One of the staples of the managed services business model is the focus on monthly recurring revenue. In our latest Global Benchmark Survey, only a handful were using a time-based billing model. But there are a lot of folks who use a more customized pricing model, and that can also include a combination of hours, hardware and a cost-plus approach to those things.
Now, this does leave us with a question – is the billable hours model a thing of the past?
There’s a compelling case that it should be. Here are a few reasons.
Reason #1 – Billing is a Hassle
When you bill for labor, you have to track your labor, match that up with your billing system, and then recover payment from the client. The client gets bills that vary from period to period, which makes it harder to prepare for, and it’s harder for you to manage your expenses, too, not knowing how much you’ll bring in each period. It’s more complex, so it costs more, and stretches your cash conversion cycle. What are the benefits that justify this?
Reason #2 – Inaccurate Billing
Nobody wants inaccurate billing. It drives your clients nuts, and for you it creates the risk that you’ll do work, and just never get paid for it. If your techs are tracking it, you can’t bill it, and you just end up doing work for free. Oh yeah, and did we mention billing errors drive your clients nuts? You can actually churn clients just on billing issues alone.
Reason #3 – Perverse Incentives
In economics, perverse incentives are when people are incentivized to pursue behaviors that they shouldn’t be pursuing. In trying to maximize billable hours, your techs have no meaningful incentive to be more efficient. What’s more, they don’t have an incentive to do anything that isn’t billable, like documentation. No incentive to be efficient AND no incentive to build in good work habits like maintaining great documentation? Now you’re just trying to fail. There shouldn’t be a trade-off between revenue generation and improving your business processes.
Reason #4 – Inefficient Cash Conversion Cycle
The cash conversion cycle with billable hours looks something like this:
Do the work → Figure out billing → Send invoice → Get paid (eventually)
With an MRR-based model it’s
Get paid → do work
When collections occur weeks after the work, you put yourself at increased risk of not getting paid. If someone doesn’t pay up front for their managed services under the MRR-based model, you have options as to how to handle it. You have control over what expenses you’re willing to take on until they pay. Even when you’re getting paid on time, it takes several weeks longer to get the money when you’re doing billing by the hour.
I can’t say for sure that there’s no role for billing by the hour going forward, but it’s definitely a practice that’s falling by the wayside as IT service providers increasingly focus on the managed services business model, billed by seat or by endpoint. If you truly want to do less with more, you need to increase efficiency in everything you do, and that includes cash flow management.
So are billable hours still a thing? Yeah, but there’s a lot of pretty good reasons why they shouldn’t be.
Documentation is a virtuous cycle. Better documentation gives you more time to do other things, including improve your documentation. Start creating this positive feedback loop of efficiency today, by taking a closer look at IT Glue.