How The Time-&-Materials, Billed-By-The-Hour, Business Model Stifles Innovation
Be honest with yourself, right now, you don’t have to tell anybody out loud, just answer this question in your head. Have you ever exaggerated your time on a time sheet, even just a little bit?
The billable hour methodology for completing work, sometimes referred to as time and materials, is used primarily because it’s tradition. It’s been used since the beginning of the environmental industry because it was hard at first to determine a scope of work for certain tasks and projects.
Now I would agree, that when the scope of work is uncertain yet the work still needs to be done, that the “time and materials” method is a fairly simple way to proceed and at least gives you some basis for determining costs. However, the billable hour by its very nature actually encourages waste, fraud, and abuse. The pressure to “stay billable” is profound and ever present.
It seems though, that after you’ve completed certain tasks enough times, you have enough history and data to determine how long something should take and for those tasks, it is actually simpler and more effective to do away with the billable hour and go to a flat fee. Image if laboratories charged for lab analysis by the billable hour.
For instance, I myself have sampled thousands of groundwater monitoring wells. Because of that experience, I can tell you within a statistical certainty how long it will take me to sample a well. Granted there will be a few outliers that will take longer, however, there will also be outliers that take significantly less time.
The reason I’m writing this article is because I’m frustrated that the environmental industry is essentially still collecting samples and preparing reports using the same techniques and technologies that they were using 30-some-years ago when I started in the industry. Since then, numerous companies, including SampleServe, have introduced techniques and technologies to reduce time in collecting samples and preparing reports.
Why haven’t these techniques and technologies swept across the country like most technological improvements do? One could say that it’s because the technologies aren’t really that good. Maybe the technologies just aren’t there yet? Having been in hundreds of meetings introducing the technology that SampleServe has developed, the consensus seems to be that the technology is fantastic. People seem to giggle with joy at how we can move data from the field, to the office, and to a report in seconds. However, the conversation quickly turns uneasy and cold around how “saving time” will actually reduce the company’s revenues.
In one recent conversation I explained to a potential customer how we could generate all the various graphics that would normally take 6 to 10 hours of time to prepare, our software could generate the same graphics in under six-seconds. The response was “How do I bill six-seconds”?
How do we answer that? Perhaps go into a lecture about how it’s good for them in the long term to save their clients money? Are we to do short seminars on how changing their business model to a “flat-rate for a defined scope-of-work” will likely improve profit margin and their bottom line? SampleServe is here to provide technology solutions, in this day and age, it doesn’t seem like we should be road blocked by antiquated standard practices of an entire industry based on billable hour techniques.
Yet again, case in point; just recently I presented to a large national engineering firm that does much of the environmental work for a large petroleum retailer. There were approximately 12 Project Managers in the room that between them, managed several hundred projects for the petroleum retailer. After presenting our product, the general consensus in the room was that SampleServe technology was really well thought out and is likely going to be the way things were going to be done in the future. However, as typical, it was brought up by several of the Project Managers that if they started using the software now, they would actually significantly reduce the revenues the company makes on each project.
The reason is, this particular client requires them to submit invoices that detail the time spent on each project and they get paid based on the billable hour. If they were to use the SampleServe software, which would allow them to complete the same work and report in approximately 40% - 60% of the time that it takes now, their revenues would drop substantially.
When your company judges you based on your “billability” and “utilization rate”, this is an important factor to your career success. Frankly, I don’t blame them, I used to have to be “billable” and I thought along the same lines. Innovation that is going to reduce your ability to “bill time” isn’t as well received as one might instinctively think in the current “status quo” billable hour business model.
In the meeting, as a consolation prize, all the Project Managers did agree that on new business projects where they needed to be competitive, because they are a big national and somewhat expensive firm, that the SampleServe software would be “perfect”. Our software would allow them to win those projects and complete the work in a timely and more cost-effective manner than their competitors and still be profitable. Nice! I’ll just sit by the phone and wait for it to ring.
This same conversation in various forms and levels has occurred hundreds of times. As I mentioned, I find it very frustrating that the institutional practice of time and materials billing is essentially our biggest obstacle in implementing our product. One would think that developing the product and technology would be our biggest obstacle, frankly, those obstacles are easier to overcome than the current institutional practices.
It’s the same concept and techniques used in manufacturing. If Henry Ford would have been paid based on “time and materials” for each car that he built, he would’ve stuck with building a car one at a time versus developing the assembly line. When being efficient pays more, people become efficient.
So, what’s the solution, not just for my company but the industry as a whole? Quit rewarding inefficiency! By paying a flat rate for a defined scope of work, you will see the development of innovative techniques and technologies to get these scopes done in a more efficient and effective manner.
Bring new solutions to your clients with results-based payment for scopes-of-work that can be easily defined and gain more new business. Innovate, there are lots of ways in which you produce a better product that ultimately enables better decisions, quicker, and at a lower cost. If you don’t innovate, someone else will. Remember, your current client, could be somebody else’s new client.
There are some promising signs, there are several state petroleum funds out there that are switching to a payment for a defined scope of work. Kentucky, Colorado, California, and Minnesota have set amounts that they pay for certain tasks. It seems to be working for them. If the companies in those states can improve their processes and efficiency, they can actually make more money than they would’ve using the billable hour. It’s my understanding that Indiana is switching to a similar model as well.
The bottom line is, until the industry as a whole switch to a business model that actually rewards efficiency and technological advances, innovation will continue to be inhibited. The time and materials, billed by the hour methodology has its place, but for tasks that have become commoditized, which are most tasks in the environmental industry, the time to switch away from the time and materials billed by the hour methodology has long since passed. Have you started to think about the future of your environmental business as technology shifts and shapes in our industry?
Learn more about how to cut cost, increase profit margin and win more business through digitizing your process. Reach out to me, Russell Schindler directly or go to SampleServe.com to schedule a no cost demo or chat with our team for more information.