Working as a consultant for the last decade or so, you get used to speaking a lot about hourly rates. However, only I seem to be the one that talks about a ‘billable hour’ when I discuss rates with clients and prospects. Having spoken to a number of clients and employees who have moved from other consultancies I started to realise that there might be a reason for this indirect opaqueness of description used by other businesses… accountability.
One of the core operating mandates of DMPG is to ‘be the client’. By this we mean that we operate in a manner in which we would expect if we were the client. One of the key principles of this is transparency. We want to be transparent about everything we do. Who we hire and why. When we hire them and why. Why something costs as much or as little as it does. What all the options are, not just the one that might suit us best. In amongst this is a definition of a ‘billable hour’ which is rarely the same thing as an hour worked.
So, how is it different?
First of all, let me clarify my own definition of a ‘consultant’ with my client hat on. In my opinion, if someone bills themselves as a consultant or an expert in a particular subject matter or connected with a particular software tool then they should be exactly that… an expert. As such, I would not expect to pay an expert’s rate for someone who has to learn how something works as part of the delivery effort to me.
If, as a consultant/expert, I am presented with a real-world challenge that I need to solve then I should charge based on the solution I deliver. If as part of that solution I needed to learn something new about the area or tool that I am the expert on then that needs to be done as part of my upskilling and personal development time and not passed through as a cost to the client. If I need to learn something related to the client’s unique way of operating then of course that is chargeable BUT that knowledge should be disseminated to the rest of the consulting team for the client rather than them having to pay multiple times over for our inefficiency.
As a result, we start to see a breakdown of time that might look a bit like this:
In the above example – and very typical – scenario, 60-85% of the hour spent is chargeable. The way these definitions work are as follows:
||To understand something unique to the client and their situation that is therefore also non-transferrable.
||To fill in blanks around knowledge. This could come from discussions with other consultants in the team or through documentation research.
||To validate that something you think will work actually will work for the client’s specific requirement. This is only chargeable if you’re having to customise something you know will work as standard for the client’s unique situation. If you are using this validation method to test your own research of a new function/feature then it should not be chargeable.
||Once you know exactly how to solve the client’s requirement this is time spent delivering it to them.
Ok, but perhaps other companies charge variable rates by resource type?
Indeed they do – at least the bigger ones do. But I still disagree with this model. Just because someone is less experienced on paper does not mean that the end solution they deliver is automatically going to be less valuable. Sure, a more experienced consultant is more likely to know the answer to a more complex problem but absolutely no-one will know the answer to any and every question posed.
As such, even if there is a variable hourly rate in place for different levels of seniority I still think the concept of a billable hour remains. Just paying less per hour for a more junior resource is not an acceptable trade-off as they could easily be more expensive than the consultant charged at a higher rate if they spend a lot more time arriving at the same solution.
Perhaps other consultancies do this already but just don’t mention it?
That might be the case. The industry does seem fairly focused on what an hourly rate is vs the cost of what is delivered and it’s relative value. I can understand why as well. I’m 750 words into an article to explain what a billable hour is… during prospecting/sales conversations I would have lost someone’s interest a long time ago!
However, given my first point about the fact that I (DMPG) appear to be the only one talking about this concept, I have my doubts. Judging by the amount of money we’ve been able to save companies that have switched their requirements to us just compounds this doubt. I think it is far more likely that the inherent opaqueness of an ‘hour’ is preferred by a lot of consultancies that are run with a single mission – that you’ll be unlikely to officially find in a mission statement – profit.
But surely companies are supposed to make a profit?
Absolutely! All companies should be run to make a profit. However, being run in a way that is profitable is very different to having a sole purpose of making profit. The operating costs for competitive consultancies are generally the same. The biggest overheads are:
- Staff costs
- Premises ← maybe not so much since the pandemic!
- Operating materials (hardware/software/insurance etc)
With costs being somewhat equal what drives a profitability ratio of a consulting company? In my view there are 3 commonly accepted levers for this but only 2 of which actually affect profitability:
- Hourly rate
- Efficiency of delivery hours
- Amount of billed hours
- Staff billability rates
The first one is a red herring. If a rate is higher it should be higher because it actually costs more to deliver. Perhaps the project requires more experienced consultants or is very ad hoc in terms of how resources are called upon. Either way, the rate should reflect the complexity of the project and therefore not actually affect the profitability of it.
The second one – at least for DMPG – is the biggest lever. The more projects we complete that test us as a company then the better we become which in turn means that as an average we can reduce the % of an hour spent that is not billable… this has the most dramatic impact on profitability for us and is something that I think should be true of all other consultancies. Right now we’re running at 73% across all time spent:
The above is an excerpt from our time tracking software for the period 01/07/2021 > 30/09/2021. Our target as a company is 80%. Every single % that we increase this is essentially a % point on the bottom line (the profit line). Our motivation for doing this is through increasing our knowledge, skills and efficiency of delivery.
The third one is essentially a variation of the second BUT it is the unfair option in my opinion. To just increase billed time means that one would either have to fudge a time sheet or deliberately assign more resources than were required to an account to increase the hours – both of these options constitute fraud in my view.
The fourth is the one that I think is most common – again, this is through my observations and conversations and not through official research. In this fourth instance it essentially means that the consultant needs to have the highest possible billable rate of time. If we assume that a working week is on average 37.5 hours a week then a consultant working to a target of 85%+ billability (apparently a common target) then this would mean they are expected to bill at least 32 hours a week. Just think about that for a second though, this would give this employee a maximum of 5 hours a week for the following:
- Tracking time correctly
- Training & personal development
- Supporting the upskilling of new/junior staff
- Social interaction with colleagues/clients
- Ability to make mistakes and learn from them
- Ability to help colleagues when they are unwell or on holiday
While this is technically possible it’s not something I would want to be a part of. We have a target of 60% at DMPG as our staff are our best asset. We need to avoid them burning out and we must support their personal development if we stand a chance of hitting our 80% billable hour rate. Does this reduce our profitability rate… absolutely it does! However, I strongly believe that if I were to increase this billability target that my staff attrition (which is near zero) will suffer massively and as a consequence of that client retention will also be negatively impacted.
I’m in this for the long-run, to feel proud of what we do and how we do it even if that means that our profit margin isn’t as high as it could possibly be. This comes through in our hiring process as well. We place a lot of stock on attitude as well as aptitude. As a result, very few people actually get past the first stage of our process, an informal conversation with me. This frustrates our recruitment partner sometimes but they do still appreciate what we’re building for here.
In regard to what you may take from this…
Other Consultants – If you’re in a role where you have massively high expectations on billability and aren’t getting the support you need to be successful, then leave. Talk to me before you do it as well of course.
Clients – Don’t be afraid to ask about billability rates and how a billable hour is defined. If you’re feeling really bold then ask them what their profitability rate is and how it’s achieved. I would tell you under NDA although I’m not sure many others would tell you theirs. It’s far too easy to ask for an hourly rate and haggle on that rather than focus on what is delivered, by who and how.
As always, if you’ve made it this far and would like to ask more questions about this content then please do. I’ll be happy to answer them.