Professional Services Face Generative AI-Driven Pricing Conundrum
Billable time needs to be approached differently now that AI has reduced workflow times from days to hours
As more and more professional services firms lean on AI-driven tools for more effective use of knowledge workers, we are seeing a cyclical recurrence of the conversation about how professional services firms charge for their services and whether this latest wave of technology will impact traditional pricing models such as the billable hour.
Workflows and deliverables that previously took multiple days and/or professionals to complete can now be tackled in a matter of hours. Does this technology-assisted “leverage” present a pricing conundrum for professional services firms? If so, how can we expect professional services firms’ pricing models to evolve over the next decade and what might that mean for professional services organizations and their clients alike?
Billable Hours Are Not Going Anywhere
Those who think that the advent of AI means the end of the billable hour would do well to reacquaint themselves with the old witticism: “Rumors of my demise have been greatly exaggerated”.
The billable hour is not going to disappear from professional services organizations overnight. It's a very resistant business model and more likely than not, it'll be an option for delivery of work for another decade, alongside other models.
To that point, there will be a greater opening for new fee arrangements – traditionally called alternative fee arrangements, including the concept of value-based pricing such as fixed fee arrangements – for certain types of work.
An Evolutionary Approach
AI can be leveraged for high-volume, repetitive pieces of work. For example, AI should absolutely play a role in reviewing hundreds upon hundreds of contracts during a due diligence exercise at a law firm, as it can perform that task just as effectively as a legal professional and in a fraction of the time. That allows the lawyers to focus on the higher-value analysis of what the data means and advise the client on the correct business choices.
The professional services firms, for their part, should utilize value-based pricing for this type of work. But high-end, high-value, highly strategic pieces of work? Those will likely continue to be billed by the hour or similar arrangements underpinned by time, based on any uncertainty in the work as much as the fact that they represent the knowledge work that AI can’t perform.
What this means for clients is that an evolutionary strategy might be the best way to handle their workloads: Giving certain routine or repetitive pieces of work to firms or teams that utilize AI and can offer an attractive fixed price while reserving more valuable pieces of work for billable hour engagements.
How Does the Sausage Get Made?
If a sausage factory buys a piece of machinery to make the leap from handmade sausages to mass-produced sausages, then the sausage should become cheaper for customers. The company can't just add the cost of the machinery to the price of the sausage.
That is the pricing conundrum that professional services organizations are now facing with generative AI. They’ve bought technology that – in theory – should make their services less expensive. However, clients are not necessarily willing to see a line for "AI usage" that increases the price – unless of course that investment allows the firm to innovate new products, evolve their offerings and improve business as usual.
The bottom line? Some pieces of work might utilize AI and may be well suited for a fixed fee but there is still plenty of more bespoke work to be done, which will likely utilize more traditional pricing models or will rely on human judgment depending on what is being sold.
Ultimately, this is a way for professional services firms to resolve the pricing conundrum and ensure a balanced blend of tradition and innovation around pricing in the years ahead.
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