The Death of Billable Hours
“If AI can cut project time in half, why are clients still paying the same fees?” I’ve heard dozens of business leaders ask the same thing, and frankly, it’s a fair question.
AI is rapidly accelerating in the workplace, making fee-for-service (FFS) models increasingly obsolete. It’s not just a problem for your Finance and Operations teams - it requires workforce planning and remuneration strategies that move beyond traditional hours-based structures.
McKinsey has reported that automation and AI are making it increasingly difficult for businesses to justify head-hours based pricing strategies. While businesses gloat about the efficiencies achieved through emerging tech, clients are asking why on earth they would continue to pay the same retainer fees, or accept the same project estimates.
Clients want those savings passed through in contracts, eroding the margins of agencies and consultancies that still rely on head-hour pricing. Those that are adapting are reaping the benefits - Accenture, for instance, has shifted to value-based contracts in its AI consulting practice, where fees are now tied to client outcomes rather than billable hours. Despite these changes, many businesses resist or fear a shift away from FFS and cling tightly to traditional remuneration models.
As a business leader with a decade of experience supporting businesses align their Go-To-Market and People & Culture strategies, I’ve seen firsthand how this shift is playing out. Agencies are squeezed in a race to the bottom, so invest in efficiencies, only for these to be used as grounds to renegotiate retainer fees. In the Advertising industry alone, we’ve seen the consolidation of agencies in the ever-present push for efficiency - most notably the Omnicomm and IPG merger confirmed this week.
Value-based pricing and productisation have emerged as partial solutions, but they’re not enough. The bigger issue? How we engage and remunerate people in this AI-powered era.
People are a business’s largest cost. If we’re going to change how we make money (and we must), we also must examine how we spend it.
The Shift
Automation and AI-driven efficiencies are no longer novelties—they’re now essential. And clients expect these efficiencies to be reflected in contracts. The result? Reduced margins and, ultimately, shrinking workforces.
Australian businesses have been shifting to value-based or outcome-based pricing in response to this for a number of years, yet they still lag behind other western markets. In the U.S., McKinsey has reported that nearly 60% of healthcare reimbursement is now tied to quality or value rather than traditional service hours. If an industry as complex as healthcare can pivot, surely service-based industries like advertising, architecture, and professional services can evolve past outdated models too.
Some forward thinking businesses are embracing innovation - Agencies like Deloitte Digital have begun experimenting with AI-powered creative processes, shifting their pricing from head-hours to performance-based fees.
What businesses have yet to crack is a remuneration and workforce planning strategy that aligns with this new world. The need isn’t purely commercial. Employees are pushing for different ways to engage with employers too.
Employees want new ways to engage
The gig economy, fractional roles, contracting, and fully remote positions are booming. This isn’t just a post-pandemic blip—it’s the future of work. Employees want new ways to engage with work.
Gen Z has surpassed Boomers in the workforce and will make up 30% of it in five years. This generation prefers flexibility—they don't want to be tied to an 8-hour desk job if they can accomplish their tasks in 4 hours. Deloitte's 2024 Gen Z and Millennial Survey underscores this shift, revealing that a strong preference for flexible work is driving greater demand for part-time jobs, job-sharing options, and models such as four-day work weeks for full-time employees.
Flexibility is also a driver of productivity. In 2020, The Economist estimated that distractions in the workplace, including rigid work structures, lead to an annual salary cost of approximately US$34,448 per person in lost productivity, totalling around US$391 billion for U.S. companies alone.
Employee motivators have changed
Top talent wants to be remunerated based on the value they bring, not the hours they clock. Fixed salaries are increasingly being viewed as archaic, and businesses need to be aware of employee perception. Here’s how employee motivators have evolved over the past ten years:
From Leadership to Autonomy: A decade ago, employees valued strong leadership. Now, they prioritise autonomy and the ability to manage their own work.
Increased Emphasis on Purpose: Employees want more than just a paycheck; they want work that aligns with their personal values.
The Evolution of Flexibility: Work-life balance used to mean separating work from personal life. Now, it’s about integrating work into life in a way that suits individual needs.
If businesses continue to use outdated engagement and recognition strategies, they will struggle to attract and retain top talent. Deloitte's research indicates that 94% of employees would stay longer with a company that prioritises their well-being and offers flexible benefits tailored to their lifestyles, revealing that flexibility correlates directly with commitment. Your workforce strategy can be the solution.
How Businesses Can Address The Death of Billable Hours
The FFS model is on life support. Businesses need a workforce and remuneration strategy that aligns with a pricing model not tied to head hours. And people want more flexibility.
Rather than fearing the decline of traditional business models, leaders can claim the opportunity to innovate. Here are some approaches that provide a more flexible cost base while catering to employee motivators:
Project-Based Remuneration: Adopt a project-based pay model, where employees are compensated for the scope and impact of their work, rather than the hours worked. This encourages efficiency and accountability.
Permalance Model: A hybrid between freelance and full-time work, permalance offers freelance workers annualised salary contracts, creating a talent bench that businesses can tap into as needed. This ensures a steady talent pipeline and predictable cost while providing freelancers with stability and benefits.
Profit Sharing: Instead of fixed salaries, businesses can adopt profit-sharing models where employees receive compensation based on the company’s financial performance. This aligns incentives and rewards employees for delivering real value. This is a well tested model in the Private Equity and Start Up sectors that is highly attractive to high-performance talent. Profit sharing can take many forms (from equity options to short-term incentive schemes) and is easily adaptable to all types of businesses.
Unlimited Paid Time Off (PTO): Unlimited PTO allows employees the freedom to manage their own work-life balance. When combined with output-based models, it encourages high performance while giving employees the autonomy to take time off as needed. This model significantly increases the value of a base salary, strengthening employers' position during negotiations. To be effective, it requires a strong performance model where performance is measured against clearly defined expectations.
Forward-thinking organisations are already experimenting with these models. Those that embrace change now will be better positioned to attract top talent, drive innovation, and maintain a competitive edge.
Originally posted on LinkedIn, March 2025
