Monday, September 3, 2012

Time to do away with hourly billing

The persistence of hourly billing in many knowledge-based service professions comes across as an anachronism in this age of outcome-focused work ethics. Many of the leading consultancies and professional service providers, who lose no opportunity to drive home the critical importance of outcome-focus to their clients, bill them in terms of the man-hours of work done.

The idea of hourly billing has its roots in the manufacturing shop floor. Here the highly specialized work output was clearly defined (or definable), with each employee being expected to deliver a certain work output each hour for a specified number of hours each day. It was also important to quantify this given the widely prevalent practice of over-time work done by factory workers.

However, in modern knowledge based sectors, where team-work and individual effort are equally important and their interaction affects the quality of their output, hourly billing has the potential to severely distort incentives. The absence of clearly defined work output and time schedule for each individual worker only amplifies this risk. Primarily, hourly billing ends up distorting incentives and encouraging the employee or hired worker to bill excessively.

For example, in software and consulting, it incentivizes professionals to shift work (otherwise doable during regular office hours) to off-time hours (such as weekends), so that they can claim the much higher hourly rates during such times. Similarly, the leading management consultants bill exorbitant rates for the hours devoted by their top executives. But the terms of reference of this time is only defined very vaguely and often generates limited marginal value addition. Such pricing enables these firms to justify the huge rates they charge their clients.

The time may have come to debate the need to junk hourly billing and embrace the more efficient outcomes-based billing route in all knowledge-based sector labor markets.

1 comment:

Sai Prasad said...

There are some areas of work where it is not possible to estimate the time it would take to complete the job. This is more so in the case of knowledge based work.

There are lacunae in the way problems are defined by the owner. The definition and needs of the owner shift along the way due to changes in his own perception of what the final outcome may be.

Changes may be necessitated, at the instance of the owner, along the way, for reasons which cannot be controlled by the owner as well as the contractor.

As i write this, i can think of many examples in the software sector as well as in Hydro power projects.

This however, does not take away the basic argument that there needs to be an increased focus on outcomes.

Every owner, i feel, needs to arrive at a compromise between the two models to appropriately incentivise his contractor.