Prisoners of the Hourly Rate

By Tim Williams

The agencies that stand out are those who innovate and create solutions outside the confines of a client brief. They deliver proactive thinking and serve up ideas without waiting to be asked. They develop their own intellectual property and product ideas.

So why don’t more firms fit this “world class” description? No doubt talent has a lot to do with it, but there’s a much more basic reason most agencies don’t deliver brilliant, unasked-for work: it’s not billable. 

Surveys show that client organizations are unfortunately critical of agencies’ willingness and ability to deliver proactive thinking. They praise agencies for being responsive (reactive) but give them failing grades for being proactive. We can lay much of the blame at the feet of the hourly rate.

We don’t work on production lines

As agency executives complete a typical workday, they know they will be judged by factors that transcend the quality of their work; most notably, their “billability.” The truth is, the mindset created by counting hours is much better suited for factory workers than knowledge workers. The work of a laborer is usually standardized and repeatable; the output of assembly line workers correlates directly with the number of hours they spend on the factory floor. But the output of knowledge workers varies wildly based not only on talent, but motivation and inspiration. 

The hourly rate system fosters a production line mentality that’s in direct opposition to the spirit of ideation and innovation. It creates an inducement to be efficient rather than effective, which is at odds with what the best professional service firms really sell: brilliant solutions to difficult business problems. 

At firms that make the decision to sell solutions instead of hours — and therefore discontinue the practice of time tracking — the universal reaction is a feeling of “liberation,” as though they’ve been released from a corporate lock-up. No doubt this has a lot to do with the fact that no one likes having to complete a daily time sheet, but this unshackled feeling actually goes much deeper.

The right KPIs for professionals

When you emancipate your associates from recording, defending, billing, and reconciling their time they can turn their attention to doing more of what really matters: creating inventive, effective work for their clients. In effect, you’re signaling to all employees that the emphasis moving forward is on accountability, not utilization.

Questions around employee performance then revolve around the quality, originality and timeliness of the work, not the degree to which estimated hours conform with actual hours. Note the inclusion of “timeliness” as a critical performance factor. Moving away from time tracking doesn’t mean the firm isn’t policing deadlines. Quite to the contrary — the organization will be paying attention to percent of actual project completion, not percent of hours used. (There is generally no correlation between these two metrics). 

Liberating your firm from time tracking requires that you first transform your approach to scoping, pricing, and managing your work. On the front end, scope definition and pricing should be based on outputs (the actual work product), not inputs (hours or time of staff). On the back end, project management will therefore focus on tracking and managing actual work completed — outputs — not a guesstimate of hours. If you scope well and price well, you will have profitable projects, profitable clients and a profitable company. Timesheets move from being undesirable to unnecessary. 

The punishment does not fit the crime

Unless and until you make this paradigm shift, you’ll devote misguided energy to enforcing a system designed to make non-conforming employees feel like miscreants. A well-known agency in New York designed a system to publicly shame time sheet slackers, who were required to sit in the “Chair of Shame” until late time sheets were submitted. Other agencies require that offending employees place a dollar in the late time sheet jar every time they miss submitting a time report. There are countless more ways company leaders inflict punishment on the time bandits in their firms. No wonder professionals report feeling unchained when their employers decide to make them accountable for work delivered instead of hours recorded. 

The impact of a “timeless” culture on client relationships is significant. No longer will your people be locked in pointless conversations about “Why does this take so many people working so many hours?” But most importantly, it provides your people with the incentive and confidence to think proactively about their client’s business.