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Is the Hourly Model Broken?

I can’t speak for James, but when he and I founded RedMonk six years ago come November (crazy, isn’t it?), I for one did not anticipate what we’ve become today. I didn’t even try, to be honest. My belief was that as most successful ventures will, RedMonk would evolve according to the rules of natural selection; in this case the needs of the market, our customers, and our competition.

Because there was always this: if we didn’t adapt, there was no point in worrying – we wouldn’t suffer that long.

But one thing we were jointly committed to from the first day was a rethinking of the traditional analyst model. We had – and still have, for the most part – significant philosophical differences with the models that preceded our own. The notion of “seats,” for example, was something we viewed as unnecessary friction and a barrier to entry. Obviously we had big problems with commissioned content, but even the way that the rights to publications were sold after the fact – web rights were one fee, print another, and so on – rubbed us the wrong way.

One problem we have yet to solve, however, and I don’t believe this is unique to our industry is the issue of hours. We, like many in our industry, work according to an hourly model. In theory, whenever you’re working with us, we put you on the clock, dock hours from your contract, and if you run out you can simply purchase more.

In practice, however, this model has issues.

  • It doesn’t reflect the way that we work:
    In a few ways. Generally, our client (and even non-client, to some extent) briefings include substantial feedback, reaction, and analysis. And yet we cannot typically “bill” for this value because it has been scheduled as a briefing rather than a consult. So we can either a.) withhold all useful feedback from our nice paying client, saving it for a scheduled follow-up call, or b.) deliver the feedback in the most convenient form possible – the call we’re already on – and trust that the value is understood and will be rewarded.

    Also much of the work that we do for our clients is non-consultative in nature. Whether that’s offline community interactions, event attendance and feedback, product testing and usage, client networking or any of the dozens of other behind the scenes services we perform on behalf of clients, these are not accounted for under an hourly model. Because…

  • It doesn’t handle (well) micro-interactions:
    The hourly model, venerable as it may be, does little to account for interactions like the emailed request for an immediate strategic response to a new threat that we received last Friday. Given that our priority is servicing our customers, we enjoy responding to these types of ad hoc, low friction inquiries. But they are not, typically, accounted for in an hourly model. Leaving us have two real choices: trust that customers perceive and appreciate that benefit (which, often, they do), or move to a legal-style billing-by-the-minute. Which brings us to.
  • It imposes an accounting overhead on both parties:
    One of the banes of my existence, before we brought the inestimable Marcia on board to help, was documenting, tracking and accounting for all of the analyst hours consumed. It’s a tedious, mind-numbing task with little obvious reward. And yet, because it’s the way that most analyst models work, it’s a real necessity. Neither side, in my experience – analyst nor customer – appreciates this chore. But both sides dutifully perform it in the hopes of documenting for accounting purposes, if nothing else, what precisely was done with those hours. And speaking of what was done with the hours…
  • It imposes a barrier to entry for interactions:
    This, frankly, is my biggest issue with the hourly model: it’s a massive barrier to entry. We frequently have employees within end user customers that would like to leverage hours that are available to them per the terms of a RedMonk subscription, but either are intimidated by the prospect of reducing the number of available hours even slightly (the hoarding problem) or uninterested in the occasionally cumbersome process of procuring hours (the process problem). This typically results in one of three outcomes: 1.) the original request is dropped and/or forgotten, 2.) a “briefing” is scheduled in which our “feedback” is heavily and actively solicited, or 3.) a back channel inquiry is made.

These are far from the only problems I have with the analyst hourly model, but the most obvious from my perspective.

Common courtesy would seem to demand that after presenting a list of problems, some ideas regarding potential solutions would also be put forth. But the superior achievable model is non-obvious to me.

Consider the difficulties of a non-hourly model such as a (virtually) unlimited subscription. In removing barriers to entry, it might do so so effectively that clients gorged on hours, unbalancing their consumption and our ability to service them and other clients. Plus, the complete absence of documentation is probably not a great idea.

Answers, then, I don’t have for you. It’s something that we continue to try to evolve and improve internally at RedMonk, but there may be aspects of the model that we are quite unable to resolve. But should any of you – and we have folks from the customer, analsyst, and analyst relations areas in the audience, I’m sure – have opinions or suggestions on how we could address some of the mentioned issues, we’d be all ears.

Categories: RedMonk Miscellaneous.

  • http://www.jeremyross.org Jeremy Ross

    Build briefing time into the deal. It’s valuable and shouldn’t be given away.

    You always have the retainer model (use it or lose it), which I despise as much as hourly.

    Fixed fee engagements put your and your clients’ interests at odds. Your incentive is to get done with least time spent and move on.

    Hourly is a pain, but clients are assured they get what they pay for, which, arguably, is your time. Make re-upping easy, i.e. automatic built into the contract. They’ll just get an invoice when it happens. Kinda like toll tags. Put a provision in the contract that no more than X hours will be consumed in a month without prior approval.

  • http://twitter.com/jonathaneunice Jonathan Eunice

    Completely concur. We face precisely the same problems at Illuminata. However you try to track or account for your contributions, it’s painful.

  • http://www.snellspace.com James Snell

    While I definitely would not presume to have all the answers on this… based on my past experiences with hourly billing, I am a firm believer in flat-rate billing that is independent of the actual number of hours actually spent working with the client. To deal with gorging, every client is assigned a priority class; when new work comes in, clients who pay more per month get a higher priority in the scheduling, quicker responses, etc. Accounting for what work was done during the month is still of critical importance so clients can determine if they’re getting the value they’re paying for. Whether it takes one hours or ten hours to address the issue is irrelevant to the actual billing. It’s one idea anyway :-)

  • http://dberkholz.wordpress.com/ Donnie Berkholz

    Have you considered selling percentages of time instead of hours?

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  • mike

    Have you thought of accounting for the minutes spent per client with some minutes being accounted for as “shared”?

    The idea i am thinking of is that once all of your working minutes are recorded into some system, how you bill them can be a seperate discussion, and you can decide with a client what works best for both parties.
    For example for those clients that want or need the traditional hourly billing model, the data is extracted and presented that way, but for a client that has bought into the “flat-fee model”, they can see when and how you spent time for them (and this allows for things like conference time etc).

    Hope this makes sense.

  • http://www.brightfly.com Brandon Dunlap

    You could adopt a pricing model similar to ours (which is only fair, since we have adopted an open source analysis model similar to RedMonk’s). We charge a fixed fee to solve a problem, then add on a layer of support (silver, gold , platinum, etc.). This means that our consulting time and expertise are value priced to preserve our margins, and offers a tiered approach to letting customers self-prioritize what level of assistance they would like on that solution for a whole year.

    Basically, we sell services as though they are software. License plus maintenance. Where “license” is the solution (marketing plan, speaking engagement, security program management guidance, etc.), and for a year they can have us on tap to answer their questions via phone, e-mail, or even in person.

  • http://chrismahan.blogspot.com/ Chris Mahan

    I look at things this way:

    All money (the whole of all the cash available today worldwide) is the future value of monetizeable labor (ml). This in turn is the product of human effort (he), skills (s), and tools (t). For this nifty equation:

    ml = he (times) s (time) t

    Note that there is no “time” element. It is assumed in the “human effort part”. Also, skill includes knowledge.

    (skill is a multiplier, so unskilled but not impaired: skill = 1)
    (tools is a multiplier, so untooled but not impaired: tools = 1)

    Note that tools include material (such as ore, wheat, flour, paper, whatever) and actual tools (computers, hammers, image-editors, trucks and airplanes, etc)

    Note that skills include physical and mental abilities, as well as knowledge.

    Now, tools are bought my monetized labor, so this creates a recursive equation:

    tools = ml = he (times) s (times) t

    and eventually leads to

    tools = ml = he (times) s

    So ultimately tools can be reduced out of the equation.

    Which means money is human effort multiplied by skill.

    Now, human effort is the activity that performs an output.

    Skill is something that applied to human labor allows the reduction of the amount of time used to complete the activity, and/or increase the quality of the output, or even allow the output to be created.

    For example, someone with poor English composition skills would take a very long time to write a analysis paper on Virtualization in 2008, regardless of the amount of effort expended. Someone with great English composition skills would be produce that output in much less time. Someone with no knowledge of computers, regardless of English composition skills, might never be able to produce the output.

    The hourly model assumes a fixed skill level, and measures output in amount of effort over time.

    This model is flawed for information technology because skill varies widely and a very skilled person could produce with very little effort (time) what an average person might take weeks to do.

    So you need to stop thinking of “hours” worked, but rather of units of output. Since in the information age, you cannot readily standardize on what a unit is (A quip? A paper? A blog comment? A remark in a call? A reference to your company in the WSJ? Attending a conference?) you end up having to lump these things into “What Analysts Do” (conveniently initialized as “WAD”) and applying an arbitrary measure such as hours for billing purposes.

    I say create a new billing term such as Work Unit (WU). In your contract, instead of “number of hours included” put ” number of Analyst Work Units included” and use those up as you go in the month, then summarize:

    Work Units expended from 9/1/2008 to 10/1/2008

    Blogging presence: 400
    Conference Calls : 1600
    Report Preparation: 2800
    Report Delivery: 900
    Direct converstations with Company empplyees: 800
    Twitter: 700
    Facebook: 600
    Friendster: 500
    Digg: 250
    Press Releases: 2500
    etc: 900
    etc: 400
    etc: 40

    Then, you review that with the client. If they want you to do more or less of each type of category, discuss strategy, tactics, and adjust.

    Try to expend all “available work units per month”, or roll them over (to accumulate for big projects). Adjust monthly billing to client to reflect their usage.

    Finally, don’t go crazy on the minute tracking. Ballpark it. The analyst needs to be fair, but who cares if 8 blog comments are worth 320 work units? Are then individual blog comments each worth 40 points? Not really. One might be long and insightful and worth 250, the other 7 might be simple me-toos.

    Makes sense?

  • http://www.mooreds.com/weblog/ Dan Moore

    Tough questions all around. I’d be very interested in what other professions that have been around longer do. For example, what a lawyer does is not very much different than what you do (it’s certainly closer than, say, an auto assembly line worker). How about doctors?

    Those are the two professions that I can think of off the top of my head that
    1. involve esoteric abstract knowledge
    2. have been around for a while

    You’d think that if there was a way to solve the ‘billing problem’ these professions might have found it.

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