How should we think about our time in the service industry?

Posted by Kevin M. Finn on August 10, 2006Comments (3)
Budgets, Business, Thinking

Thanks to Tick, we've recently had the privilege of engaging in a few discussions regarding tracking time as it relates to billing, hourly rates, profitability and such. Most of these conversations have taken place via other blogs or email, so I wanted to bring some of that conversation here for further exploration.

To kick things off I want to explain OUR thinking about how we believe you should look at time in the service industry. The idea is simply that time is inventory. Please note that unless I specify otherwise, when I refer to a budget, I mean a "budget of time" and not money.

Time as inventory

Each day a typical employee has about 8 hours to sell. At the end of the day, any hours not sold immediately expire. It's similar to what a grocery store deals with. If they don't sell the milk by the date on the carton, the milk expires. They lose the investment in the milk and the potential profit from selling it. The same thing happens when a billable resource doesn't bill all their billable hours in a day. You lose the investment you made in that time and the potential profit from selling it. So as impersonal as it sounds, you have to look at an employee’s time just as a grocer looks at milk. Just to be clear...I don't advocate referring to employees as resources or their time as milk. I'm just saying this is how you need to think about time in the service industry, from a business and profitability perspective.

What does our budgets have to do with inventory?

The challenge with budgets is that they are typically set before the project is even started. We put a $price$ on our service based on these estimated durations and then hope (and sometimes pray) that we turn a profit. If we hit our budget, we get to bill for every hour we worked and all our inventory is moved with the profit margin determined by us and not by chance or circumstance. Go over budget? Now your selling your inventory for less than you wanted and possibly even less than it cost you! Ouch.

What if you bill for every actual hour?

Sometimes you get that sweet deal where you get to bill for every actual hour without having to build a budget up front. Yes, I know it isn't common. But even in these cases your client is still going to want some kind of estimate, loose as it may be. If you end up going too far over that estimate they're not going to be happy. Opps - I've done that...

Does the budget really matter as long as we hit the deadline?

If you don’t worry about the hours spent and just focus on deadlines, chances are your going to burn out your teams. I have been guilty this too. What's interesting here is that if you look at your time as inventory, you just created more of it. So let's say you have a few employees who really like to work nights and weekends. What can you do with this extra inventory? Sell it, build a product, update your own materials - but don't give it away.

What's the bottom line?

The challenge is to move the emphasis from billability, hourly rates, project prices, and everything else that distracts from the simple fact that if you just hit your (time) budget you will make money (assuming you charge more than your time costs you of course). It's a bit of a paradigm shift for some I know, but from our experience what matters most is moving the inventory.

The result of this mindset is simplicity. Regardless of how you charge for your inventory, the only thing standing between you and profitability becomes your ability to hit a (time) budget.