What do effective pricing and agile development have in common? Quite a lot, it seems. Especially in the world of professional services, where most firms are stuck in an industrial age model of adding up their hours (costs) and calling it a price.
If you have a hard-working team that seems to be working longer hours by the day, it’s likely because you don’t have a hard-working business strategy.
Do the executives on the front lines of your firm have a clear, unequivocal understanding of the principles that guide your commercial decisions?
In the age of disintermediation, no firm that plays on a national stage can claim to be a monolithic stand-alone resource for its clients. Rather, the best professional service firms are part of an increasingly complex and interdependent ecosystem of specialized solutions providers.
What if the metrics of success used by most professional firms are wrong? What if law firms, accounting firms, ad agencies, and a wide variety of consultancies are investing their resources at getting better and better at measuring the wrong things?
The hue and cry raised by agencies today as they deal with the professional buyers of their services is louder than ever. With each new business win, a short-lived celebration is soon tempered by the demands from client procurement managers who not only seek to negotiate lower pricing (which is their job), but increasingly endeavor to dictate to agencies exactly how they should sell, package and price their services.
Most professional firms walk into pricing discussions armed with an understanding and defense of their costs (spreadsheets populated with people and estimated hours) but have spent virtually no time or energy comprehending the value they’re about to create for their client. It’s little wonder that the senior executives at most professional firms are easy prey for the tactics of professional buyers in compensation and contract negotiations.
As marketers continue to trim budgets and cut costs, agencies are struggling to grow their revenues and improve their margins. The reaction of most firms is to attempt to do a better job of estimating, recording and billing for the agency's time. That is not the answer.
What Timesheets Don't Tell You
LinkedIn Article by Tim Williams
January 31, 2017
Is it possible to run a successful professional service firm without billing for the hours recorded on timesheets? Apparently so, as thousands of the most successful ones have already abandoned the idea of selling inputs and instead focus on outputs and outcomes.
But even those professionals who concede that time-based billing is a suboptimal way to capture value fret that without timesheet data, they’ll lose the essential information they need to run their business. Given that time tracking has become so ubiquitous in professional firms, most professional managers have been brought up to believe it’s the only tool they have to manage their resources and profitability.
Indeed, because time reports look so precise and scientific, they create the illusion of providing crucial metrics. But the reality is timesheets tell you almost nothing about the measurements that really matter in knowledge work. And if you accept (as most informed managers do) that timesheets are notoriously inaccurate, their true utility is marginal at best. (Not to mention the many negative effects time tracking produces in terms of internal motivation and misalignment of economic interests with clients, but that’s another story.)
To illustrate what timesheets do and don’t tell you, take the following 10-question quiz:
TRUE OR FALSE
Timesheets are an effective measurement of:
TRUE OR FALSE 1. COST OF COMPLETING A PROJECT
TRUE OR FALSE 2. QUALITY OF THE WORK COMPLETED
TRUE OR FALSE 3. CLIENT SATISFACTION
TRUE OR FALSE 4. DEGREE OF PROJECT COMPLETION
TRUE OR FALSE 5. EXTENT OF INTERNAL COLLABORATION
TRUE OR FALSE 6. SCOPE COMPLIANCE
TRUE OR FALSE 7. EFFECTIVENESS OF INDIVIDUALS OR TEAMS
TRUE OR FALSE 8. PROMISES KEPT AND DEADLINES MET
TRUE OR FALSE 9. EFFECTIVENESS OF FIRM’S RECOMMENDATIONS
TRUE OR FALSE 10. ABILITY TO FOLLOW DIRECTIONS AND COMPLY WITH COMPANY POLICY
Now let's analyze these questions one at a time.
1. COST OF COMPLETING A PROJECT
False. Even if timesheets were accurate (which we know they're not), adding up time spent on a project does not provide what a cost accountant would consider an actual cost. In economic terms, time is not a cost. Salaries are a cost. Rent is a cost. Office supplies are a cost. Time is not a cost. In knowledge work, time is a constraint.
2. QUALITY OF THE WORK COMPLETED
False. Hopefully, no explanation is needed here. It would be dead wrong to conclude that “more time” on a project necessarily means better quality.
3. CLIENT SATISFACTION
False. If client satisfaction is correlated to time spent in any way, it would only be in a negative sense. What do clients want? Fewer billable hours. What do firms want? More billable hours.
4. DEGREE OF PROJECT COMPLETION
False. Timesheets tell you nothing about the degree of completion on a project. No matter that 5 hours were estimated for the discovery phase and 4.5 of them have already been spent; the responsible party may just be getting started.
5. EXTENT OF INTERNAL COLLABORATION
False. Internal collaboration is desirable, but timesheets will never tell you if it’s happening. Indeed, they are likely to hide it, given the economic disincentive for too many people to “spend time” on a project, or meet together in a conference room to solve a problem.
6. SCOPE COMPLIANCE
False. Ask a project management professional in an engineering firm what it means to manage the scope of a project and they will say nothing about hours. A project is “in scope” if deadlines are being met, hard costs are within budget, and the client hasn’t requested changes or additions beyond the original Scope of Work — period — and hours logged don’t give you the answers to any of those questions. If the exercise of monitoring time “overages” tells you anything (remember, timesheets aren’t accurate), it would be that either the firm is poor at estimating or the project team is poor at time management — not whether the project is staying within the agreed-upon scope.
7. EFFECTIVENESS OF INDIVIDUALS OR TEAMS
False. Timesheets tell you nothing about individual or team performance, and provide no basis for helping teams or individuals improve their professional effectiveness.
8. PROMISES KEPT AND DEADLINES MET
False. As a manager, can you rely on timesheets to help gauge whether deadlines are being met? Does a timesheet tell you if the firm is keeping its promises to clients? Or if associates are honoring their commitments to one another? Does a time report help you know when the company is truly over capacity, or does it mostly reflect internal perceptions of being busy?
9. EFFECTIVENESS OF FIRM'S RECOMMENDATIONS
False. Nothing in the time tracking system even attempts to measure the thing professional services firms get hired for in the first place: effectiveness.
10. ABILITY OF STAFF TO FOLLOW DIRECTIONS AND COMPLY WITH COMPANY POLICY
True. In the final analysis, this is really the only accurate (and dubiously useful) information provided by the timesheet system. What proportion of your staff is willing to do as they’re told and submit a regular timesheet? If you’re looking for a leading indicator of obedience, you might as well ask them all to wear non-matching socks and see who’s willing to comply.
Of the measurements above that most professionals would agree are vital to success, what kind of tools do we have to measure them? For many firms, the answer is almost none. Instead, we keep peering through the wrong end of the telescope, looking for ever more precise ways of measuring the wrong thing.
If you want your clients to start hiring and paying you based on the right things — your talent, expertise, and effectiveness — instead of having the lowest hourly rate, keep in mind the insightful observation of behaviorist Dan Ariely: “You are what you measure.”
Do you stumble when trying to describe your firm’s “elevator pitch?” Most business executives do. The unfortunate truth is that most of us don’t have a very thorough understanding of how our companies create value.
Paradigms take a long, long time to change. The mental maps we carry around in our heads are etched in neural pathways that both dictate and predict our behavior. If our paradigm is that the world is flat, we navigate very carefully to make sure we don’t sail off the edge.
Here lies the billable hour. It died a slow and predictable death, brought about by natural causes. The billable hour would have turned 100 in just a few years. Born in 1919, it is the offspring of Boston lawyer Reginald Heber Smith, who was hoping his creation would help him diagnose and correct certain ills in his firm.
The most highly-regarded firms on the planet aren't just good; they're different. They stand out not just because they're excellent at what they do, but because they have a deliberately different purpose, principles, and set of practices. In professional services, this is the 1%.
Can the same kind of "feature fatigue" made famous by over-engineered electronic devices apply just as well to a professional services firm? Absolutely it can, and it produces largely the same effects.
Is it possible to trade retainer-based client relationships for project work and still do great work, keep people happy, and earn healthy margins? In the increasingly disintermediated world of professional services, it's essential for firms to more effectively adapt to the new ways client organizations are parceling out work.