Number of Billable Hours is a poor metric for employee performance

Since first reading Alan Weiss’ in-depth writings on the subject of value-based fees, I have become a strong proponent of the concept. Several years ago, I introduced a methodology for establishing value-based pricing for construction defect expert consulting services that has been successfully implemented on over a hundred engagements and led to significantly increased profit margins for companies that have adopted the practice.

Writing at CPA Trendlines, consultant Alex Koltin wrote a post offering his predictions and recommendations for CPAs in the coming year called, 2014 Roundtable: The Gloves Are Off. Last, but certainly not least, of Koltin’s points is the following:

I think the value billing phenomenon (throw out your timesheets and just bill for value!) will lose some of its steam. I sense some of the firms that have executed the strategy are having some challenges when they are trying to measure associate and partner performance, as well as a high degree of difficulty when trying to merge other firms in. I believe the concept of value billing is wonderful, but I’m sure not a believer in burning the timesheets and not knowing what our true costs are along the way to deliver the service.

Besides Alan Weiss, one of the other heavyweights in promoting value-based fees is the Verasage Institute, a “revolutionary think tank for professional-knowledge firms.” Verasage senior director and partner Ed Kless offered the following response to Koltin’s remark about the “value billing phenomenon.”

I think you have analyzed some of the challenges quite well. However, one quibble is your use of the term “value billing.” True advocates never use this term. To us (yes, I am one of them) “value billing” is akin to saying “soak the rich” when referring to tax increases. It is derogatory. We use the term value-led pricing or value pricing when referring to the process. With a customer, it is always a fixed price.

Kless goes on to tackle the assertion by Koltin that timesheets provide a metric for employee performance. I agree with everything he says, but wanted to focus on a specific nuance: incentive.

I once worked for a company where billable hours were the primary measure of employee value. Every month, grown adults (many of whom were licensed professionals, I might add) would wait in nervous anticipation of the monthly billable hour chart to be posted in a shared space for all to see. And, I kid you not, one lucky individual each month would receive a gold star in recognition of their having billed the most hours.

What did this incentivize:

  • Dragging out work as long as possible
  • Hoarding of work by senior staff
  • Clients became reluctant to authorize additional work for fear of cost
  • When work was authorized, it was often at the last minute, resulting in overtime and less than stellar quality
  • More efficient practices in carrying out our services became a direct threat to overall profitability
  • As clients sought more cost-effective and predictable service providers, all of the above problems were exacerbated
  • As revenue and profit plummeted, decisions to lay off employees were based entirely on billable hours

Measuring employee performance based on who spends the longest time getting things done seems counterintuitive and just plain lazy. Clients hire your firm because of the end result.

When you hire someone to provide you with professional services, don’t you want to know how much you can expect to pay in advance? Do you feel good about paying someone 0.7 hours at $XXX per hour to prepare a fax?

When you are empathetic to the client and put their needs and concerns first, the client will have even more respect for you.

Links: CPA Trendlines and Verasage Institute


Image courtesy Seth Anderson