Everyone is familiar with time and material billing. We do the work and whatever time it takes; we bill you at the end of the month. It may be fair, and it may be accurate, but it can give clients heartburn when they don’t have insight into their monthly expenses, especially in today’s environment. A new trend we’re seeing in outsourced service businesses, and one we’ve started offering, is fixed fee billing (a set cost for services that does not change based on time spent). Let’s explore how this could benefit your organization.
Benefits to the Customer
For an organization creating a budget and forecasting profitability, the ability for management to plug and play a flat monthly General and Administrative expenses (G&A) line item is extremely attractive. As the oil and gas business has shifted away from the historical wildcatter mentality of boom or bust via exploration, there is a growing desire to tighten up the economic model and deliver returns to investors that meet their investment criteria. Billing on a fixed-fee agreement makes it easier to budget and when you better know your cost, it is easier to determine what is required to succeed.
Another annoyance for management teams is having to explain to investors large variances in month-to-month operational expenses. “Why was G&A up 20% this month?” But with a fixed fee, management can eliminate that question. Once investors get accustomed to seeing monthly G&A at the same level, they tend to not ask questions and instead focus on other expenses that have monthly swings. A level of transparency allows clients to see and understand what they are paying for and when.
Benefits to the Outsource Provider
For the team providing the service, working on a flat fee arrangement also creates benefits. The outsourcer is better able to understand and project work, staff and resources appropriately and minimize overhead to the actual time they need in order to meet client obligations successfully. The outsourcer is fully incentivized towards efficiency.
And secondly, the ability to sustain reliable revenues from customers is highly desirable for managing a business. It is much easier to manage payroll, lease expense, insurance and the other cash requirements of running a business by securing a stable stream of cash.
How Do We Make It Successful?
For a fixed fee outsourcing agreement to be advantageous for both parties, the key ingredient is solid, open communication. The client needs to have a good understanding of their operation and communicate the scope of desired services. The outsourcing agent needs the operational experience to translate the work into a model that both creates an acceptable margin and also delivers the appropriate customer value. As a service provider, clear communication can avoid scope creep and lead to better streamlining services and the ability to identify any needs to expand service lines offerings down the line. Often, the best way to find the right balance is to start on an hourly basis and switch to a fixed fee after several months of processing. An introductory phase allows both sides to refine the balance of the relationship.
Interested in outsourcing your back office? Contact us today.