There’s an interesting article on the NYT about an accountant who has stopped billing by the hour:
A few years ago, he said, he realized that the billable hour was undercutting his value—it was his profession’s commodity, suggesting to clients that he and his colleagues were interchangeable containers of finite, measurable units that could be traded for money. Perhaps the biggest problem, though, was that billing by the hour incentivized long, boring projects rather than those that required specialized, valuable insight that couldn’t (and shouldn’t) be measured in time. Paradoxically, the billable hour encouraged Blumer and his colleagues to spend more time than necessary on routine work rather than on the more nuanced jobs.
I look at this from two perspectives: billing within the firm and billing to clients. When billing to clients you want to bill close to the value that they place on your work. Any less means you’re leaving money on the table. Of course there needs to be value in it for the client, too, but the basic idea is to get most of the value of your work paid to you. That doesn’t work so well with billable hours. Many times it might only take an expert a few hours to find the solution that generates tens of thousands of pounds of value for a client. Most people would balk at paying £10,000 for five hours work but they’d be happy to pay it for something that generated them £30,000 of extra business. The framing of billable hours doesn’t help the service provider here and just gives the client a way to bargain down the price: “You can’t possibly be wanted to charge me £2,000/hour!” From the perspective of charging out, then, the ideaa of moving away from billing hours to billing for value makes a lot of sense for professional services.
However, from the inside of a firm what the management are worried about is the opportunity cost of their employees’ time. By measuring billable hours and the value per hour they get a sense of the efficiency of the firm. Without being able to measure inputs and outputs that’s pretty hard to do, and the main input for a professional services firm is labour. So, from an accounting perspective, it makes a lot of sense for firms to measure the number of billable hours that their employees rack up. However valuable the insight, there is something else that could be done with the time.
Reconciling these two ideas is pretty straightforward: charge out at value and measure hours against that project internally. Each project then has an implicit billing rate that reflects the value of the insights that the professional provided. In this way the firm can measure the quality and quantity of services provided while ensuring that it charges clients appropriately. Blumer’s solution throws the baby out with the bathwater: as usual, there’s a reason why things evolve to be the way they are and it’s rarely stupid.