Moving a studio off hourly billing: what broke
By Allan Leone on
Around 38% of agencies have shifted at least one service line off hourly. The advice is right. The difficulty is undersold, and it lands in one specific place that nobody warns you about.
Around 38% of agencies have now moved at least one service line off hourly billing. Having done it, I would say the recommendation is correct and the transition is harder than the people recommending it tend to admit.
What improved immediately
Efficiency stopped being self-defeating. Under hourly, every improvement we found reduced revenue on the same piece of work, which is a strange thing to build a business on. Under outcome pricing, the gain is ours to keep.
The conversation with clients also changed shape. It moved from how many hours this will take to what it is worth having, and the second conversation is better in every respect. Clients engage with it more seriously and it surfaces disagreements about value early rather than at invoice time.
What broke
All of the estimation risk moved onto us, and it concentrated in one place: scope ambiguity.
On hourly, a vague scope is the client's problem. They pay for the exploration as it happens and nobody has to be right up front. On a fixed outcome, a vague scope comes directly out of margin, and you discover the size of the mistake in week five when it is too late to reprice without damaging the relationship.
We lost money on two projects learning this. In both cases the estimate was reasonable for the project we thought we had agreed to.
The fix was not better estimating
We tried that first. More detailed breakdowns, historical averages, padding. The estimates got more confident and roughly as wrong, because the error was never in the arithmetic. It was in not knowing what we were agreeing to.
What worked was making discovery its own paid engagement, small and bounded, whose only deliverable is a written scope both sides sign. Two weeks, fixed fee, and the project proper is quoted afterwards against that document.
It sounds bureaucratic. It is the single change that made the model survivable, because it moves the guessing to the point where being wrong is cheap for everyone.
The thing to keep doing anyway
Keep tracking hours internally even after you stop billing them. It is the only way to know whether an outcome price was right, and without it you are pricing on feel within about six months.
Where to start
- Pick the service line you have delivered most often and price it as an outcome. History gives you the real cost.
- Write a discovery offer before you need it: fixed fee, fixed duration, signed scope as the deliverable.
- Put the change mechanism in the contract. Out-of-scope work gets quoted, never absorbed silently.
- Keep internal time tracking. Review outcome prices against actuals every quarter.
Tags: agency, business, process