Organizations turn to consultants for assistance in the areas such as venturing out for new business, solving critical problems, introducing new operating procedures, or acquiring niche skills.
Consultants are subject matter experts who provide business advice or even operate alongside the organizations’ workforce, depending on clients’ requirements.
Moreover, they can work with higher efficiency than the organization’s employees because of the following reasons;
- Possessing more experience
- Unaffected by office politics
- Exposure to industry best practices and innovation
- Advantage of working for multiple clients
- And many more
These qualities make consultants a better choice for organizations but their billable time comes at a huge price tag. The chargeable hours of consultants cost more than that of the employees of that firm. Then why do organizations have to hire consultants despite their expensive billable hours? It is because the organization needs external support to achieve their business objectives, which otherwise isn’t possible with their existing workforce.
This article will help you understand the definition, advantages, and disadvantages of billable hours in consulting. Let’s dive deep:
1. How does consulting billing work?
There are two billing methods in management consultancy, i.e., billable hour method or fixed-rate billing.
In a fixed-rate contract, the client pays the consultant a predetermined price to complete the task within the time constraints.
For the billable hours model, the consultant bills the client on an hourly rate, or the client has to pay for the billable work. Generally, management consultant companies charge their clients at the end of every month or after achieving a particular milestone.
How billable hours work?
While hiring a consultant and signing the contract, both client and the consulting firm agree upon considering what percentage of hours should be billable.
To state a billable hour example, suppose the contract of a ten-hour project states that 80% of total working hours will be considered billable. In this case, the client will pay the consultant for eight hours even if they have spent a total of ten chargeable hours.
Billable hours can be of any percentage value e.g. 80%, 90%, or even 100%. In 100% billable hours, the client pays a consultant for every hour they spend on the project.
What is billable time?
Billable time is an alternate term used to describe billable hours. It specifies the time spent to achieve the desired result.
2. Why is the billable hour model ineffective for the management consulting business?
Consultant management’s hourly rate method isn’t as effective as other professional services companies such as accounting or law firms. It is because of the following reasons:
Lack of performance transparency
There is no reference to measure the performance of consultants. The client can only track the number of consulting hours. However, they cannot measure the value consultant adds to the project. Many times the junior consultant may not have adequate knowledge and will be learning on the job at client’s premises. But the person will be still billed on a specific hourly rate.
Even if junior staff puts in more effort than the experienced hires, it is not measurable. Their pay scale and billable hours in the appraisal period would still be significantly lower than that of more qualified counterparts. With unequal pay and stressful juggle between several projects, work-life balance is challenging to attain in consulting firms leading to a higher attrition rate.
Maximize billable hours at the cost of quality
Consulting firms charge the clients for billable work; hence, the more chargeable hours, the higher the cash flow. Consultants always feel the pressure to maximize billable hours at the cost of quality of work.
The situation gets worse when an untrained consultant forcibly maximizes the billable time, but does not deliver as per client’s expectation. Unfortunately, the clients have no means of measuring performance and have to pay for the consulting hours. Eventually, it adversely affects client relationships.
Limits teamwork and professional development
Since the consulting firms focus on maximizing billable hours and revenue generation, consultants often deviate from the project and their career objectives. They are not given the opportunity to take up projects that can add value to their professional growth and development. Instead they are assigned to the ones which generate additional cash flow.
While filling individual consultant utilization spreadsheets, most consultants thoroughly focus only on their billable work. The consultants ignore and deny the need for teamwork to increase their billable time, which ultimately jeopardizes the consulting firm’s credibility.
3. What are the advantages of billing consulting hours?
This section explains the benefits of billing chargeable hours in the management consulting business.
Improves individual employee productivity
Hourly rates encourage consultants to put in extra hours, especially when the project needs attention. On the other hand, consultants working on fixed rates are not motivated to go the extra mile to achieve perfection. They settle with an average quality of work just sufficient enough to maintain their relationship with the client.
Consultants working on billing hours won’t hesitate to work on a critical project that demands long hours. The consultants strive to achieve the perfection that not only satisfies the clients but also improve their firm’s credibility.
Forecast project resource cost accurately
Management consulting firms can accurately estimate the project resource costs that help their clients to finalize the overall budget. Consulting firms can lay out the hourly charge-out rates and even calculate the internal cost rates to measure consultation revenue. They can keep a track of non-billable consultants and mobilize them to billable or strategic work.
Track the in-demand skills and competencies
The future of a consulting firm rests on the evolving skills and competencies of the consultants. The most convenient way to track the in-demand project skills is to identify high consulting hours rate in accordance with skills capacity.
Consulting organizations can easily narrow down future relevant skills with advancing technology and project techniques. It increases productivity by restructuring consultants based on the in-demand competencies.
Balance the forecasted and actual hourly cost
Billable hours unify planned and actual cost via consultants’ utilization. Comparison between actual and estimated consulting hours allows consultancy firms to set reasonable billable hours for the clients.
Resorting to a robust resource management tool helps them keep a track of enterprise-wide consultants’ utilization, as entered on timesheets and analyze the utilization against planned or forecasted hours. Using this analysis managers improve future forecasting and align it to real numbers.
Assist in important decision making
Many times client organizations engage consulting firms to help them select a specific product or decide on a software solution. Since these require significant investment and are related to strategic direction, they are interested in taking a second opinion on their choices. The consulting organizations are in a better position to help out as they have exposure to similar clients and industries.
Because of the cost difference, the first choice for any organization is always to use its internal workforce over a consulting resource. However, lack of necessary skill set, tight project deadline may force them to look for a consulting option. A consultant also can not get work at a specific client site for a continuous period and gets engaged only when his skills are needed. They need to move around between multiple clients and their job becomes very stressful. As a result, many consulting organizations face a very high attrition rate.
An organization should hire a consultant once they make sure that their internal workforce cannot undertake the project. The reason behind that inability can be anything like tight deadlines, limited skills and experience, organizational politics, limited creativity, etc. Most importantly, the organization should hire consultants they can entrust with task ownership, project completion, and fair billing practices.
Having said that organizations can regularly upskill their workforce to adopt the evolving technologies and stay relevant down the line. In this manner, they can become self-sufficient instead of paying hefty bills for consulting hours.