Virtual Consulting: Value Pricing Replacing Billable Hours
Working as a virtual consultant for the past few years, I am very happy that this model is starting to take off. Talking to other consultants & business partners, I came across this article by Herbert Goertz, SAP Consulting Exchange
Thanks largely to the recession, many professional services firms have been forced to abandon billable hours as a business model. Witness Monday’s Wall Street Journal article, ““Billable Hour” Under Attack.” Although the article happens to be about law firms, the issues raised apply just as much to technology consulting.
Billable hours often reward inefficiency — whether for legal work or SAP consulting. The longer it takes you to do something, the more money you make. Hire a lot of low-rate billers, keep them 100% billable, and you’ll make a lot of money. Take away the billable hour and what’s left is value pricing. Both clients and consultants can focus on what’s really important: the value of what is produced, not how long it took to produce it.
One of the effects of value pricing may be to accelerate the trend toward crowd sourcing sites like cumulusIQ. While the actual pricing mechanics may vary, the key to all these sites is a fixed price for a successful outcome. The client may offer a prize based on the amount it is willing to pay. The site itself may set the price based on a menu of solution categories. Or consultants can bid based on the amount of money they will accept.
The benefits to the client are obvious — the price is certain and the pool of available talent is theoretically infinite.
But there are also advantages for the consultant. Great consultants are not penalized for being either too fast or too brilliant. If it takes them 10 minutes in the shower to solve a hard problem, so what? They can go on to the next hard problem and maybe solve that one in 10 minutes too. And if they really are that good, word will spread and the consultant will not be dependent on a single employer (or recruiter) feeding them projects. If the pool of consultants is very large, so too is the pool of potential clients.
I can’t honestly say whether this trend will happen in the legal profession, but it’s looking more and more certain that it will happen in ours.
Dirk Leifer had a follow up question and answer:
What Would a Virtual Consulting Team Look Like?
Herbert’s blog discussed how both clients and consultants benefit from virtual engagements using online marketplaces where buyer and seller come together on a fixed price. That’s fine for individual consultants, but most projects involve teams. Does the model still work for teams? Teams involve several issues that individuals working alone do not. For example: Who would bring the consultants together to form a team? How would tasks be allocated among members? Who would take overall responsibility for the final deliverable?
In many ways, team-based virtual consulting would look a lot like today’s offshore delivery model. Offshore eliminates most face-to-face interaction between contributors and customers. Team-based virtual consulting would eliminate most face-to-face interaction between contributors as well. Another difference: offshore providers charge clients for overhead (utilities, etc.) that virtual teams don’t incur.
The technology needed to do virtual consulting is fairly straightforward: voicemail, wikis, screen sharing, email and so on. The challenge will be on the management side. Here’s my answer:
Virtual consulting management hubs will emerge that will organize teams from deep “benches” of talent willing and prequalified to work virtually. These teams will respond to projects that clients put out for bid — much like an individual might respond today to a posting placed on cumulusIQ or InnoCentive. The project will be value based rather than hours based. That allows teams to leverage virtual consulting’s inherently superior scalability. Teams can right-size resources dynamically to optimize cost-performance over a workforce theoretically scalable to any size. Managers won’t have to constantly be looking over consultants’ shoulders to see if they’re busy. And clients no longer need to care about how many man-hours a particular task required, as long as deadlines are meet.
The key to all this will be the team leader. It’s one thing to say that things like day-to-day management, client satisfaction, quality control and meeting deadlines will all be handled “in the cloud.” It’s another thing to believe it, given the puffy nature of clouds. The team leader must be someone that everyone (clients and consultants) knows is solid. At the end of the day, this is the person who will be held accountable to bring the project “home” safely. He or she must therefore have a proven track record of setting up and running project teams — indeed setting up entire consulting practices — in remote locales. Even if a person is highly skilled and very experienced — those qualities alone are insufficient. He or she must be a known quantity.
When all a client wants is for someone to answer a question, the credibility (or even the identity) of the source is not critical. If the answer works we’ll pay you, whoever you are. In a team context, however, the leader’s credibility is everything. I can’t wait six months to find out you failed when my only recourse is to withhold payment. In virtual consulting, trust — rather than technology — will be the differentiating factor.
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Before the end of next decade, all services will eventually be based on value pricing and fixed bid. This will work to advantage in increased productivity and cost benefits overall…