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Why A Billable Hours Model Does not Work in Consulting

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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Image from Chris Chabot under cc.

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