We work with several service-oriented clients (architects, graphic designers, advertising agencies, etc.) whose businesses are based on billable hours. It’s a seemingly simple business model–they pay someone X and they bill that person out at X times a multiple (usually 2 – 3 times the billing rate). Cha-ching, right? Unfortunately, as with everything, it’s not that easy. This business model’s success is based on one thing: utilization. Put simply utilization is the percentage of time you can keep employees billable. The higher your utilization rate the more lucrative your business will be. So how do you ensure strong utilization? It requires effective management in many areas, particularly with timesheets and scope creeps.

Timesheets

It can be easier to get teeth from a group of people on a Friday afternoon than a record of what they spent their time doing. But like them or not, timesheets are essential in helping to determine if your team is working effectively. Just because people are talented it doesn’t mean they’re efficient. You can and should generate a utilization report from timesheets that will allow you to examine where employees are spending their time, which will help you to determine many things… Are they spending more time than was allotted for a specific project? Do they have too much downtime giving them the bandwidth to take on other projects? Or are they working overly long hours on many things and is it time to hire more help?

Timesheets are also essential if you haven’t agreed to a finite scope of work and are billing clients as hours are incurred. If you aren’t recording the time being spent you are more likely than not leaving money on the table.

Scope Creep

Scope creep is both a verb and a noun. It can refer to the natural ways that projects have to expand from that which was originally defined. And it can refer to an actual creep, a client who intentionally tries to weasel more out of you than what was agreed and for the same price. Regardless of the type of creep, managing scope is a must in ensuring a profitable business.

Before a project even begins the scope of work should be clearly defined. How many deliverables, how many revisions will be provided before a final deliverable, a timeline in which work will be delivered, a timeline for when the client will provide feedback and final sign off… all of this and as much other relevant detail as possible should be provided along with the associated project fee. The proposal should also specify that work beyond the outlined scope would require additional fees.

More than anything managing scope creep requires a big set of balls. That’s right, I said “balls.” When you have promised your client 3 deliverables and they ask for 4 you need to have the balls to speak up. Many, many times in the desire to please clients, those in client service simply say, “OK.” This will surely please your clients. But if you’re also trying to sustain and grow your business not adjusting the fee associated with a change in scope is not going to do you any favors in the long run. And it’s going to set a precedent with that client that you will do free work.

In summary, to make this type of business model profitable you must track your staff’s time, manage your clients’ demands, and be sure to get paid what you deserve for the work delivered.