The Billable Hour Trap

Source: VeraSage Institute

The following includes excerpts, reproduced with permission, from a blog entry by Ed Kless.

I would like to update the idea of comparative advantage as originally put forward by economist David Ricardo, but updated for the knowledge worker, especially the small firm.

Adam Able is the owner/operator of a small IT consulting firm. Adam has been working in his industry for over 20 years and has a wealth of knowledge and domain expertise with the products with which he works. Adam can slam out a new customized report in an average of two hours. He can also do an average migration of data in one hour.

Igor Egit is relatively new to his profession. On average it takes him three hours to deliver a new custom report, 50 percent more than Adam, and it takes him four hours to develop a workable data migration, 400 percent longer than Adam.

If each does one report and one migration the total is 10 hours and the yield is two reports and two migrations. Comparative advantage says that while Adam is better at both, and could theoretically do it himself in six hours, he is better off specializing in migrations and allowing Igor to do the reports, even though this runs counter to the idea of efficiency. The yield is still two reports and two migrations, but each received an hour of additional discretionary time.

The trap is set, however, if we introduce the idea of a billable time rate to this example. Since it is unlikely that Adam's rate would be three times that of Igor's, Adam's customers will either a) insist that they pay a reduced rate for Igor, or worse, b) insist that Adam himself do the work.
Adam, in the name of good service, will acquiesce to the customer. Likely, Igor will be out of a job; and Adam will miss more Little League games.

For the complete entry, read “A Post On, Egads, Effort.”

From VeraSage Institute, October 3, 2012, http://www.verasage.com/index.php/community.