Adios Billable Hours

FunctionFoxThis post originally appeared in the FunctionFox Resource Center. You can view the original, and learn more about FunctionFox, here.

I spent the first six years of my marketing-agency career chasing hourly quotas instead of results. Yes, we cared if the client was happy and successful, but the fundamental economic driving force behind the firm’s existence was the billable hour.

I discovered early on that the billable-hour model was a flawed, archaic, agency-centric system that wrongly ties agency performance to outputs, not outcomes. In 2004, four years into my career, I became highly motivated to build a more efficient and profitable solution that shifted the focus to client needs and goals.

The idea was centered on making services tangible, with clearly defined costs, features, and benefits, almost like buying a product off a retail shelf or signing up for a software service. My theory was that if clients understood exactly what they were getting, and agreed ahead of time what it was worth, we could remove the mystery from the equation and focus on delivering value and results.

Transparency would build trust, reduce friction between clients and the agency, and make it simpler to sell services to the mass market. The problem was that the billable-hours model was the only one I had ever known. How would I build an entirely new financial model and productize a service business?

The Origins of Standardized Services and Set Pricing

My solution was to standardize services, and apply set prices based on a number of variables. In essence, I believed it was possible to achieve economies of scale in the production and delivery of services, much like a manufacturing company does with products. If we could lower the cost of services over time by improving efficiency, then, in theory, we could increase profits, possibly even above industry benchmarks.

Set prices would enable us to bundle services into packages designed to fit specific market segments, and they would also dramatically reduce time spent building new business and account development proposals. Plus, we would be able to make marketing agency services more affordable and effective to the under serviced market of small businesses.

The guiding principle was that set prices had to be value based, meaning we would determine them based on perceived and actual value, rather than the number of billable hours something takes to complete.

Time Tracking Becomes Even More Important

In this new model, efficiency and productivity would become the primary profit drivers, and the keys to generating measurable returns for clients. But this value-based pricing model does not eliminate the need for timesheets. In fact, accurate time tracking becomes more essential than ever in order to:

  • Monitor efficiency and productivity.
  • Analyze employee performance.
  • Produce client activity reports.
  • Evolve pricing.
  • Ensure that future projects are completed on time and on budget.

A number of other agency-management solutions we use offer time-tracking features as part of their products, but we have always preferred TimeFox. It is intuitive and reliable, and easily scales as new employees and contractors are added to the system. Even though it is designed to accommodate billable hours, we were able to customize it easily to fit our model of service packages and set pricing.

Disruption is Coming to Marketing Services

Pricing strategy is a key component to disruption. Agencies motivated to change will shift away from the inefficient legacy system of billable hours, and move to more results-driven, value-based models. This presents an opportunity for agencies and independent consultants to disrupt the industry with lower prices, and potentially higher profit margins.

As you move away from standard agency models, you must to be committed to efficiency, productivity and performance. That means using accurate time tracking to evolve your services and pricing, assess your firm’s performance and forecast workflow based on historical data. Do it right, and your agency can be at the forefront of the coming industry transformation—and way ahead of the competition.

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