An analysis of IBM’s current woes and a subsequent revisit to Robert X. Cringeley’s critique of Big Blue got me thinking about what I call the insanity of the hourly rate. A consultant claims IBM expects its consultants to bill 93.5% of all hours worked. That is 52x40x93.5% = 1944 hours a year. If true, and I say if because I know how pissed off people exaggerate, then IBM is effectively asking its staff to screw its customers. Work it out.
The total non-chargeable time equates to about three and a half weeks. Including holidays. So lunches, sickness, travel, training and waking up in the morning 15 minutes late would all seem to be chargeable. More likely, its staff are expected to work ludicrous additional hours simply to get to that magic recorded number. I’ve heard recent claims about the Big 4 and the demands they put on their newly qualifieds. The tales I hear have a similar ring to that of our anonymous consultant.
When I was a partner, we reckoned our staff would do very well to hit 80% time recovery with 75% the norm. But that creates problems. There’s only so many hours in a working year – regardless of how you massage rates, recovery percentages or what have we. If you’re not getting the ‘desired’ recovery then the two sets of people who suffer are clients and staff.
Cringely notes IBM is suffering from a severe staff shortage and is experiencing quality problems. That sounds oh, so, familiar. When you’re locked to hourly billing which is killing everyone, the only thing you can negotiate is the rate. Which is why value pricing makes sense. When you deliver something of value to the client, they pay for it willingly. In fact they will come back for more. But you’ve got to plan, be realistic and actively manage resources. This is rarely done beyond the level of fag packet configuration. But the problem is not going away.
If Stowe Boyd is correct, the future of business will be based on the social, with process being a retrofit. I’m not sure I’d go that far but it raises an interesting question. If the social informs our relationships with other businesses then weaknesses in the business model of this kind will surface very rapidly. Like they are on blogs like this. Then what?
Rick Telberg has an interesting study into CPA charging practices in the US entitled: You Are What You Charge. He says:
In fact, the billable hour may be one of the worst things that’s ever happened to the CPA profession. I am not here to urge the profession to raise or set prices. But I am suggesting that faulty thinking about pricing is at the heart of many of the profession’s business and economic issues.
Apart from partners at firms in the UK, anyone who bills by the hour might want to take a look at Rick’s study – it’s a free download. More on this later.
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