Billing - by time or by results: risks and rewards

This article about KPMG’s alleged overbilling has been all over the news for the last few days.

However, this blog is not about KPMG. It is about how you bill for services, how you remunerate your team for client work and how you select a provider.

There are two ways that both billing and remuneration can be done – by time or by results. Both have their advantages and disadvantages - their risks and their rewards.

Should you bill by time or by results? When choosing a service provider do you prefer one that bills by time or by results?  Do you even find out how the team members of your provider remunerate their team?  The first reaction to this is likely that it is none of your business.  However, given that the remunueration method affectsd many people's way of working, perhaps it is your business?

Employees may work to either model.  A salary is essentially time-based - an agreed amount (or package) for a month or year of effort.  However, many employees, especially in sales-based organisations work partially or wholly for commission.  This is results based.

Working to time is rarely in the interests of the project

Billing by time – minute, hour, day or otherwise – creates a tension between the client and the supplier because the client wants to keep time (i.e. cost) to a minimum while the supplier wants to consume time which in turn boosts their revenue. Billing by time can encourage people on a project to work slowly and to make mistakes which they subsequently fix. I have witnessed both slow work and huge errors on several projects.  I have also seen little willingness by the creators of these mistakes to remediate at their own cost.

Billing by time can also make it extremely difficult to establish the cost of a specific result.

Billing by results puts the client and the service provider on the same page because both want to achieve the expected results.

Put the Client and the Service Provider on the Same Page

Efficient work is ways of increasing the speed of delivery AND the quality while bringing costs down. It is difficult, but very rewarding

Billing by results encourages team members to think about and develop efficient ways of working and reusable tools. Why would someone who is billing by the hour develop such tools? What would they gain?

Billing by results has its own challenges, the main ones being defining the results, i.e. scoping out the project in a way that makes sense to both the client and the supplier - which in many projects is not easy; and then agreeing when those results have been achieved. It also assumes that the people on the client side provide their input in a timely fashion. Some clients find this challenging to manage.

Last year, I was working on a large Microsoft Dynamics 365 implemention where the client had agreed a fixed price for some very badly and loosely defined results.  The supplier - a Microsoft Partner who wanted to get into Dynamics 365 projects - engaged inexperienced people onto the project.  They did this because the project was over budget and so they selected the cheapest resources - cheap when viewed by their hourly rate!

Billing by time simply requires a reliable way for people working on a project to record the time spent. Some project timekeeping systems do not even require any description of how the time logged as spent was actually spent, i.e. what was delivered during this time.

I vividly remember about fifteen years ago, when we received a bill from my husband's lawyer, which was for about $13,000.  The only text on this multi-page bill was 'email', 'letter', 'phone call' and dates.  Even when we asked we could not get any further detail about the work done!  Our faces were like this image!

If we look at the risks for the client and the supplier for results-based billing and time-based billing, we can see why time-based billing is so popular. With  results-based billing a supplier has the risk of paying a team member for longer than expected in delivering a result, or perhaps even for time spent that did not deliver any result to the client. This can turn a profitable project into a loss-making project, for the supplier. With time-based billing, the client may pay for time that delivered little in the way of results. This can massively reduce the expected return on investment for the client.

When we focus on the rewards of the two approaches, time-based billing is far easier to implement – typically a time-based engagement could start immediately. With time based billing the expected revenue and associated profit is usually easy to estimate - and this may have contributed to the headline problem in the image.

Results based billing requires definition of the results - which may in itself require work to achieve; and a committment from both sides to work towards achieving those results.

Both methods require communication between the sales team, who initially sell the project, the delivery team who deliver the project and the people who manage the billing the project. For some organisations, this can be problematic - this also may be where the issues highlighted in this news article arose.

When you engage #Opsis to help you implement CRM – via our SuccessRM or otherwise – we start with education and scoping. This foundation enables us to proceed with a results-based project, so you know what you will get.  We offer a choice of engagement methods - time and materials (our least preferred), project based and retainer based.