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business models, strategies and technologies

Rethinking the billable hours paradigm

Knowledge workers should probably be ramping up for some kind of paradigm shift in pricing – selling the benefits they create (value) rather than the hours they work (costs). But how?

It seems a bit paradoxical that the one sector of industry that’s fairly central to innovation and new thinking is itself stuck in a seriously geriatric pricing paradigm (gargantuan generalisation, here). Legal beagles, bean counters, marketing shops, bizz-development consultants and many other providers of professional services seem to be resolutely enmired in the uninspiring – and increasingly misplaced – world of hourly billing.

A quick mea culpa is probably in order here – my company is unfortunately among the “culprits”, pun not intentional. And I freely admit to it grating on my sensibilities every time the onus of invoicing grinds around. Why does it bug me? I think it’s (at least) two-fold. One aspect is that in many cases the client has no real basis for assessing the sheer excellence of the text and the ideas I delivered. Another is that there is simply no way – that I know of or can really imagine – of actually measuring the bankable benefits of the killer ideas and words provided. This means there’s no real or obvious link between billing and benefit on the one hand, or between billing and work done on the other. it’s all a bit too fata morgana-ish for the kind of intelligent, customer-aware business practices I want to run with.

There’s another wrinkle, too. One of the big “challenges” knowledge workers often encounter is that jobs are often near-impossible to “price” in advance. The work involved is often “development” as much as “production”, and is heavily dependent on a wide range of unknowns that are – well, unknown – at the beginning. Issues and problems only begin to emerge as the experts ask questions, probe into background and make suggestions. It’s not unknown for the end result to be vastly different from what the client reckoned they wanted or needed – kinda’ like taking an old-faithful car in for “just a service”. This all makes up-front pricing a complete shot in the proverbial dark, almost guaranteed to get any conscientious knowledge supplier seriously shafted.

As an occasional, involuntary customer of the purveyors and guardians of arcane, non-transparent and non-productive capabilities like lawyering and accounting, I also experience hourly billing from the customer side of the counter. And it ain’t ever a pleasant encounter. Each bill is solidly but invisibly laden with expensive, non-productive overhead, prestige-building inner-city offices as well as administrative burdens and branding packaging – all completely irrelevant to the bog-simple, ground-level services I wish to purchase. I’m always gobsmacked when our accountant sends his annual bill – just one big figure, unexplained, un-itemised and totally unhelpful, with no obvious path for transparency, questions or recourse. There are no indications that the encounter is designed or implemented on the customer’s terms. It all feels like a conjuror’s curtain designed to discourage questions, criticism or insight.

But generalised sniping and bitching is too easy – what are the possible solutions? I’ll be writing separate articles about innovative pricing models in particular industries and by particular companies.

Pricing models passed over?

In recent years, most industries have seen (and the front-runners have sometimes embraced) pricing revolutions in various forms, including data-driven dynamic pricing, consumption pricing, subscription pricing, while “freemium” pricing is now standard fare in large parts of the software industry. Rethinking pricing models has paved the way to entire new business memes (as in the always-mentioned Uber and Airbnb, poster children of disruptive thinking), and spawned new industries as well as kicking off radical shifts in old ones, with manufacturers scrambling to resaddle as service providers with a completely different, long-term service pricing model.

Somehow this isn’t quite as easy for mainstream knowledge workers and providers of intangible services. But surely something should have been learned?

Perceived value

The pivotal issue in all this is, of course, locking down an appropriate metric for value.  The ideal/easy answer would be to bill the client on the basis of the exotically amorphous “perceived value” – there would be a sense of intrinsic fairness about it, non? “Pay me what you feel it’s worth” would be a delightfully cavalier, Quixotic business model that’d garner a blend of serious notice and serious customer irritation, delightfully in tune with currently popular customer-centric thinking, yet completely devoid of awareness about practical realities in real-world SMEs and over-burdened clerical staff on the receiving end of such an invoice.

Another big drawback with “perceived value” is that in many cases the client has no real way of assessing how good the text I delivered was (and is very often either blithely ignorant or delusionally dismissive on that crucial score). I’ve often discovered and dealt with problems they didn’t even know were there, and eradicated issues they can’t even see.

Factored pricing matrix?

Perhaps one key angle on a real rethink should lie in realising there is no one answer, and introducing a multi-factorial answer that’d determine a pricing package closer to complex realities? This would require a mindset capable of moving beyond the true-since-Moses model of a fixed price for a tangible deliverable. In an ideal world, it’d feature key checkpoints that would include transparency, documentability and customer-centricity. Would it – for example – make sense to determine knowledge worker fees on the basis of some kind of weighted mix? Possible components could be:

  1. Risk alleviation and reputation insurance component
  2. Level of technical complexity dealt with
  3. Level of briefing on one side, specialist insight provided on the other
  4. Quality of deliverables and level of ambition
  5. Balance between degree of uniqueness and mainstream sameness/conformity
  6. Some element of built-in transparency/notional explanation/documentation about invisible issues tackled
  7. Spectrum between emailed documents and manpower-saving automatic insertion into digital workflows
  8. Spectrum between traditional “product purchase” and collaborative work structures/knowledge sharing
  9. Balance between speed of delivery on one side, and speed of payment on the other – both incentivised

In a closer-to-ideal world, one could imagine clients making in-advance decisions about how they wish to weight each component in the matrix, resulting in an indexed price that transparently reflects customer wishes/priorities, and with an element of built-in financial incentives. An approach like this would, however, also require big doses of willingness from both parties to invest sufficient time and effort into agreeing, honing and implementing such a relatively complex pricing model. It can only work if understood and greenlighted by both parties.

Value or lack of mistakes?

One thing that cropped up on my mental map while writing this is that there are no immediate/obvious/easy mental images associated with “value of intangible services”. I wanted to find some suitable illustration for this text-turgid blog post, but just about every obvious visual depiction is only a stilted metaphor or an over-churned cliché.

So perhaps the real rethink should lie in a complete re-assessment not just of a mere pricing mechanism but instead of the entire perception of what’s being bought and sold here. If you go to a specialist company that’s basically selling knowledge you don’t have but that you have decided you need to have, you’re basically buying some kind of non-specific reassurance that “things have been dealt with” by experts – sometimes even with a guarantee in the form of professional liability. If you already knew what the technical issues, communication conundrums, legal pitfalls or accounting abysses actually were, you probably wouldn’t need to venture into the consultancy eco-system.

So perhaps “perceived value” should be replaced by “perceived professionalism” in terms of the purchase of a degree of certainty that key issues have been dealt with and there aren’t any obvious or crucial mistakes. This ultimately translates into paying for risk alleviation, or risk management. Which is a completely different kettle of conceptual fish than billing manpower hours, face time or keyboard productivity.

However, most paradigm shifts don’t devolve from comfort zones and mere “nice-to-have” considerations. I would fear that in the time-challenged, real-world world of intangible professional services most clients and most suppliers would opt for the easy way out – “it ain’t worth the bother.” But one day the fecal matter will hit the fan, and then … But somehow it would do knowledge workers proud – and greatly boost their credibility – to be ahead of the game with intelligent, innovative pricing models suitable for our times.