It may be time to talk about the billable hour, and how it is ending. Experts now estimate that the average billable consultant spends between 10-12 percent updating and billing. This was once a common practice, which was started by lawyers. It’s easy to see how this can quickly eat into your margins in enterprise IT and technology services. The good news is that this is changing. The nature of contractual customer relations is changing to adopt a subscription-based economy. This will reduce the misalignment between clients who want fewer billable hours and consultants who want more hours.
1. Incentivize Innovation
Innovation is what most of our clients in the services industry want. Professional services are often more motivated to bill hours than to innovate. They are more profitable when they can be repeated, scaled and then on to the next. It is important to create a business structure that rewards outputs and results in order to encourage innovation. Billable hour systems work when activities are measured against industry KPIs, and not just “busyness” or “utilization”. Finding more errors is the only way to secure your job in a billable model. You could even say that the interests of the customer and the firm are at odds. This issue is really highlighted when innovation and streamlining processes result in fewer hours on the books.
2. Fixed-Fee Future
Many PMO leaders in the services industry are guiding their organizations to the fixed fee model because it builds trust with customers. It’s easier to predict (hello cash flow!) It promotes accountability and predictability. This cultural change can be made without worrying finance executives or other stakeholders who are more used in measuring success in units time. To do this, you need to change the way statements of work (SOWs), and create a more prescriptive solution. This approach may help sales teams feel more comfortable presenting sales-ready product lists to prospects, which will reduce the sales cycle and save them time spent on research that doesn’t make sense.
3. Utilize Technology
Professional service automation solutions are a smart way to adapt. Templated packages that can be used to forecast are a great way to align with development teams. This will create internal harmony between internal service teams, such as those supporting Enterprise IT. Once your resources realize they are being incentivized to perform in the same way as their clients or internal stakeholders, everyone will be part of the same team and aligned behind SLAs that are impactful and measure what matters, which is strategic effectiveness against business goals.
We pay tribute to the passing of the billable hour. It is safe to say that, after revealing how and why it was coming to an end, it is unlikely that many of us will feel guilty when the fixed-fee contract wins.
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