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EG64: Hourly billing and Parkinson’s Law

Written by Emanuel Martonca
on August 29, 2022

By now we are all familiar with some version of what is usually referred to as Parkinson’s law: work expands so as to fill the time available for its completion.

Introduced in an 1955 essay in The Economist [link], it was initially meant as a commentary on the inefficiencies of public bureaucracies and their tendency to create meaningless work for themselves just to pass the time.

Unfortunately, we can now have similar conversations about software developers working for private companies.

And the biggest culprit is hourly billing.

Incentives

When the project is billed by the hour, people tend to want more time to complete the tasks.

They will find no reason to be more efficient than expected.

When someone knows their work will be reported in a timesheet to be invoiced by the hour, why would they solve in 1 hour a task for which they are expected to take 3 hours? Even if they knew a faster way to do it, how many people would actually do that? 

And if fatigue, lack of discipline, external interruptions or any of other factors will delay the completion of a specific task, what will most people do? Will they finish it on their own time, taking into account their own inefficiencies? Or will they just report more hours on the timesheet and find some plausible excuse for why the task took longer than anticipated?

Fundamental organizational model

There are many explanations and reasons for this reality.

Consequently, the solution needs to take into account matters related to human psychology, internal processes and procedures, quality of recruitment and selection and so on.

But the fastest change you can make to increase the output quality is to move away from the hourly billing and replace it with a pricing model that also has a measure of value incorporated.

There are many possibilities:

  • sprint-based (weekly or with 2 week-sprints)
  • monthly retainer
  • fixed scope
  • per activity type
  • and many others

Depending on the context, the type of services you are delivering and your business objectives, one of these pricing models might be better for you than the others.

What is important is to incorporate some metric that measures quality and deliverables, not just the time spent.

Alignment of incentives

At first glance, the hourly billing model for software services companies looks like the obvious choice, because employees are paid for their time. It thus seems that there is an alignment between the costs and revenue model, so the risks are minimized for the company owners and managers in charge.

This is only true for the companies at the very bottom of the quality pyramid. When all you care about is to make a quick buck, without any intention to build a long term business, it’s fine to pay employees monthly salaries and sell their time by the hour. The longer a project takes, the better for you, in the short term.

But that is no way to build a long term successful business.

Once you move from selling “cheap” or “cheaper” to selling higher quality services, hourly billing becomes a drag on your business.

WHAT THIS MEANS FOR YOU

Are you using hourly billing? 

Why?

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