Why The Consulting Billable Hours Model Does Not Work For Consulting Firms
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 work model with aspiring management consultants, clients currently working for consulting firms, and other people in our network. I find that most consultants misunderstand the problem with this model.
One misunderstanding I would like to address is that the billable hour model is not bad. It is a fine model. The problem is that it is inappropriate for management consulting.
This is worth discussing because most consultants are quick to conclude that this model is poor without providing a convincing reason. We insult accounting firms for using the hourly rates model purely because we assume that if accounting firms are using it, it can’t be good, or if lawyers are using it, it can’t be good.
On the contrary, the billable hours model works well for these two professions.
Management Consulting Work – How The Billable Hours Model Works
In the billable hour model, you have a consultant at, for example, Deloitte, who is going to be measured on the number of hours that he has billed to a client and the total work 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 the total working hours the consultant 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 work hours out of total working hours is called utilization. It is a key metric used in performance evaluation and productivity tracking by the consulting arms of professional services firms like Deloitte and PwC.
Why The Billable Hours Model Works For An Accounting or Legal Firms
Let’s look at the most important difference between a consulting firm and an accounting or legal firm. This difference is what makes the billable hours model work for accounting and legal organizations. An accounting or legal firm is significantly more regulated than a consulting firm. There are various professional bodies involved in tracking all the activities of these organizations. There are also a lot of guidelines in terms of being able to benchmark the performance of employees of such a 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 an excellent 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.
The consulting work is a different ball game. There is no transparent way of assessing the performance of most consultancies, which is why it is such a lucrative industry that so many people want to jump into, and that is why there are so many bad consultants, meaning consultants that do not add value or add significantly less value than what they receive in terms of compensation.
I call it relative transparency since I am sure some lawyers and accountants will tell you their performance is not transparent. If 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 the right people to projects.
In management consulting, the transparency concerning performance is significantly lower. Consequently, it is harder to know how individuals are performing. McKinsey, BCG, and Bain will tell you it’s easy to assess their consultants and project teams, but it is not easy because there is no global standard.
Right now, a top international consulting firm’s Singapore partner will think twice about using that same top international consulting firm’s Madrid and Zimbabwe consultant. That is because even within the same major consulting firms, performance is not clear and there is no global and public scorecard against which they can compare performance.
Therefore, the billable hours model works for accounting and legal organizations because they are in a standardized profession and, most importantly, they are regulated and relatively more transparent. In those professions, it is clear what is good and bad.
In those professions, it is okay if people pursue billable hours, as if they seek billable hours at the expense of quality, it will eventually show up in most cases, ultimately leading to being reprimanded by audit committees or by the designated bodies that control the quality of audits or legal work.
This is the check built into the legal and audit professions. When things go wrong at McKinsey, Bain, BCG, Deloitte, PwC, etc. that information is usually never becomes available publicly. There is no check in the system to help clients. It is not the fault of those consulting firms. It is due to lack of governing bodies and standards in place.
Thus, in an audit and 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, the billable hour model indicates the time spent to achieve the goal of a project. So, the billable hour model will work if there are metrics in place to assess if the desired result was achieved or not.
So, suppose an accounting or legal organization starts pursuing revenue at the expense of high-quality work. In that case, the firms will know quickly if the quality is dropping because they will see it through the transparent way those two professions are run.
However, when the accounting organizations went into consulting, they adopted the billable hours model. It worked in accounting, so they thought it would 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 emphasize profitability.
This is an incorrect assumption.
It is incorrect when people say that utilizing the billable hours model forces consulting firms to put profits first. McKinsey and BCG are not profit averse as they charge a lot of money for the work they do.
I can assure you when McKinsey, BCG an dBain 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, BCG and Bainareis not charities and many of those partners are not particularly charitable.
6 Reasons Why The Billable Hours Model is Bad for Consulting Firms
If the billable hours model is not bad for management consulting because of the emphasis on profitability, then why is it bad? Here are five reasons why the billable hours model is bad for consulting.
There Is Very Little Performance Transparency
You don’t know when a consulting project is doing well. If the consultants working on a project are pursuing billable hours at the expense of a client, you will only know the work is bad if a client complains. And even if a client complains, there is no transparent system to compare performance or track productivity.
Management consulting firms will say they are good at comparing performance, but they aren’t actually good at doing this. That is why most professions have oversight boards, standards, and benchmarks.
It Does Not Encourage Teamwork
This is another reason why the billable hours model is bad for management consulting. The model does not encourage teamwork. It fosters a pattern of behavior where every junior consultant is looking out for themselves.
If you are pursuing billable hours, then you are not pursuing teamwork. You will only be doing things that will give you the highest billable hours at the end of the day.
The Model Leads To Higher Turnover And Lower Job Satisfaction
Another reason the billable hours model is a bad idea for management consulting is that it puts junior consultants in an unfair situation.
Assume there is 20 million US dollars worth of work in an office for this particular year. 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 probably not meet their utilization target.
Moreover, suppose someone is staffed on an engagement team for clients 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 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 consultants should not be punished if they cannot get staffed onto projects.
Also, if the junior consultant puts in more effort than the senior consultant, there would be no way to measure this and adequately reward them. Their pay would still be significantly lower than that of the senior consultant. With the inequality in pay and juggling between several projects, it becomes challenging to achieve a work-life balance, which resulted in a negative perception people have about consulting lifestyle. This eventually leads to lower job satisfaction and a high turnover.
When McKinsey, BCG and Bain hire lateral partners from Deloitte and Accenture into the firm, there are times some partners have to fight pretty hard to ensure the lateral hire does not measure younger consultants on utilization.
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 a 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 hourly rate versus being put onto projects that are important for their professional development.
This is obviously detrimental to the firm’s performance and is one of the reasons why tier-2 firms struggle to catch BCG and McKinsey. Even when they get great people into the firm, they fail to develop them.
Potential Damage To Client Relationships
When you put the responsibility of meeting utilization targets onto an analyst or associate, you are placing the responsibility of “sales” onto people who are not mature enough, experienced enough, and, I would say, sensitive enough to manage the process.
What do I mean by that? A young associate or senior consultant, straight out of business school, who is terrified of losing his job, doesn’t understand the nuances of explaining decisions to clients. He will do whatever is possible to get his billable hours up, even if it will 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 their interactions with the client may be damaging to the firm.
It Affects Work-Life Balance And Leads To People Burning Out From Consulting Lifestyle
This model will negatively affect the consulting lifestyle. Consultants will want to increase their time spent in the office just to increase their billable hours and therefore, hopefully, increase their pay at the next performance evaluation. They will put in most of their time to pursue many activities, even if it doesn’t have any impact on project objectives.
This will subsequently affect the work-life balance of a consultant.
For example, take a consultant who is well aware that his pay depends on the number of hours he puts in (number of billable hours or unitilzation). Such a consultant would not mind working overtime, even if it affects other aspects of his life. His focus will be on increasing his working hours so he can get good pay at the end of the project, or at least not get managed out. He might even spend the weekend at the office. The issue becomes worse when consultant was on the beach for a large portion of time and struggled to find a project to join.
While you might be tempted to say the consultant is diligent, don’t forget that many of the activities do not have any impact on the client’s project. And also, not having a work-life balance leads to the type of consulting lifestyle that leads to burnout.
When you think of billable hours, remember this: two conditions must be met 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 are 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 the consultant has done a good job.
On the other hand, you go into battle in the audit or legal profession. 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 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 the 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 pressure a junior consultant to make those trade-offs. This is someone who is not ready to handle those demands and not equipped to judge between engagements. This leads to decisions that are likely detrimental to firm performance in the medium and long term.
It’s like telling your two-year-old kid, “Here is a knife. Go and source your own food”. They may “prepare” the family dog just to put food on the table, unable to make the necessary judgment calls.
The role of any partner is to protect and guide employees so that they can focus on their professional development. When they understand the firm’s culture and how to make decisions, they can decide how they will allocate their time to get their billable hours up.
When you hand over the accountability for billable hours to a junior person, you are basically saying, “You are on your own,” and that is not right. In fact, we know it leads to problems.
The billable hours model is not bad. It is clear why accounting and legal firms use it. For an accounting or legal firm there are reasons for using the hourly rate 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 a 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 will get punished because some partner somewhere did not sell enough work or because you are not that good at networking and showcasing your abilibites so partners would want to put you on their projects.
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 has been known to work, but it works better in some professions and definitely not in management consulting because of the behavior it forces people to exhibit.
QUESTION(S) OF THE DAY: What is your advice to readers who work for firms which force them to focus on billable hours? SPREAD THE WORD! Like this? Please share it.
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