How Agile Inspires Better Margins

What do effective pricing and agile development have in common? Quite a lot, it seems. Especially in the world of professional services, where most firms are stuck in an industrial age model of adding up their hours (costs) and calling it a price. 

Modern pricing, as practiced by most 21st century businesses, is based on a top-down model that starts with the question “What is the value to the customer?” Professional firms employ a backward bottom-up approach that begins with “What is the cost to the firm?” The cost is measured using hourly rates, making “hours” the inventory of the firm. This is why in professional firms, “utilization” reigns supreme.

Agile points in a different direction

The agile world cares nothing about utilization or "billability." It only cares about accountability. The internal question is “Have you solved the problem in the target timeframe,” not “Have you met your billable time targets?”

Agile doesn’t care about activities and efforts, only work delivered and problems solved. And agile certainly doesn’t equate hours spent with value delivered. It’s possible that a project could be at 110% of estimated hours and only a 10% level of completion. Which measurement really matters?

Agile is focused on actual productivity, not “busyness.” In fact, the agile approach purposefully uses a metric other than hours to scope assignments. Agile teams employ a unit called “story points” or “project points” to estimate the “size” of an assignment. And to ensure that team members steer clear of traditional hours estimation, these points are usually non-sequential (using systems like Fibonacci sequencing: 1, 2, 3, 5, 8, 13, etc.) Another effective scope estimation approach uses t-shirt sizes. Some phases or elements of the project may be identified as small, while others are medium or extra-large. By steering the discussion away from hours, agile teams stay focused on meeting the deadline not logging the time.

To those of us who grew up in the world of “waterfall” (traditional workflow management), the agile philosophy inspires a very different way of thinking and working. (For a much better overview of agile, read Agile Planning and Estimating by Mike Cohn.) And because it’s focused on being effective instead of efficient, agile also provides a powerful mental framework when it comes to pricing professional services. 

“Clients don’t care about the labor pains; they just want to see the baby.” Ron Baker

Clients buy results. They buy solutions to business problems, not the requisite services and activities. They care about the end, not the means. Except that we’ve taught them to care about the means, the activities, and the efforts, because a few decades ago professional service firms decided the best way to capture the value is to track and sell hours. So while what clients buy is results, what professional firms sell is efforts, creating both cognitive and economic dissonance.

Solving the problem vs. spending the time

In the hourly rate system, it's entirely possible for a scope of work to be completed without producing the scope of value. This is because the internal incentives are centered around devoting the time instead of creating the results. Agile teams would never let this happen. One of the key tenets of The Agile Manifesto is “Responding to change rather than following a plan,” meaning solving the problem is more important than following the sequential steps in a scope of work. Time, in the agile world, is a constraint, not a unit of value.

Because agile teams (and agile-inspired organizations) are not paid by the hour, their goal is to get to the solution as quickly as possible. To this end, they develop rough prototypes of their ideas and solutions and expose them to clients as early as possible. This is almost never done in professional firms, where front-line executives are concerned with justifying how much time it took to get to a solution. Consciously or unconsciously, front-line executives would be concerned that a rough prototype would make it look like the problem was too easy to solve. Paula Scher, a partner in the well-regarded design firm Pentagram, tells the story of drawing the new Citi logo on a napkin during a meeting. Fortunately, she wasn't selling her 34 years of expertise by the hour.

Ad agencies, in particular, are notorious for labor-intensive preparation of finished-looking pieces. The "big reveal" in professional services is the antithesis of the "low-fidelity" prototype in the agile world. When the goal is to solve the problem, not spend the time, “low fidelity” ideas can be reviewed and approved before investing time in a finished product.

Ultimately the agile philosophy helps align what matters internally with what matters externally to customers: completed outputs and outcomes, not inputs. By pricing, measuring, and paying attention to the actual work and results created for clients instead of the self-reported amount of effort that appears on timesheets, you can create not only a much more profitable company but a much more accountable culture. 

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Tim Williams leads Ignition Consulting Group, an international consultancy that advises advertising agencies and other professional service firms in the areas of business strategy and pricing practices. Tim is the author of several books, including "Positioning for Professionals: How Professional Knowledge Firms Can Differentiate Their Way to Success."

Twitter: @TimWilliamsICG