The Billable Hour Paradox

PPS

2 hours ago5 min read

Author: John M. Norkus

AI efficiency gains are dismantling the billable hour model that has sustained

professional services for over a century. Could your firm's rising productivity

metrics be signaling the end of your business model?

John Norkus blog — The billable hour's time is running out

This blog is the first in a series of five discussing the challenge for professional

services pricing when disrupted by AI technologies.

Sarah Chen (not her real name) remembers the exact moment she realized her

world was about to change. It was a Tuesday morning in late 2023, and she had

just finished reviewing her team's latest client deliverable -- a complex business

assessment that would typically take her junior staff weeks to complete. This time,

it had taken hours.

"I should have been elated," she told me, sitting in her corner office in one of

Manhattan's gleaming towers. "Instead, a chill ran down my spine. This wasn't the elation I expected; it was a premonition of something unsettling."

Sarah, a senior partner at a large advisory firm, had just witnessed what physicists

call a phase transition -- a moment when everything that seems stable suddenly,

irreversibly changes. Her team had used a new artificial intelligence system to

complete their analysis. The quality was better. The insights were deeper. The

clients would be thrilled. And that was precisely the problem.

To understand why Sarah's experience represents a pivotal moment in business

history -- and why it threatens to upend a trillion-dollar industry -- we need to start

with a story about turkeys.

The Turkey Problem

Nassim Taleb, the mathematician and philosopher, tells a story about a turkey who

gets fed by a farmer every morning. Each day reinforces the turkey's belief in the

fundamental goodness of the world and the reliability of its food supply. This

conviction grows stronger and stronger -- until the day before Thanksgiving, when

everything changes.

The professional services industry is that turkey, and AI is its November.

For over a century, the industry has operated on a deceptively simple premise: time

equals money. This idea can be traced back to 1909, when a Boston lawyer named

Reginald Heber Smith introduced a revolutionary concept: tracking work in sixminute

increments. That simple innovation spread through the professional

services world like wildfire, becoming what Forbes magazine would call, as

recently as 2021, "The Currency of Knowledge Work."

Dr. Robert Cialdini's groundbreaking research in social psychology helps explain

why this system has persisted for so long. His studies revealed that people are

significantly more likely to trust pricing models they understand, even if those

models aren't necessarily in their best interest. The billable hour's endurance, then,

isn't just about tradition -- it's about the psychological comfort of simplicity and

familiarity.

The AI Disruption

But comfort can be dangerous. The Boston Consulting Group recently identified

what they call "the jagged frontier" -- the way AI is eliminating billable hours in

unpredictable bits and pieces across different service lines. This isn't like previous

technological disruptions. When offshoring hit the industry in the 1990s and 2000s,

it simply moved hours to different locations. AI isn't moving hours -- it's

eliminating them entirely.

Here's what makes this moment particularly precarious: Almost 80% of

professional services firms believe their current models and long-term

improvement programs will be sufficient because they've been sufficient to date.

This is what psychologists call status quo bias, and it's particularly potent in

partnership-based organizations where stability is valued over innovation.

The numbers tell a stark story. Firms are proudly announcing 50% efficiency gains

from AI adoption, seemingly oblivious to the fact that they're advertising their own obsolescence. It's reminiscent of what happened to Kodak -- a company that

actually invented the digital camera but was so invested in its film business that it

failed to adapt until it was too late.

The Billable Hour Paradox Page 3

Contact: johnmnorkus@gmail.com

The Efficiency Trap

Michael Rodriguez (not his real name) learned this lesson the hard way. His firm

had just implemented a new AI system for tax compliance work, reducing the time

required for certain tasks by 70%. "We were celebrating our efficiency gains," he

tells me, shaking his head. "Then our clients started asking why our prices hadn't

dropped by 70%. We had no good answer."

This pattern -- what I've come to call the "efficiency trap" -- is playing out across

the professional services industry with the predictability of a Greek tragedy. But

there's something deeper at work here, something that behavioral economists like

Daniel Kahneman would recognize immediately: People are incredibly good at

recognizing patterns but surprisingly bad at recognizing when those patterns have

become obsolete.

The Outliers

Not everyone is caught in this trap. Marcus Reynolds (also not his name),

managing partner at a mid-sized consulting firm in Chicago, saw this coming.

Unlike his peers, Reynolds embraced what he calls "value-based pricing" early on.

His firm now charges based on outcomes rather than hours, using client codeveloped

methods to calculate the actual value delivered.

"Everyone thought we were crazy at first," Reynolds tells me with a slight smile.

"They said clients would never go for it. But here's the thing: clients don't actually

want to buy hours. They never did. They want to buy outcomes."

The Future of Value

The transformation happening in professional services today mirrors what

happened in the software industry during the shift from packaged software to SaaS

(Software as a Service). The winners weren't the companies that simply changed

their pricing model -- they were the ones that revolutionized their entire approach

to creating and delivering value.

This brings us back to Sarah Chen. After her moment of revelation, she did

something unexpected: she started experimenting with new pricing models based on value delivered rather than time spent. "It was terrifying at first," she admits.

"But we realized that if we didn't disrupt ourselves, someone else would do it for

us."

The paradox is this: Success with the billable hour model is breeding its own

demise. Efficiency gains from AI are eroding the very foundation of how

professional services firms price and sell their work.

Consider these facts:

AI and automation are making traditional time-based billing obsolete at an

accelerating rate

Industry consolidation is creating an urgent need for pricing standardization
Current efficiency gains through technology are actually destroying value

under traditional models

The firms that successfully transition could see 2-7% EBITDA improvement

within 12 months

The billable hour's time is running out. The question isn't if your firm will change,

but how. Will you lead the transformation, or be forced to follow?

Disclaimer: The stories and insights shared in this blog are based on my personal experiences and conversations throughout my career. While some content reflects recent events, they are drawn from a broad range of interactions with professionals across professional services, including friends and colleagues from various organizations, and do not specifically refer to or represent any single employer, past or present. Identities have been anonymized, and quotes may be paraphrased or combined for clarity and storytelling purposes. This post is a personal endeavor and does not reflect the views or proprietary information of any employer.