The purpose of billable hours has been to quantify a service-based industry and provide an explanation for pricing that can often seem arbitrary to clients. How much does a new website cost? Or creative for a new campaign? “As many hours as it takes us to produce it” has become the standard response.
Unfortunately, this mentality has devalued the agency’s product. By presenting clients with scopes based on billable hours, it commoditizes hours instead of the work and values time spent instead of quality. This has a number of unintended consequences: It creates bad habits within the agency team, as they’re focused on the wrong objectives; it lowers the level of client service, since quality can be sacrificed in favor of staying within the projected hours; and it can add a layer of mistrust, especially in agencies that have a straight hourly billing structure model.
But the biggest challenge to the billable model is that it teaches clients to determine budget and value based on the process and not the final product. As an example, an agency will charge twice as much for a campaign that takes 100 hours to complete and generates $50 million of sales than it will for one that generates $100 million but only takes 50 hours to complete. The process is built to undermine agencies that are more efficient with their time and provide more value. As advertising agencies across the industry are already rethinking the traditional agency model, billable hours needs to be part of that evaluation.
Another reason for mistrust
It’s not a secret that part of disruption to the industry is the loss of trust between agencies and brands. The current billable hour structure is not dissimilar to the commission-based media buying model that has incentivized agencies to advise their clients to make bigger buys, whether it is in their clients’ best interests or not. Selling based on billable hours may encourage an agency to operate below-board. For example, an agency might cease operational work before the end of the month because their allocated hours might be spent, which naturally, contradicts the always-on expectation of the retainer model (though this decision sounds ridiculous, it isn’t a hypothetical). Additionally, if an agency moves slower, they can charge more for their product, which begs the question, “Does it really make sense to penalize an agency that does good work faster?” But that’s exactly what has traditionally happened.
During a time when advertising is embattled by controversies that have marred the industry’s reputation, like the sweeping ad fraud and brand safety issues, the shady practices encouraged by billable hours only upholds this narrative. The “in-house agency” has become more common, with more and more brands bringing in talent and building out their teams in-house, an environment in which billable hours are never even discussed.
Abandoning billable hours as a sales mechanism forces agencies to think more strategically, not tactically. Without billable hours, agencies must make more meaningful business cases to their clients and are unable to hide behind billable hours and vanity metrics that have little to no bearing on a client’s sales or business objectives. This approach is more challenging but better for the long-term health of agencies.
Billable hours do have a role—internally
That’s not to say that billable hours should disappear entirely. The practice is useful for managing internal resources, both account- and agency-wide, and helps monitor productivity and identify any service gaps. It also protects against over-servicing accounts, which can lead to a client roster imbalance. Finally, it provides leadership with an overview of resources that can be effectively and realistically applied to new business.
Billable hours are an effective internal tool but can have a harmful effect on an agency’s client-facing practices and also create an atmosphere that fosters bad behavior. Agencies should stop using billable hours as a way to measure account service and focus instead on the metrics that matter when attempting to show and measure value: those that satisfy a client’s business objectives.