FTE Rates vs Service Rates


FTE Rates vs Service Rates


The Challenge

When working for clients within an organization I think it's dangerous to bill hours based on individuals directly with a given statement of work. You tend to put yourself in a corner by limiting the availability of team members, lock yourself into a rate for a particular sow, not to mention severely limiting any efficiencies gained.

Availability of team members
Once an FTE is identified on a statement of work, that individual probably shouldn't be showing up on any further SOWs. One individual has a limited number of hours they can actually work per week. Trying to explain how one individual is efficient with his time across multiple contracts and yet the rate stays the same is a conversation best avoided.

Locking yourself into a rate.
Another downside of having an individual tied to an SOW is that person is expected to conduct the work, even if there are less expensive alternatives such as junior team members, or system automation. You also run into a situation where you are expected to, over time, lower your rate; however, the employees continue to expect those yearly merit increases. At some point you may find yourself where the employee is costing more than you are charging the client. Not a good situation.

Exposing Yourself.
Time management and client deliverables can be tricky when you have named resources working for a client instead of a named service. What happens when your employee wants to take a vacation, change roles, or worse, change companies? Because you've tied a single individual to a statement of work, you probably wont have that seamless transition you were hoping for.

The Service Catalog

A common approach to solving these issues is the creation of a Service Catalog. Service Catalogs provide your organization with a clearly defined service, its scope, and rate. Take a look at your company and I'm sure you will find your teams conducting common, repeatable functions. Things like reporting, data integration, data monitoring, account onboarding, etc. Group these functions into Services, give them labels and rates based on a net zero cost. Categorize these services and vuala! You have a Service Catalog. (of course there is a lot involved in the creation but in the end it's totally worth it, literally)

Service Owners and Budgets.
Appoint a Service Owner and empower him with his own budget and define financial goals. Making the Service Owners responsible for their budgets helps them make more informed decisions about spending. Do you really need that expensive SME or will a junior help augment the existing expertise on the team? Or how about that software license you pay for every year and yet.. no one uses the product anymore. Without the Service owner's oversight much of the details gets lost in the weeds of day to day operations.

Service Rates and Growth
Client Service and Accounting teams can easily assemble accurate quotes based on the Service Catalog. If a particular resource is running thin, new business or existing client growth in service consumption will cover the cost because its already built into the service's rate.

Efficiencies gained benefit everyone.
When someone figures out how to make things more streamlined or they've automated a process, the time saved translates into more revenue gained for the company and in turn those individuals should be recognized for their efforts.

A common fear when moving to a Services model is the loss of individuality and creativity. This shouldn't be the case. The Service Manager should be actively engaged with Account Teams to capture new ideas and existing needs. The Service manager then translates those needs into an existing service provided one exists. If something new is being requested, a new Service should be created, costs captured, and a new rate defined.

I've seen both FTE Rate and Service Rate systems implemented and the businesses that operate using the Service model tend to more productive and profitable.

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