One of The Most Dangerous Mindsets in Professional Services
One of the most dangerous mindsets in professional services is “to grow revenue, add more people” and it’s been festering for nearly a century.
This is an excerpt from my weekly newsletter where I share my experiences and insights as they pertain to growing businesses.
Plus, I answer subscriber questions to help them grow their businesses.
We’re about 20 people and I see potential to keep growing, but what I feel will happen is my profit will tank (at least early on) then I’ll have many more people on payroll. Just the thought of that gives me anxiety. Is there another way to grow without having to add people in lockstep?
I could take this in several directions, but today I’ll focus on unraveling people from revenue. The lady that asked this question, let’s call her Emma, is billing her people’s time to customers. Most (if not all) of you are as well — it’s been the default revenue scheme for longer than most of us have walked this earth.
Timesheets and the billable hour are single-handedly the worst things to ever happen to this industry. While presenting a simplistic path to incremental revenue, they kick you in any number of unintended ways. But I want to highlight three things, in particular, that are plaguing Emma’s business.
- Income Ceiling — Emma has placed a limit on how much money her business can generate. There are only so many hours in a day and she has a finite number of employees. Unless she has found a way to add more hours to a 24-hour day?
- Experience Tax — Emma will hit a limit on how much she can charge her customers per hour. If she can now accomplish a task in 4 hours that once took her 40, Emma will need to raise her rate 10x just to maintain the same income. But that’s unlikely given most customers would look for cheaper hourly options.
- Incentive Mismatch — Emma needs to maximize billable hours, but her customer wants to minimize them. This is overly simplistic, but let’s hold on to this line of thinking to illustrate my next point. Both parties are focused on the effort, but that has nothing to do with the customer’s true motivation. The result they want to achieve has inadvertently taken a backseat to a misguided tug-of-war.
So, what now?
For this exercise, I’m going to make a big assumption here. Emma has a solid grasp on what the customer wants to achieve. The customer expects an explicit outcome — they haven’t purchased a glorified bucket of hours (more on that later).
What the outcome is, doesn’t matter here (as long as Emma is capable of delivering it), but we do need to acknowledge that it will either help the customer increase revenue or reduce costs. It is valuable to the customer.
With that, Emma has two questions she needs to answer before proceeding:
- What is (truly) necessary to produce the outcome?
- How quickly can a high-quality outcome be produced?
If you noticed, I’m looking to minimize effort. That flies in the face of billable hours. Emma wants to grow her business but doesn’t want to add people in lockstep. This is how you scale — you find ways to accomplish more with less effort.
Nail The Essentials
You need to carve up your delivery process to find the elements that make you the essential choice for customers. The 20% that produces 80% of the value. These are the pieces that make you stand out. Most likely they’re tightly coupled to empathy and opportunity costs. When you get them right, you produce exceptional results.
The essentials require talented humans. While aspects of what makes these elements highly valuable could be automated, you’re not striving for efficiency here. Your goal is to keep these parts “human”. They’re crucial for fostering relationships.
Hint: you’ll probably have to talk to customers to get this one right.
Eliminate Everything Else
Once you’ve distilled the essentials, determine how to ditch or minimize everything else. This is where repetition and abstraction come in. You want to engineer the work out of these tasks. This can look like a process accompanied by training and documentation or it can look like tools (software, hardware, etc.) that produce a consistent result. Or it can be a hybrid of both paths.
The idea here is that you’re investing in IP (intellectual property) that makes your firm more effective and productive than any other. You want to free up your people to focus on the aspects of the outcome that will produce outsized benefits.
Bake In Quality
If you can’t do the first two with any consistency, you can’t guarantee a consistent level of quality. This is where you engineer in guardrails in the form of milestones, check-lists, and in-person discussions. The more consistent you are here, the more consistently you can produce a high-quality outcome for your customers.
What I’m not advocating for here is a process that is so rigorous that you spend more time checking boxes than you do adding real value for your customer. If you’re not careful, this can degrade into an efficiency trap where you focus on completing tasks instead of questioning whether they need to be done in the first place.
Change The Price
Everything up to this point has been about producing value by focusing on quality, consistency, and human interaction. I never mentioned hours or timesheets. That’s because they don’t matter. I don’t care if it takes you 5 hours or 50 to complete an essential task. My focus is on the outcome. I only care about hours when you spend time doing something that provides little to no return.
Pricing must evolve if you want to scale your business. But I’m not going to get super in the weeds on it here. You’ll need to approach pricing differently. Think in terms of the value you provide, not the time you spend. This is harder than hourly billing but will set you up for greater success — and remove the income ceiling.
Analogy: Any easy way to look at this is thinking about your mechanic. Most likely, he doesn’t call out the number of hours he spends. He knows his pricing based on the result you need to achieve. It gets more complex than that, but you get the gist of it.
As a first pass, I’ll give you an easy way to get started. I don’t like this approach — mostly because it leaves money on the table — but it gives you a starting point and an incentive to iterate toward better results.
Start with your original pricing for now. The pricing that leveraged your costs (hours) plus a margin when you used to bill by the hour. This isn’t technically pricing — because the focus is on your costs, not the value to your customer — but it provides a likely path to profitability. Plus, your margin will grow as you automate the tedious, low-value tasks and construct guardrails to preserve high-quality results.
There is more to say here, but I’ll unpack individual areas in future issues. To scale your business, you need to produce more with fewer inputs. That in itself implies you don’t need more people to produce more revenue.
The biggest obstacles to scaling are the investments necessary to eliminate or greatly reduce the effort needed to complete low-value work and evolving beyond billing customers based on the number of hours you spend.
A glorified bucket of hours: When simply selling hours, it’s common to punt on the scope of the project. In return, the customer is less likely to get the result they need because it was never specified at the outset. They suffer and so do you.
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