My first job in Professional Services was a "Product Consultant". It was my responsibility to aid our customers in the extensibility and usability of our product. At that time, all of our services were sold as either a pre-defined offering or we wrote a custom scope of work. In each case, the service was bookended with a total number of hours that would be needed and available to complete the work. There was never a risk of "going over on hours". In fact, we often built in language that gave the customer "X service hours over a duration of Y days to complete the project." That, on paper, fully protected us from an "on-time, on-budget" perspective. But in reality, there was always a delta in the hours available vs needed and there were frequent extension requests to complete projects. Simply put, the T&M approach left both the customers and the practitioners frustrated.
I experienced this phenomenon for years, until I was in a leadership position and had the authority to do something about it. It was only after much research, collaboration with customers, agreement from practictions, and coordination within the organization that I was able to effect change and move to outcome-based, fixed fee service offerings. That was circa 2013. Here we are seven years later and I still see people struggling with these same concepts. Hopefully, future service leaders will be able to use this reference to overcome some of these hurdles we faced in implementing a fixed fee approach.
The Ins and Outs of T&M
Selling services via T&M is akin to selling your product by listing the features. It's very vendor-centric and takes a lot of liberties with the depth of your customer's knowledge in this domain. But it's appealing because it's easy. Here's why:
It's easy to calculate the $ per hour. Customers will usually tell you the rate of your competitors and there's a lot of information out there on the web to draw from. You can also calculate it from a cost+ model and target margins.
If you want something easy to negotiate, $ per hour is very black and white. You settle on a number with your customer and everyone feels like they won (or lost).
Your $ per hour rate is its own branding. It tells the customer a lot about how valuable you think your services are.
Billing is theoretically easy. Send a bill for hours consumed, when consumed. Case closed.
Change requests are easy to calculate and bill for. Add more hours; bill when hours are use.
Clearly all of those things seem easy. But easy doesn't mean simple. And easy doesn't mean good. I alluded to some of the challenges earlier and there are a lot more. Such as:
When you scope an activity in terms of the number of hours it will take to complete. You immediately create a friction point with customers.
If the scope of work is something the customer could do themselves, they may argue with the estimate of how long it should take (level of effort).
If the scope of work is something the customer could do themselves, and they agree on the number of hours, they will immediately commoditize the value of the service and attempt to drive your hourly rate as low as possible.
If the scope of work is something the customer can't do themselves, they may get stuck trying to understand and equate the number of hours so that it's logical to them. If they don't get there, the conversation will stall.
Fixed Fee simplifies the conversation
For customers who are unused to the concept of associating hours to a task and estimating the level of effort to complete it, the exercise can feel very abstract and nebulous. It's a clear jump from the sales dialog, where a seller asked the customer what they're trying to achieve or what pain they're experiencing. So by offering customers fixed fee services, the conversation can go back to a normal business line of reasoning. It accomplishes this by:
Keeping the focus on what the customer is trying to achieve and/or problem they are trying to solve (outcomes).
Frames the service solution around the expected outcomes.
Details (scope) the "how" where by the service solution will achieve the outcomes.
Allows the customer to quickly assess the value of the service by focusing on the outcomes.
If the customer is allowed to continuously think about the outcome of the service engagement, and the service provider only needs to convince them that 1) they can achieve the outcome and 2) the investment in that solution is far outweighed by the value of the achieved outcome, it becomes an easy decision for the customer to make.
Effects on operations
Running a T&M service deliver operation is not always a walk in the park. When a "bulk of hours" is sold to a customer, you have to account for the logistics of hour delivery and hour billing. For example, if a customer buys 40 hours to use over the next 3 months, you don't necessarily know when they will chose to use the hours. So it becomes difficult to allocate a resource or resource pool to those hours vs. other defined projects. And if you're billing the customer as the hours are consumed, you need a sophisticated process or integration with your accounting software to release billing from your time tracking system.
With Fixed Fee service delivery, there is more planning required up front as well as continuous evaluation of the fixed fee offers. You need to scope out the fixed fee offer in terms of level-of-effort, task dependency, risk assessment, resource requirements, and expected duration. In this case, the services team is accepting a marginal risk that the estimates of what will be required are accurate. From there, you need to reconcile those estimates as the offer is delivered and adjust for future sales as appropriate. But once that work is done, the management of services deliver and billing becomes much simpler. You can easily allocate resources to projects based on expected delivery effort and timelines. And since there's no consumption based billing releases, you can create simple triggers to bill in advance or at the end date.
What's next?
More and more service organizations are making the jump to Fixed Fee, with technology services leading the charge. Peter Wride had a great post on why he chose to implement Fixed Fee at Gainsight. So the question naturally becomes, what's next? There are lots of people who advocate for revenue sharing models or ROI based service fees. It makes sense. We're living in a "prove it" world, and customers want to be sure that the value of their investment is yielding the results that truly moves their business forward.
My expectation: For services that directly support a revenue driving engine, we'll see more ROI-based services that are tied to key financial measurables. For services that focus on optimization of a process, they'll be an attempt to create a time-savings to value equation with measurables and there will be a similar ROI-based approach there as well. Have you implemented either of these approaches? Are you stuck on T&M and need help moving forward? Comment below to start a discussion.
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