How the services industry needs to move past hourly billing
Hourly billing has long been the foundation of professional services in legal, accounting and other arenas. But that foundation has started to crack.
The COVID-19 pandemic has forced companies to rethink how they interact with customers, employees and consultants. “All the processes and needs that were in place at the start of this year need to be questioned now,” said Grant Thornton Principal Business Consultant Chris Smith. “That’s forced both companies and services firms into a quick adaptation phase.”
“All the processes and needs that were in place at the start of this year need to be questioned now.”
As companies adapt, professional services need to adapt too. Firms have traditionally adapted the services or expertise they offer, but there are now three pressure points that require a bigger change.
Understand the three pressure points
The COVID-19 pandemic and other factors have fundamentally changed they way interactions and relationships are going to work for services firms. In particular, firms need to address three points:
1. New needs
“First, you need to figure out what is attractive to customers now, which perhaps wasn’t a few months ago,” Smith said. “This revolves around how they want to be engaged, what services they require and how you need to go about offering those services.”
2. New structure
The growing “gig economy” paired well with the professional services model. “It was all the rage at the start of 2020,” said Grant Thornton Global Business Services Industry Leader Sean Denham. “But now, there’s an argument as to whether professional services firms want to engage a gig economy that doesn’t have the same infrastructure, capability or security entailed. And, do clients still have the demand for sporadic help? With a larger unemployment pool, they have more power to make demands. So, there might not be the same benefit to having a low-cost, short-term skills pool on hand.”
3. New environment
With the shift to remote work environments, professional services firms need to evolve their approach, build relationships and demonstrate value amidst flexible work hours and a lack of face-to-face interaction. “For both clients and service providers, remote working has been a forced change – and it’s perhaps the biggest obstacle to overcome and mitigate so far,” Smith said.
Find the need
The three pressure points require a new approach that reconsiders what’s now a regulation or other necessity for clients, along with what’s strategic.
A simple two-by-two matrix can frame the discussion of timely and strategic needs.
“It has never been more important for professional services firms to re-evaluate the current and future needs of their clients.”
“With every change that a company makes to its ecosystem, there’s a change to how services firms fit into that ecosystem,” Smith said. “Are the services they’ve relied on actually critical? If not, how can you remain relevant and valuable?”
“It has never been more important for professional services firms to re-evaluate the current and future needs of their clients,” Denham said. “I firmly believe that those who use this period as an opportunity to move away from the outdated hourly model will be those who thrive – both now and beyond.”
The annuity model
One new option is the annuity model, where clients have a yearly subscription to services rather than having to manage, track and pay for individual hours. To make this transition, Smith said that professional services firms need to take five steps:
- Understand the client’s new needs in the Strategic priority matrix. Anything long-term and non-strategic is where professional services often come in, as companies realize they don’t need in-house capabilities in those areas.
- Work out the expected outcomes. Once a need is established, it’s essential to know what outcome each service should achieve.
- Establish the frequency of the outcomes. Is this a once-a-week task? Is it a yearly audit? Is it a quarterly tax file?
- Complete the year. If you want to charge a yearly subscription, you need to provide a yearly service; not just a task-based or time-based proposition. This is where the ability to provide ongoing insights, rather than just a siloed job, comes to the fore.
- Determine price and delivery. How will you price and deliver this final, need-based, outcome-driven, continuously relevant service?
The annuity model gives professional services firms a chance to reduce risk amid crises like pandemics, since it guarantees year-round revenue. To use it, though, firms must be able to demonstrate year-round value, even if the client’s initial core requirements are short-term or time-specific. If your client work will not fit that requirement, you still have another option.
The outcome-based model
“Another option we’re seeing, which I’m very excited about, is a model that is geared entirely around outcomes. Success. Achievement,” Smith said.
Rather than paying for the process, companies can pay for the results.
“It makes perfect sense,” Smith continued. “Very few companies are contacting us every few hours to see how the process is coming along, because all they really care about is the final result – and whether we’ve brought value at the end of it all.”
At times like this, the outcome-based model also gives companies more flexibility in their initial investments – and clearer traceability for the return on their investments.
“For instance, a professional services firm could charge less initially, but then write it into the contract that for every successful outcome that derives from the service, they would receive a fee,” Smith explained. “That way, the client knows they’re only paying in alignment with the positive results they’re seeing. It’s also a differentiator among firms that now have to unearth what ‘success’ means.”
Take charge of change
These new models give firms a chance to flex the agility and digital muscle they developed while adapting to the changes from COVID-19. But most importantly, they help services firms connect to success.
Even before the pandemic, many companies were reconsidering what services they needed, how to get them and how they wanted to receive them. Now, every company has been forced to reconsider those factors. That makes it a prime opportunity to adjust business models, while also guiding clients through this difficult period and out the other side.
“Firms can propose better ways to work in the future,” Smith said. Denham added, “In terms of who will thrive at the end of this: it will be those firms that actually add new strings to their bow – the ones that work out how to form new virtual relationships and leverage those relationships through a new model.”
Chief Strategy Officer
Chris Smith is Grant Thornton’s chief strategy officer and a member of the firm’s Senior Leadership Team.
Charlotte, North Carolina
- Technology and telecommunications
- Not-for-profit and higher education
National Audit Growth Leader,
National SPAC Leader, Office Managing Partner, Philadelphia
Sean Denham is the Global Services Industry Leader and Office Managing Partner (OMP) for Grant Thornton’s Philadelphia office.
- Technology and telecommunications
- Transportation, logistics, warehousing and distribution
- Private company audit
- Public company audit