There is an objective standard that connects time worked with a specific output.
Professional and B2B services firms cannot do this.
Factories can do this. They have measured to the second how long it should take a trained worker to execute the task.
If a worker takes longer to complete the task, efficiency is diminished.
If a worker can do the task more quickly, efficiency is increased.
The factory owner understands that efficiency increases the ROI on the resources required to build and maintain the factory.
Without the ability to precisely compare the perfect performance with the worker’s actual performance, you can’t measure efficiency nor impact it.
Why am I writing about this in an article for Owners and CEOs of professional or B2B services firm?
Proponents of tracking and billing for time insist that it ensures efficiency. The theory is that if a professional tracks the amount of time it takes for them to do some piece of work for a client, the firm will have insight into the efficiency of the individual.
After all, the individual is earning a compensation package in return for generating revenue for the firm. The more efficient the person’s work, the higher the ROI.
Let’s compare the factory and the firm
Each factory has assembly lines built to construct one specific product. It could be cars or bottles; whatever it is, that assembly line produces zillions of the same thing, over and over.
One professional or expert meets a variety of needs for each client. Nothing is repetitive and routinized.
- Emails are specific to the topic and the client.
- Documents are specific to the project and the client.
- Designs, content, research, and so on are all specific to the project and the client.
- A lawyer may be an M&A expert, but each buyer or seller requires legal work specific to the business for sale.
- Web designers have to understand the message and intent the client wants the website to convey.
- Marketers have to research the competition and create a marketing plan that both appeals to the client’s target market and stands out from the competition.
You get the idea.
There is no single, repetitive task in work that is going to deliver life changing differences to clients.
Therefore, tracking the time it takes the professional or expert do something does not lead to efficiency.
Would you tell the fractional CFO to hurry up or the estate planner to get the job done more quickly? I hope not!
Efficiency is not profitability in professional services firms
The assumption underlying the goal of efficiency is that as a company becomes more efficient, it will become more profitable.
That is, the revenue generated will increase for the same time worked, while expenses stay the same. All the revenue generated by efficiency falls to the bottom line (profit).
Ironically, the exact opposite is true in professional or B2B services firms!
The more quickly work is completed, the less the clients pays since they are paying for the time worked.
Revenue is LESS for the time worked, not more.
Non-time based Pricing Models may benefit from time tracking (for awhile)
Yes, it’s true that understanding how long it takes a firm to deliver the outcome to the client is helpful for non-time based pricing models.
Your firm is entitled to be paid proportionally for the life changing differences it delivers. And we all acknowledge that some differences take more or less time to be delivered.
Thus, having a good sense of the time it takes helps you get your fees in line with the outcome you deliver.
I think of it like this:
All of the firm’s expenses (fixed, variable, interest, taxes, etc.,) are required for the firm to deliver anything to clients. So it’s necessary for profitability for the firm to know the amount of the resources applied to any client project.
A simple formula adds up all money going out of the firm annually. The firm also decides how many hours in a year it will work. And it sets a required net profit margin, and the corresponding markup needed to achieve that net profit margin.
The result of these calculations is what I call the ‘resources applied’ figure per hour. When the firm is designing options using the Choice Framework, it uses the hourly resources applied figure as part of the fee. The client is not advised of this number, nor does the firm promise this number. It is part of the art of IMPAC T Based Pricing. It does help ensure that each project will deliver the required net profit margin.
Once the firm has a track record of successful IMPACT Based Pricing projects (4-6 months) the need for tracking time goes away completely.
More revenue without more time
Most importantly is that your firm understand and believe that as your expertise accumulates, you are able to deliver life changing differences of greater significance and THAT is what entitles you to higher fees.
It is not more time; it is more IMPACT.
Thoughts? Text TIME to 703-801-0345
