LinkedIn Article by Tim Williams
Published on July 23, 2019

When it comes to remuneration agreements, are you setting the table for an all-you-can-eat buffet? That’s what usually happens when a professional service firm agrees to sell FTEs or staffing plans. In the absence of a predetermined set of outputs or outcomes, clients can load an almost unlimited amount of work onto the plate of the same limited group of people. 

The impact of this approach on the quality of life in professional service firms like agencies is easy to predict, producing headlines in the trade press like “The ad industry’s broken business model is breaking talent.” To put it simply, some of the best people are washing out of the business. 

Overworked and undervalued

Greg Paull of the consultancy R3 reports that in agency financial audits they perform, they “Routinely see evidence of overwork in agencies, up to as much as 60 percent above billable hours.” In law firms, the pressures of the billable hour are intense, where associates must meet a minimum number of billable hours to qualify for bonuses and salary increases. Law professor and former partner Stephen Harper observes that “Billing 2,000 hours a year isn’t easy. It typically takes at least 50 hours a week to bill an honest 40 hours to a client. Add commuting time, bathroom breaks, lunch, holidays, an annual vacation and a little socializing, and most associates find themselves working evenings and weekends to ‘make their hours.’”This type of behavior hurts all parties involved: the individual, the firm, and its clients. Worse, it breeds distrust and dishonesty. 

But there is a better way. In the marketing business, when agencies are paid to produce business results, clients are incentivized to provide effective briefings and agencies are incentivized to create effective work. In this model, an effective campaign can enjoy a long life (as it should) and the agency can benefit financially without having to constantly log hours on a timesheet. 

Conversely, when an agency sells “head hours,” it creates an order-taker mentality at the agency and an order-giver mindset at the client organization. It also means the agency’s main motivation is to keep as many people as busy as possible. As industry icon Rory Sutherland observes, “Nowadays a system of payment by the hour rewards a kind of fatuous industry. You see this take shape in complex, endlessly reworked strategies, generally following something you might call the ‘path of most resistance.’” 

What's normal is not optimal

Over the past few decades, this approach of buying and selling hours has become normalized and accepted as standard. But among client organizations, there is a clear appetite for new and better approaches. A recent study by The Association of Corporate Counsel in Australia and New Zealand shows that an overwhelming majority (84 percent) of companies want their law firms to move away from hourly billing. In the U.S., surveys of major marketers show that labor-based fees are no longer the preferred method for paying advertising agencies. (Curiously, this same survey shows that agencies themselves are the ones defending the hourly rate system.)

Client motivations for changing remuneration approaches are not, as you might suspect, centered on cost savings. A new study by the World Federation of Advertisers shows that most large companies believe a different approach to the way they pay their agency partners will improve agency-client relationships. By better aligning the economic incentives of buyer and seller, the level of trust increases. Higher trust engenders better work and less rework. 

Transformations and the stages of grief

Defenders of the hourly rate have spent the last several decades arguing against their own interests. But finally it seems the global pricing revolution that has swept through businesses of all types has finally made its way into professional services.

It’s as though the leaders of professional firms are now working themselves through the “five stages of grief”: 1) Denial 2) Anger 3) Bargaining 4) Depression 5) Acceptance. There’s a long journey ahead, but the destination is in sight.