WD - Billable Hours
The Billable Hour Myth
Why Managers Fail Their Information Workers
Posted: Dec 18, 2006
Edited: May 9, 2007

Unrelated to where I actually work, the truth is that within small companies, only a certain percentage directly generate profit. In most small businesses, that percentage should be 100%. If each employee generates direct income, then each employee only has to work enough to cover themselves + their portion of the company expenses.

However, as you increase employees (say from 1-2 in a small shop to 10 people in a still small shop), managers do not directly produce income most times. So with, say, 4 techs and 3 support staff, each tech has to generate their pay and share, plus an additional 1/7th share, and 1/4 of the managerial salary. In service oriented companies, this gives rise to the soul-sucking and mythical Billable Hour. This is the break-even point.

Techs, especially geeks, despise the Billable Hour. We are a new generation of employees which greater powers have named "Information Workers." Geeks believe, at our very core, that the value of our work is not measured in the amount of linear time we put in, but instead the results of our labors. That is why many geeks are willing to put in 60+ hours a week, often for the thrill of seeing projects through to fruition. It's the hunt for solutions we value, not the per-minute bill rate or the On-Clock/Off-Clock ratio.

Trench workers, geeks, have two types of problems. Some problems are interesting, and we will spend untold hours working on them. These are problems that have value in the solution; it may be intellectual, something never before tried; it may be spiritual, a gift to the world. Or it may even be purely selfish, a new technique to try for the joy of it. The other type, "uninteresting problems", are the types of things that are rudimentary or broken by design. For instance, fixing roaming profiles problems for a client when roaming profiles are broken by design. Reformatting and reinstalling Windows is rudimentary and should be handled by interns. Consistently, though, it's the uninteresting problems that we get paid for.

Why? Because things that are broken by design are much more likely to break. Over, and over, and over. Interesting problems typically only need solving once, and they are more or less unique. Uninteresting problems are the continual drain on your willingness to work. You wake up in the morning for interesting problems; you fall asleep at night, exhausted, because your day was filled with zero intellectual stimulation. Clearly, this accounts for a significant part of the Tech Turnover, a common trend whereby it is impossible to keep highly skilled people in a job once their skills are matched to the job. Management is typically surprised by this; even with astronomical salaries and a bad economy, Tech Turnover will remain high. To the truly skilled Information Worker making a decent wage already, additional salary plays second fiddle to the promise of more engaging work. This brings us to the Billable Hour Truth Zero: Knowledge workers often value job challenges and learning opportunities over compensation.

And that is why the Billable Hour is so egregious to IW's. Management has taken a very powerful genie, the whole of a worker's education, experience, and life, and trapped it in the most ill-fitting container possible: linear time. This creates a huge schism between management, who needs a clear way to provide income, and the IW, who knows in his heart that linear time is the worst possible way of representing the skills that he possesses.

Eventually this dichotomy shows up on the venerable Timesheet. As the IW becomes increasingly efficient in a job that requires no additional skills, learning, or effort, Billable Hours drop. Mainly, this is due to increased efficiency on the part of the IW. Problems that originally took her three linear hours to solve now take about thirty minutes. In order to provide the same income per IW for the company, the Client:IW ratio must increase in proportion to her efficiency. Now, she's solving more problems per Timesheet period, but the critical thing that matters to her, increasing of skillset, never changes.

Management eventually decides she is slacking off and has a Talk with our disaffected IW. "You need more Billable Hours. You used to have thirty Hours per week, but now you only have seven. We can't keep you on like this."

What management failed to realize is that, in many cases, they were directly charging their clients for the incompetence of their own Information Workers. As the IW reached perfection and her clients were serviced better, it took much less time to do it. The schism widens, and the IW who is still at her first job realizes the First Truth of BIllable Hours: the Company makes more money if their Information Workers are less competent, not more. This is not to say the IWs can be incompetent; they must have a baseline knowledge in order to support the product. But as their knowledge grows from baseline to expert to guru, it takes them less time to solve the same problem. This translates into a much shorter resolution time on problems, and many fewer Hours being billed out per week.

Eventually the schism grows to outright animosity. Management assumes the IW has stopped trying. The IW is overloaded with far too many clients to keep track of because she is a "high performer", yet barely even covers her own salary in linear Billable Hours; stress builds and resumes start getting sent out. Our favorite IW worker takes a new job where she will be able to learn new skills. Perhaps it is a non-Billable job, or a more highly technical support/consulting job. She still cannot reconcile how management decided her entire life could be billed by the hour.

Our favorite management team, on the other hand, now has a conundrum. Their star performer that did three times more clients than anybody else has just left. It was for the better, she was losing the company money. But she had built key personal relationships with her oldest, most valuable clients. And to replace her, they either have to offload parts of the client list to other, not as good techs, or find a new one.

Except that at the price they were paying the former IW, they can't hire somebody with the same skillset. In fact, even at significantly more they probably couldn't; a person with the same skillset would not be interested in the job for the same reasons that the former IW worker left. And so management has to hire a greener IW. The greener IW can't handle the same client load, but he gets almost 35 Billable Hours per week because he is inherited a system that is way over his head. Problems that took the Guru 10 minutes to solve take the Green a few hours. The numbers look great, though! Management is blissfully unaware of the Second Truth of Billable Hours: It will take at least three green employees to replace the Star Information Worker...for the first few months.

And so, neglecting to learn the Second Rule, they are forced to employ two additional, less experienced workers to fill in gaps. Perhaps, if the management team is especially sharp, they will learn the First Rule on this iteration. But most likely their client base will not grow fast enough to fill in the Billable Hour gap when their three new employees hit the Expert level. And this, the Third Rule of Billable Hours:

Green IWs can have outstanding Billable Hour ratios, but "strangely" don't have that many clients. Expert IWs offer a compromise between the number of clients and the Billable Hours. Guru IWs can support vast amounts of clients, but are unlikely to produce significant gains in Billable Hours due to their exceptional skill level.

Assuming the client base grew during the time from the three Greenhorns getting recruited and the first one reaching Guru status, the cycle starts over. If the client base did not grow, it's very likely the company will suffer severe financial backlash when the Guru leaves. This is because most of the employees will spend their time an Expert status. Experts need relatively large amounts of clients to get Billable Hours and thus justify their existence. But the company -must- hire at least 2-3 new employees to take on the workload of a fully utilized Guru; therefore, the client base must expand to give the 2-3 new employees at every iteration enough support requests to draw Billable Hours against.

Once again, the Four Truths, in order of importance to management staff:

Zero: Information Workers are highly skilled and often value increasing their skills and being challenged at work over monetary compensation, assuming their salary baseline is being met. Information Workers who are bored care little about the job and are an extreme flight risk.

One: A company billing by the hour will make more money with one less-competent worker than one highly skilled one, as long as the less-skilled worker is ultimately able to perform the job.

Two: It will take at least two, if not three or more, less-competent workers to shoulder the workload of a Guru who leaves the company. But this is a temporary condition, and will eventually result in workers who are underutilized and, more dangerously to the company, bored at their job.

Three: The natural progression is Greenhorn -> Expert -> Guru. They can be distinguished by their Client versus Billable Hour load. Greenhorns can handle a small number of clients and generate large ratio of Billable Hours to Hours. Experts support a medium number of both, and generate the best income per marketing/acquisition dollar spent. Gurus can handle a huge client load, often 3x more than an Expert, but still turn in an often unprofitable Billable Hour Timesheet. Gurus will be leaving the company shortly, but will need to be replaced as per Truth Two.


Some ways to fix this:



Most Information Workers will perform their jobs in the most efficient way possible; that is part of the Information Worker's Creed.