Today I want to talk about the billable hours model and why it is unsuitable for management consulting. I have had a lot of discussions about the billable hours model with aspiring management consultants, clients currently working for consulting firms and other people in our network. I find that a lot of people misunderstand the problem with billable hours model.

The billable hours model is not evil. It is a fine model. The problem is that it is inappropriate to management consulting.

We talk about the billable hours model as if it is evil, but for the wrong reasons. We insult the accounting firms for using billable hours model purely because we assume that if the accounting firms are using it than it can’t be good, or if lawyers are using it than it can’t be good.

On the contrary, the billable hours model works well for these two professions.

How the billable hours model is used in management consulting

In the billable hours model you have a consultant at, for example, Deloitte who is going to be measured on the amount of hours that he has billed to a client and the total hours he has billed in a year as a percentage of the total hours he could have billed.

The consulting firm will track billable hours as a percentage of total working hours he could have billed out. For example, a consultant can have 77% billable hours, 88% billable hours or even over 100% billable hours.

The percentage of billable hours out of total working hours is called utilization and it is a key metric used in performance evaluation by the consulting arms of professional services firms like Deloitte and PwC.

Why the billable hours model works for accounting and legal firms

Lets look at the most important difference between a consulting firm and an accounting or legal firm. This is the difference that makes the billable hours model work for accounting and legal firms. Compared to consulting firms, an accounting or legal firm is significantly more regulated. Various professional bodies are tracking the work such a firm does. There are a lot of guidelines in terms of being able to benchmark performance of employees of such firm.

As an example, you know when the legal firm wins because the judge decides if the firm wins. You also know when an accounting firm does a good job because the standards bodies in different countries will not penalize the firm for the work done.

In other words, great work is significantly less subjective because the work of the legal and accounting firm is publicly available and a body with known criteria for success evaluates the work. You may very well disagree with the rules of the accounting bodies, but you know what they are.

Consulting is very different. There is no transparent way of assessing performance of a management consulting firm, which is why it is such a lucrative industry and so many people want to jump into it.

When you are in an organization where there is relative performance transparency, it is a lot easier to know how each employee is performing. Therefore, it is a lot easier to assign good people to projects. I call it relative transparency since I am sure some lawyers and accountants will tell you their performance is not transparent.

In management consulting there is very little relative transparency with regards to performance. Consequently, it is harder to know how each individual within the organization is performing. McKinseyBCG and Bain will tell you it’s easy to assess performance of their consultants and project teams. But its not easy because there is no global standard.

Right now a Bain Singapore partner will think twice about using a Bain Madrid consultant. That is because even within the firm performance is not clear and there is no global and public scorecard against which he can compare performance.

Therefore, the billable hours model works for accounting and legal firms because they are in a profession that is standardized, regulated and relatively more transparent. In those professions it is clear what is good and bad.

In those professions it is fine if people pursue billable hours because if they pursue billable hours at the expense of quality, it will eventually show up in lost cases, and it will eventually show up in being reprimanded by audit committees or by the designated bodies which control the quality of audits.

This is the check built into the legal and audit professions. When things go wrong at McKinsey they simply hide it. There is no check in the system to help clients.

Thus, in an audit and in a legal profession, the billable hours system can work and it does work. People can pursue billable hours.

Firstly, they know what good looks like.

Secondly, if they start pursuing revenue at the expense of high quality work, the firms will know pretty quickly if the quality is dropping because they will see it through the very transparent way those two professions are run.

When the accounting firms went into consulting they took the billable hours model with them. It worked in accounting so they thought it will work in consulting. However, it does not work in consulting.

Billable hours and an emphasis on profitability

Many believe that the billable hours model is wrong for consulting because of its emphasis on profitability. They believe that because the consulting arms of companies like Deloitte and PwC use a billable hours model and companies like McKinsey and BCG don’t, Deloitte and PwC somehow put more emphasis on profitability.

This is a wrong assumption.

McKinsey and BCG are not profit averse. They charge a lot of money for the work they do. When people say that utilizing billable hours model forces consulting firms to put profits first, it is incorrect.

I can assure you when McKinsey partners are sitting there deciding if they want to serve a client, they are not going to offer their services unless doing so is expected to deliver a lot of profits now or at some point in the future, as part of their master plan.

McKinsey is not a charity and none of those partners are particularly charitable.

5 reasons why the billable hours model is bad for consulting

If billable hours model is not bad for management consulting because of the emphasis on profitability, than why is it bad? Here are 5 reasons why the billable hours model is bad for consulting.

1) There is very little performance transparency

You don’t know when a consulting project is doing well. If consultants are pursuing billable hours at the expense of a client, you are only going to know the work is bad if a client really complains. And even if a client really complains, there is no transparent system to compare performance.

Management consulting firms will say they are good at comparing performance but actually they are not good at doing this. That is why most professions have oversight boards, standards and benchmarks.

2) A billable hours model does not encourage teamwork

There is another reason why the billable hours model is a bad idea for management consulting. The model does not encourage team work. It encourages a pattern of behavior where every junior consultant is looking out for himself or herself.

If you are pursuing billable hours then you are not pursuing team work. You are doing things that are going to give you the highest billable hours at the end of the day.

3) The model leads to higher turnover and lower job satisfaction

Another reason the billable hours model is a bad idea for management consulting is because it puts junior consultants in an unfair situation.

Assume for this particular year there is 20 million US dollars worth of work in an office. If you put everyone on projects equally it will lead to 80% across the office in billable hours for that year. In other words, all consultants will have 80% utilization.

However, in reality, people are usually on projects at 100% utilization. Their entire working day is usually dedicated to a particular project. This means some people will likely have higher utilization than 80% and others will likely not meet their utilization target.

Moreover, if someone is staffed on an engagement team for client A during the strategy phase, the partner will usually want the same person to be involved in any subsequent work with this client, to take advantage of knowledge gained during the first engagement phase.

Also, if an office is involved predominantly in a particular type of work, e.g. pricing studies for clients within the banking industry, consultants with directly relevant experience will have plenty of options to increase their utilization while consultants without relevant experience will, all other things being equal, not be as in demand.

Therefore, some people will have high utilization, often over 100%, and some people will not be sufficiently utilized because there is not enough work to go around.

As a result, the billable hours model puts junior consultants in an unfair situation. They are not responsible for securing work. Consequently, if the partners secure too little work, the associates and younger people should not be punished if they cannot get staffed onto projects.

When we hired lateral partners from Deloitte and Accenture into the Firm, there were times I had to fight pretty hard to ensure they did not ever measure younger consultants on utilization.

4) The billable hours model does not encourage professional development

Since when do we allow the associates and analysts to determine what projects they need to be on?

Firstly, junior consultants rarely have clear understanding of which projects are most suitable for their professional development.

Secondly, if the billable hours model is in place, analysts and associates, or senior consultants, whatever you want to call them, are going to do things to increase their billable hours versus being put onto projects that are important for their professional development.

This is obviously detrimental to the firm’s performance and this is one of the reasons why tier-2 firms will never catch BCG and McKinsey. Even when they get great people into the firm, they fail to develop them.

5) Potential damage to client relationships

When you put the responsibility of meeting utilization targets onto an analyst or associate, you are putting the responsibility of “sales” onto people who are not mature enough, professional enough, and I would say sensitive enough to manage the process.

What do I mean by that? Well, a young associate or senior consultant, straight out of business school, who is terrified of losing his job, doesn’t understand the nuances of how to explain  decisions to clients. He will do whatever is possible to get his billable hours up, even if it is going to hurt the firm in the medium to long term.

For example, a junior consultant may try to influence the duration of the engagement to pick up more billable hours and his or her interactions with client to that effect may be damaging to the firm.

Final remarks

When you are thinking of billable hours, remember this, two conditions must be met for it to work.

First, billable hours will work in professions that are standardized, transparent, very open to benchmarks and reviewed by global bodies. In other words, it works in professions where good performance and bad performance is universally known.

It’s like watching a game of football and you don’t know if someone is winning. That is what consulting is like. When you go in, no one knows if consultants have done a good job.

On the other hand, in the audit or legal profession you go into battle, the audit committee rules or the judge rules, so you know if they are doing a good or bad job. In that case billable hours can work because if billable hours lead to poor performance, firms and employees within those firms get punished. They lose cases and lose clients.

Second, billable hours can only work where younger consultants are not forced to take work which raises utilization at the expense of their professional development.

Professional services firms with consulting arms that use billable hours model are not inherently more profit focused than McKinsey or BCG. The problem with the billable hours model is “whom” the model forces to make the profit trade-offs.

Billable hours forces a junior person to make those trade-offs. Someone who is not ready to handle those demands and not equipped to judge between engagements. This leads to decisions which are likely going to be detrimental to firm performance in the medium and long term.

It’s like telling your 2 year old kid, “Here is a knife. Go and catch your own food”. They may “prepare” the family dog just to put food on the table. They cannot make the necessary judgement calls.

The role of any partner is to protect and guide employees so that they can focus on their professional development and later on, when they understand the culture of the firm and when they understand how to make decisions, then they can decide how they going to allocate their time to get their billable hours up.

When you hand over the accountability for billable hours to a junior person, you basically saying, “You are on your own” and I don’t think that is correct. In fact, we know it leads to problems.

The billable hours model is not bad. I can see why accounting and legal firms use it. If I ran an accounting or legal firm I probably would not use exactly that model but there are reasons for using the billable hours model and it makes sense in the legal and accounting professions.

In management consulting it does not make sense for many reasons, especially because there is lack of performance transparency. Things are different when you don’t have that sort of buffer pushing back and transparently assessing performance.

If you are in a firm that is forcing you to focus on billable hours, like Deloitte and PwC, you can’t really get away from it. If there is not enough work to go around, you are going to suffer. You are going to get punished because some partner somewhere did not sell enough work.

You should not be fighting these battles. You are too young to be making those calls and you ultimately will be making bad calls just to get your billable hours up even if you are learning nothing of value.

So when you are thinking about these decisions don’t just belittle the billable hours concept. It can work and it has been known to work, but it works better in some professions and it definitely does not work in management consulting because of the behavior it forces people to exhibit.

QUESTION(S) OF THE DAY: What will be your advice to readers who work for firms which force them to focus on billable hours? Please share in the comments.

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20 responses to Why A Billable Hours Model Does not Work in Consulting

  1. Hi Michael. Just found the article that answered my question. Please delete my post here. Thanks

  2. Does this concept of comparative advantage can be applied to an individual? If so, like an organization, does it means as an individual everything is also organized around one advantage?

  3. You are welcome Hassan.

  4. Thanks Michael. Just read the piece where you clarify what a competitive advantage actually is, and the critical importance of comparative advantage. I’ve learnt that operating with more than 1 competitive advantage is actually counter productive because it compromises an organisation’s ability to organise perfectly around it (which is what a competitive advantage is – how you organise yourself to exploit an attribute to your advantage). Very valuable insight which has prompted me to read up more on Porter’s works – thanks.

  5. Hi Hassan,

    Actually the point I am making is that especially if PwC and Booz where leaders in their respective fields, they are more likely to fail. PwC and Booz have a high probability of surviving since they are both average, but a low probability of being exceptional.

    That sounds counter-intuitive but us the essence of strategy. You ca only excel at one competitive point of differentiation.

    To understand this point you have to read the article on comparative advantage on this website and the principle of organizing yourself around the advantage.

    A company cannot be perfectly organized around two different advantages. It can only be imperfectly organized around two different advantages.

    Michael

  6. Regarding my assumptions: I crudely felt this was the coming together of leaders in strategy and execution. On the surface, Booz & Co with its top class heritage and PWC’s well established capabilities was a unique coming together. Having just read the Firmsconsulting editorial about Cesare Mainardi analysing Strategy&PWC and mentioning Deloitte/Monitor, I now understand the context of these buy outs correctly – I look forward to the upcoming article addressing this. Having done some of my own research now history certainly bares this out so point taken.

    Ostensibly, Booz is not what it was (best people left etc) and I presume you are suggesting PWC is not high end. By high end, I assume you mean corporate strategy and implementation work at leading C-suite clients.

    Central to your argument is your assertion that no company can be outstanding in the two opposing business models of strategy and implementation simultaneously. I presume you this may due to the different approach with strategy having a critical focus on problem-solving and implementation more on change/stakeholder management and executing.

    I have learnt a lot from this exchange – appreciate you taking the time Michael!

    Hassan

  7. Thanks Hassan.

    Two things to think about: why do you assume this will work and why do you assume this shift is new and has never been tried before with abject failure?

    Those are pretty big assumptions.

    First, there is no reason to assume they will be successful today when they have never been successful in the past. What is so unique about something Capgemini tried and failed to do in the 1990’s? Or many other firms for that matter.

    Second, the market is not shifting. The suppliers to the market are trying to shift there. Trying is not the same as succeeding.

    Third, no company can excel at two opposing business models. You can either be high end or not. You cannot succeed at both.

    Michael

  8. Thanks for your response – I completely take your points around Bain not pioneering working at risk, and the challenges of setting milestones on strategy engagements.

    It is interesting to consider, however, whether your portrayal of the tension between strategy and implementation roles when working at risk will be disrupted (I hope to use this term with more success than the first attempt!). You suggest that no firm truly excels at both; clients can either: a) hire a strong strategy consultancy and then a separate, strong implementation consultancy. In such instances, the implementation firm will work with fees at risk implementing a strategy it did not recommend and this is not smart. b) Hire a firm that is average at both.

    I would suggest that the market appears to be shifting to combining both capabilities with deeper expertise. My evidence is the recent Big 4 buy-outs of strategy houses Monitor, Booz and Parthenon. Admittedly, these firms may have been struggling and some way off MBB, the mergers have not gone well, people leaving etc. – but assuming these mergers become successful one day, how long will under fire execs resist a Booz & Co strategy implemented by PWC in a genuine partnership (I work for neither firm by the way) – is this not a unique, disruptive offering (given the potential for collaboration between strategy and implementation) in the consulting market? Surely that executive’s dilemma between strategy and implementation becomes simpler. Perhaps the weakness in my argument is that these mergers are little more than branding exercises, and all that will result from the strategy through to implementation approach are weaker strategies and , at best, stronger implementations as a result.

    Many thanks for building an outstanding platform for consultants seeking to improve their lives,

    Hassan
    [Assumptions from your reply:]
    1) a) Strategy engagements without implementation piece is hard to set milestones against (e.g. how do you validate accuracy etc of strategy recommendations into quantifiable milestones)
    b) Challenging for a client to validate if a milestone was met in the best or appropriate way
    2) At risk fees are not a solution but present further challenges . Since there are no firms which excel in both strategy and implementation, clients can either: 1) hire a great strategy consultancy and another implementation consultancy. The implementation firm will work with fees at risk implementing a strategy it did not recommend. Or 2) hire a firm that is average at both.
    3) Big 3 are weak at implementation, particularly Bain.

  9. Hi Hassan,

    You raise some great points.

    From a client’s perspective, milestones mean very little. Let’s assume the first milestone is to receive the revised options for changing the strategy.

    How is the client to know the options are correct? How does the client benchmark their accuracy, efficacy etc?

    Let’s look at another milestone like benchmarking or case studies. How is the client to know if the insights from the case studies are correct, and if they are correct, that they are being used by the study team correctly?

    The client can know with near absolute certainty that a milestone was met, but it will ever know if that milestone was met appropriately.

    It has become better since so many alums of McKinsey and BCG have gone into the corporate environment, but it is still very tough. In fact, it is still very, very tough to know because most alums leave as very junior associates and engagement managers.

    At risk fees are not disruptive in the least. They have been around a very long time and do not fix anything. The problem with at risk fees is that the firm that is great at strategy may be, and is usually, bad at implementation.

    So, as a client, do you (A) hire a great strategy firm (without at risk fees) and an implementation firm that is silly enough to take at risk work for a strategy it did not develop OR (B) do you hire a firm that is good, but not great, at both strategy and implementation and is willing to work on risk?

    That is a tough decision to make as an executive.

    And Bain is a little like Elon Musk, while both are truly innovative and add value, they also tend to get too much credit for things others are doing or have done.

    Bain did not pioneer at risk fees in management consulting, they just get the most credit for it because they talk about it a lot. To imply they are great at at risk fees would mean they are good at implementation which they are not. McKinsey is far better at implementation.

    I would be hard pressed to find any material about Bain’s supposedly exceptional implementation skills. Is it on their website? Do their alumni have these skills in their profiles? No to both.

    McKinsey is of course pretty weak at implementation but Bain is worse. BCG is somewhere behind McKinsey here but also weak.

    Michael

  10. Agreed – and a brilliant read. A challenge from me (I do not work for a top tier firm (yet!) but still a global operations consulting firm with Fortune 500 clients):

    From a client’s perspective, when you mention the challenges of gauging and comparing the work of consultancies, do you not feel that agreed milestones for engagements in contracts can mitigate here? On client sites (I am an Analyst and have only had 2 clients thus far) I am seeing Time & Material commercial agreements with clients disrupted by a push for putting fees at risk. We all know Bain were early pioneers of this approach and I hear talk of the market moving towards structuring commercials (at least partly) fixed on results.

  11. What can I say Jared? This is possibly some of the best advice one can receive on this subject.

    Thank you for taking the time to post this.

    Michael

  12. Thanks for raising this tricky subject. Here are a few pieces of advice I’ve given to junior folks at law firms, where billable hours are often the key performance metric:

    1. Your objective should never be to bill more hours. Instead, it should be to get what you want.

    At a very basic level, your first goal as a junior employee should be to figure what you want to get out of your job. Your next goal should be to figure out how to get it. As a result, you should only bill more hours to the extent doing so helps you achieve some other larger goal.

    For example, if your goal is to make partner at your firm, determine what factors the current partnership cares about most when electing new partners – and then drill down. Likewise, if your goal is to go “in-house,” try to determine what you need to do to get in front of the right clients — and to impress them when you finally get the limelight.

    In each case, billable hours aren’t the end game and likely aren’t even a key driver. Instead, they’re probably a byproduct of doing something else you need to do to get what you want.

    2. Make yourself non-fungible as soon as possible so that you can exert some control over your staffing.

    For better of for worse, firms that focus on billable hours often sell a lot of commoditized work because it maximizes operating leverage (by minimizing training costs and partner time).

    To avoid this work, I usually suggest trying to develop a deep technical knowledge of a few widely used substantive areas that will quickly make you non-fungible (i.e., too valuable to staff on the worst projects) and give you something to pitch to partners who work in adjacent fields.

    Other tactics may work, of course, and your mileage may vary so just be sure that whatever you do both avoids lock-in and makes you idiosyncratically valuable.

    3. Demonstrate your commitment to the firm, but don’t compete on hours.

    I’ve watched a lot of juniors compete to be the hardest worker. It always ends in disaster.

    First, being the hardest worker isn’t a viable long-term competitive advantage. You’ll burn out. Plus, as you become more senior, you’ll contribute more value to your firm by creating leverage than by ringing the meter yourself.

    Second, you’ll subject yourself to an artificially high “hard-work” bar that will place you at a disadvantage vis-a-vis your peers.

    So, what to do?

    I usually advise juniors to demonstrate their value to the firm by billing a reasonable number of hours and then stopping and investing in themselves.

    To make the point concrete, I billed 2,500-3,000 client hours during each of my first two years in law: a high number, but nowhere near the highest in my office.

    I then stopped and taught professional education courses, developed template deal docs, etc., for another 500-1,000 non-billable hours each year — which put me on par with the highest billers.

    Unlike them, however, I was able to both demonstrate my commitment to my firm and to target skill gaps, market myself internally and just flat-out get better at my “day job” (of billing clients).

    4. Ask yourself early and often whether you really want to sell your (or your coworkers’) time long-term.

    Yes, this sounds obvious, but it’s still worth doing all the time. To make the point really concrete, I often asked my juniors three questions:

    – Do you really want to sell and not own, operate, etc.?

    – If you want to sell, do you want to sell something that scales only in time?

    – If you think you’re OK with selling time, are you really OK when the rubber meets the road . . . and you have to choose b/w doing more client work — which will create huge amounts of impact / millions of dollars of add’l value for your clients — and pitching more business — which you know will create a few hundred k of add’l revenue for your firm?

    If not, ask yourself what you want out of your job (again) and if the trade-offs are worth it.

  13. Good luck Karol. Warsaw is a great office and it is a great time to be in Poland in general.

    Michael

  14. Great thoughts MasterAsia,

    On point two, I meant there is no uniform definition of success in management consulting, unlike law or the accounting profession.

    Michael

  15. Micheal, exactly, and this homogeneity is killing me sometimes, that is why I have my McKinsey interview in April :- )

  16. Michael,

    Great article and thought provoking insights on the whole notion of billable hours and why it does not fit a consulting firm. Two comments on the relationship between the management consulting industry and billable hours –

    1. Many management consulting firms – McKinsey, Accenture, PwC, Deloitte, started out as Accounting firms or had folks from the legal profession move over. This is why old habits or traditions are extremely difficult to break once the precedent has been set. Management consulting is a mix of accounting, law, engineering, sales, and probably whatever Marvin Bower and Bruce Henderson wanted a management consultant to be (Lords of Strategy and The Story of McKinsey books). Granted, with law firms and accountants feeling the pain of outsourcing, the billable hours model might be the beginning of the end for most consulting firms should there be more transparent and objective standards of performance and international benchmarks that all consulting firms need to adhere to.

    2. I would disagree on the notion or hypothesis that it is difficult to measure a consulting firm’s success/failure. In the projects I have worked on, consultants are thrown out when a- things are going so bad that the client is losing money every minute they are working with the consultant and b- new management within a client come in and have the political willpower to toss out consultants after being fed up with their uselessness and lack of results. While I partially agree with the notion that nobody knows whether a consultant did a good job, I would say that when a client comes to their senses by tossing the “bad” consultants and bring back the “good” consultants, that is how, over a longer period of time, a client can tell whether it was the right thing to do financially and organizationally speaking. For me, having been a industry specific consultant as well as generalist during my time in business school, consulting is alot like Texas Hold-em Poker in that every pocket set of cards, community cards, turn, and river reveal something about the consulting firm and the client and that going all in or playing until all the cards are revealed makes it very difficult before the final tally to know for certain. The billable hours model is like playing Texas Hold-em with specific antes and bets while not understanding whether a royal flush or a two of a kind is the desirable outcome.

  17. Renzo,

    This is excellent advice. Thanks for sharing it. Sometimes a small tactical retreat can be a strategic career victory.

    Michael

  18. Michael,

    Hi, I always tell my analysts / associates that it is very difficult to have a satisfying career that meets your personal growth goals AND a career that meets your company’s objectives. My previous employers would almost always prioritize staying billable over a person’s growth and interests (especially at the more junior levels).

    This would always lead to a jaded / burned-out individual that felt lost in their career.

    Hence, my advice to them was always the same – at times you will have to bit the bullet and take the chargeability hit in order to get off of a dead-end project. The upside to this was that you would get a chance to work in your area of interest – the downside – the company would punish you for not staying 90%+ chargeable (goodbye end of the year rating).

    In effect – from time to time you would have to take a painful step backward in order to take two steps forward.

    Have a great weekend.

    R

  19. Hello Karol,

    Warsaw is a great city. I am slightly envious.

    Your perspective is excellent and your attitude is correct. As I mention in the article, the billable hours model will work in the audit profession and it seems to be working for you.

    I also forget to mention that it works best in service sectors where there is homogeneity of work.

    Good luck Karol.

    Michael

  20. Hi Michael, thanks for sharing this insightful article. I work for an accounting firm and I think that for me and my colleagues it is important to have more long-term perspective and do not only focus on current engagements, but perceiving and approaching engagements being future-oriented. To try to taste other industries, to cooperate with the biggest companies, because it’s always a challenge or the smallest, because it could be the way of finding yourself in a new role, where it is totally up to you, how the relationships with client will look like. To sum up- sometimes it’s not the most important thing to issue the highest bill for your service., but to be conscious that this engagement will help me to become a better auditor 🙂

    Greetings from Warsaw, Poland.

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