IS YOUR FIRM INCENTIVIZED TO BE INEFFICIENT?

By Tim Williams

By Tim Williams

If there’s one indisputable economic principle, it’s that incentives matter. Inside professional firms, some incentives are obvious and overt. Firms are highly incentivized to issue timely and accurate billing, for example. The consequences of sloppy invoicing manifest themselves quickly in the form of unhappy, frustrated clients. 

But some of the most powerful incentives are not only less obvious, they may be completely off the radar of management. Under the daily crush of client demands, we fail to appreciate that the behavior and performance of knowledge workers are a direct result of both the intended and unintended incentives that surround them, many of which actually operate against the best interests of the firm and its clients.

Upside-down incentives produce upside-down behaviors

For firms that dutifully comply with the standards set by time-based billing, the accompanying incentives can produce quite literally the opposite behaviors that the firm intends. In the upside-down Alice-In-Wonderland world of the hourly rate, professionals are incentivized to spend more time — not less — solving a client’s problem. Logging more hours on a client is clearly in the best interests of the firm (they make more money), but certainly not in the best interests of the client. 

Similarly, firms are unwittingly rewarded by devising complex solutions to problems because they’re paid for the quantity of the time, not the quality of the solution. The firm doesn’t mean to behave unethically; rather they’re exhibiting a stimulus-response behavior that’s underscored by below-the-surface incentives.

If the client's objective is to cross a river, the solution recommended by agency professionals is often to build a bridge.  In the predominant pay-by-the-hour system, there is no economic incentive to recommend the easiest solution: just swim across.

If the client's objective is to cross a river, the solution recommended by agency professionals is often to build a bridge.  In the predominant pay-by-the-hour system, there is no economic incentive to recommend the easiest solution: just swim across.

And consider how individuals in professional service firms are judged and evaluated. “How billable is this person” is the yardstick, when the metric that matters is “How productive is this person?” Hours spent does not equal results produced, or even work completed. The persistent incentive to be “busy” motivates behaviors like fudging on time sheets, logging time to the clients who can most afford it, and — worst of all — recording more hours than were actually spent so the firm can capture the revenue, which happens every December in many multi-national ad agencies who must record the time or they won't get their full fee for the year. 

The hourly rate also discourages another important behavior that is beneficial to both the firm and its clients: collaboration. The incentive at the firm is to minimize time spent to avoid “going over estimate.” If the incentive were instead to produce effective solutions (which would entail getting paid for the solution instead of the effort), much more collaboration would happen naturally. Instead, management sends directly contradictory messages: improve internal integration by collaborating more with colleagues AND don’t exceed allotted hours.

If you want to change the behavior, change the incentives

In our experience, management at most firms seriously underestimates the power these incentives have on individual and team behavior. In fact, most are in denial when the subject is raised, assuming their teams on the front lines have the same 30,000-foot motivation to maintain a healthy bottom line when instead front line executives are mostly concerned about their “billability” and being able to justify the time spent on a project to their clients. 

If you as a manager are frustrated by the firm’s seeming inability to be more “efficient,” its largely because you likely have the wrong incentives in place. If your firm gets paid for effort and activity (time), where’s the pressing incentive to optimize internal processes by investing in better workflow management technology and to mandate use of the newest project management practices? After all, in the hourly rate system, the faster you work, the less you earn. 

You say you want a revolution

No doubt most managers would say they support the idea of more effective systems, but most professional firms simply aren't built that way.  Industry observers like Michael Farmer believe that benign neglect of ever-growing workloads combined with active resistance to selling outputs rather than inputs, "Agency leaders risk presiding over the slow decline and over-stretching of a diminishing pool of burned-out creative assets." It's an unfortunate fact that when it comes to true scope management (which is not the same as tracking hours), professional firms seriously lag behind other types of companies. Farmer postulates that this is mostly cultural, fueled by the misguided notion that in a creative services business, the atmosphere must be laid back and systems free.

Imagine that instead of charging for time spent that you charged for solutions delivered. Would that provide a different internal incentive to solve problems quickly, improve digital asset management, and insist on consistent adoption of best-in-class project management practices?  I think you know the answer.


Comment