay X. If they feel the results were outstanding, they pay a lot. further. If they are not happy, they pay a minimum. They also use milestones and benchmarks to accurately assess results. This success-based strategy allows our client to bill at an average rate of $495 (about 30% more than their competitors). Of course, a success-based strategy only works when the service provider delivers exceptional work, manages their time effectively, and understands the importance of providing outstanding customer services.
Strategies related to advanced technology:
- Conduct an audit of your current technology systems and show customers how you can help them achieve their goals faster and more efficiently. Because the technology systems you built to be efficient work on the traditional billable hour model, you’ll find it difficult to charge the same rate for routine tasks that now take less time to complete. The trick is to refocus your customers’ attention on the value of your services instead of the time it takes to complete them. Perform an audit of your current systems and determine which routine services become more efficient, effective, and meet your customers’ goals faster thanks to technology. Show your customers how they will benefit from the service and highlight the end result. You’ll find that most customers (especially Gen X and Y) don’t care how long a task takes, they just care about the results it can produce.
Now is the time to consider and explore alternative billing strategies for your professional services firm. These tips and strategies will get you started and help transition your business and your customers to a system that will create mutually beneficial partnerships for years to come.
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