CWS 3.0: November 6, 2013

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The Dawn of Productivity-Based Billing

By Christopher J. Minnick

The traditional bill-by-the-hour approach to services is a relic of a dying economic age.

Popularized in the 1950s by the American Bar Association when it became concerned that the income of lawyers was falling behind that of doctors and dentists, the idea of charging by units of time — the hour — was meant to replicate the efficiencies of mass-production manufacturing. Instead it incentivizes someone to spend more time than necessary on routine work rather than the more nuanced tasks that require specialized, valuable insight.

And yet the billable hour is still the most commonly used method by companies to buy contingent workforce services. Why? Because the billable hour is easy for people to wrap their head around and measuring productivity is supremely difficult.

At its most basic, worker productivity is simply a measure of how efficiently he or she works. In essence, how much does someone produce for each hour spent on the job? Once easy to calculate for assembly line workers in traditional manufacturing jobs that were once at the core of the economy, it’s much more difficult to calculate productivity for the service jobs and knowledge-based work that dominate today’s economy. In truth, most companies have little idea how to measure the financial value of ideas and the people who come up with them. The amount of time spent on a task or the output produced may have little to do with how productive someone truly is.

The answer lies in creating broader and more nuanced measures of productivity for knowledge workers, especially those with a special expertise, that account for the quality, effectiveness and impact of someone’s work, not just the quantity of the output. Different types of knowledge workers differ in the way in which they transform knowledge into business value. Some carry out routine tasks as individual contributors and others complete complex tasks collaboratively amongst a wider group of workers. The specific contribution of highly skilled, knowledge workers to business value consists in their capability of professional judgment—their ability to apply a comprehensive body of knowledge to individual and rather complex cases.

The following figure is a classification structure for knowledge workers that can be used by companies to assess productivity.

Click image to enlarge.

As companies seek to mature their workforce practices to achieve competitive advantages, taking on “the great management task of this century” is a great place to start. 

Christopher J. Minnick is executive vice president of Brightfield Strategies, which helps Fortune 500 companies with contingent workforce strategy initiatives.

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TAPFIN

Kip 06/11/2013 2:03 pm

Christopher,

While you make and interesting and valid point, the challenges of moving to this pricing approach are significant and will not soon be overcome. Of principle conflict is the inherent framework that has been developed over decades around the "value" of a resource in terms of skills, position, and experience, aligned to a time unit. In other words, an entirely different framework would be needed for organizations to begin to use this approach.

And then there is the measurement. Many a company has tried to develop a productivity measure for their resources. I recall an effort back in the late 90's when an organization I worked for attempted to define and measure productivity in a very narrow slice - programming. The basis behind that was to prove our staff was more productive than others, thus attributing a higher value or premium to their cost. Yet even that proved far more difficult than we thought.

I do believe the industry will begin to shift in this direction. Micro staffing and Crowdsourcing are essentially models that do this from the opposite side - attributing a value to a task and removing time from the equation (or rather, putting the burden of time back on the individual). While it’s not paying for productivity, its paying for production. A slightly different twist.

But even that approach is being met with challenges. It requires the client to define the work in to discrete tasks. And then associate a value to what they are willing to pay. At that level it is difficult to maintain, and thus many companies revert back to a simpler approach – hourly. At some level the suppliers of these services will need to re-define their model to do this work breakdown on behalf of the client. At that point we will see adoption increase.

In other words, I love the concept, but I question how quickly the industry will evolve in this direction. Perhaps just the conversation can stimulate the interest to solve for this model.

Good stuff! Thanks for sharing!


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