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KP Unpacked
Join serial entrepreneur KP Reddy for conversations and discussions around innovation, technology trends, and AI for startup founders, innovation catalysts & investors focused on the built environment (and beyond!)
KP Unpacked
Breaking the Hourly Mold
In this episode of KP Unpacked, tune in as Jeff and KP explore:
- Why many architecture, engineering, and construction (AEC) firms remain stuck in hourly billing
- The hidden costs of commodity-based pricing and how it penalizes efficiency
- How real value is created by the outcomes you deliver, not the hours you spend
- The mindset shift needed to de-commoditize your services
- Insights into new business models—from value-based pricing to equity partnerships
They also share some lighthearted moments about moving from city to city and planning an upcoming Mastermind event in Phoenix on February 25th, where industry leaders, innovators, and tech founders will gather for a one-day deep dive into AEC disruption and innovation.
Interested in joining the conversation in Phoenix?
Visit https://kpreddy.co/events to learn more or apply to attend. If you’re looking at a foot of snow outside your window, a warm day in Arizona might be just the ticket!
Ready to level up your strategy and solve shared challenges with industry leaders? Join us for a one-day Mastermind meetup on February 25th in Phoenix, arizona. These quarterly meetups are your chance to collaborate with top minds from AEC and tech industries and explore innovation strategies that can transform your business. Experience firsthand what our Mastermind program is all about connecting with peers, tackling shared challenges and gaining insights you can't get anywhere else. Each meetup is hosted in a new city, bringing fresh perspectives and unmatched networking opportunities. Don't miss out. Visit kpreadyco slash events to learn more and secure your limited spot at a Mastermind meetup. Today you are listening to KP Unpacked with KP Ready a weekly dose of insights for innovators and startups from the built environment and beyond. Want more discussions like this? Join KP's exclusive online community, the Catalyst Network, to learn more. Visit kpreadyco slash Catalyst Network. To learn more, visit kpreadyco slash.
Speaker 2:Catalyst Network. All right, welcome back to KP Unpacked. This is my opportunity to sit down with KP Ready and say hey, what were you thinking when you posted that on LinkedIn? My name is Jeff Eccles, I'm a senior advisor at KP Ready Company and, as always, I am joined by our CEO and founder, and also the founder of Shadow Ventures, kp Ready, hi, kp.
Speaker 3:Hey, jeff. Now the irony is I spent all weekend working in my self-storage facility packing and unpacking.
Speaker 2:Well, I don't want to lift any boxes, so let's stick with the unpacking side of that. That sounds like a really great way to start off your new year.
Speaker 3:Well, you know, I was moving from Atlanta to Asheville, and then I move all my stuff from Asheville back to Atlanta in a storage facility, correct, and then now we're moving to California. So you know, there you go.
Speaker 2:There you go and you posted about on LinkedIn. It's not what we're going to discuss today, but you posted on LinkedIn about the climate disasters in Asheville and currently in California. It seems like those there. Is it a coincidence that you're going to those places?
Speaker 3:That joke's already been told about a hundred times in the last week.
Speaker 2:I'm sure it has.
Speaker 3:It's like my friends are all like tell me where you're moving next and I'll go ahead and short all the real estate in that market. Yeah.
Speaker 2:Yeah, well, I'm sure the governors of those States have some questions as well. Yeah.
Speaker 3:Pay for me to stay in Atlanta.
Speaker 2:Exactly, exactly.
Speaker 2:Well, let's, let's, let's pick a different LinkedIn post to unpack, as, as I say in the introduction, all the time it's. You know, this is my opportunity to ask you you know I say it tongue in cheek, of course what were you thinking? But but to ask you what the inspiration for the post is. So I'm going to start off by reading this post, and as we're, as we're discussing this, you posted about a week ago as someone's listening to this in some time shifted manner, who knows, but the post goes like this Prospect, we would like to hire your firm to help our engineering firm get out of the billing for hours business and into more of a value-add business. Me meaning KP, me great. I'll have my team put a proposal together.
Speaker 2:Prospect, we reviewed your proposal. We're comfortable with your experience and your track record and your methodology. The fee is in our budget, but we don't understand the pricing. Can you provide an hourly rate and number of hours for the engagement? Now, my background is architecture. I've been in that world a long time. I've consulted in that world a long time and I've consulted with a lot of people, a lot of firm leaders, about value based pricing, different methodologies. Because I hate you know you use this hashtag no more billable hours, hours. I hate the trading hours for dollars model. It's not sustainable. I don't believe it's not scalable, I don't believe so. When you posted this, I actually laughed out loud. Right, this, this is so true. But you know, as you were, as you were thinking this, as you were typing this, getting ready to post it on LinkedIn, obviously there was something that led to this post. So what was it? What was?
Speaker 3:it that had happened.
Speaker 2:What were you thinking?
Speaker 3:It was this conversation, right, Like it's like I had to point out the irony of it all yeah, Right, and of course I shared the LinkedIn post with them Is that you're hiring me to get away from billing time me to get away from billing time and you're confused about how I do business, which is not about billing time, and like it's just like so ironic, right, and I think it's a little bit of you know a little bit of. You are what you eat. They're so used to selling that way and providing that way.
Speaker 2:Yeah, they don't know how to buy. It's a professional services model, right.
Speaker 3:They don't know how to buy differently, right? Yet what they were asking to buy is helping them get out of this, right? So I think it would be even more ironic if I did give them a rate sheet and hours. Like I'm going to bill you by the hour to teach you how to not bill by the hour. It's like that's weird, like you haven't figured it out for yourself and you're going to come in here and tell us what to do.
Speaker 2:Yeah, and there'll be some serious questions from our team about that. What are you doing there? What's going on there? Yeah, you know in in my experience and we're we're about the same age. I'm a little bit older than you are, but you know so we've both been around the AEC industry for a bit and you know there's a person who will go nameless that I've had this debate with over and over and over for several years now.
Speaker 2:You know it's a friendly debate at this point, but I tell them all the time it's like you've got to get out of this hourly billing, not even the cycle, but the business model and the reason that they won't. You know I'm I'm picking on on one firm in particular, but it's, it's they're, they're not unique, right? The reason that they want, won't do it is one because they I don't believe they actually understand their true value proposition. Right, you know they. They attach their value proposition to the deliverables and the number of hours it takes to get to those deliverables, not not unlike an attorney or you know others in professional services. But I also think it's driven by fear, right, you know, well, you, you know you should change from this to the other. Yeah, but there's so many variables, we don't know what kind of changes the clients are going to make and you know what's going to come up and all of these things. And you know it's easy for me to push back and say, well, yeah, but your agreements cover that right. You're using AIA contract documents and it's already covered in the contract documents. But my suspicion is my knowledge is that when you're looking at this and thinking about this and talking about this and helping an engineering firm get over this hump, you're actually looking deeper into the business model than just the surface level.
Speaker 1:Yeah.
Speaker 2:You know you, you need to quit. You need to quit that trade. There's something else there, so what is it? What is it that you are trying to get them to implement when you're working with them?
Speaker 3:Yeah, so I think I think you're right. Right, the the introspection is oh, my customer treats me like a commodity. We bill by the hour.
Speaker 2:Exactly, and that's the complaint.
Speaker 3:Guess why? Because you're a commodity.
Speaker 1:And you're acting like one.
Speaker 3:You're acting like one. I mean, I had another post where I mean it's similar, like parallel. But this idea like returned office, you know, if you return to the office and you show up every day and you walk by your boss's office and say hey, good morning boss, and at the end of the day you say goodbye, boss, you've done your job. Right, you came to the office, you gave them your time, you're probably not that light, you're probably will be fine. Right, you probably have a job. If you're purely remote, it's all about results. There is no softening of oh, I showed up to the office, it's not my fault, there wasn't any work for me to do. Right, it's all results based. And and I think that's where, like a lot of this stuff, where people are getting fired now by using those mouse activity apps, you know, to make themselves look like they were online the whole time, what they miss is that's not how that works, right, if you show up to the office, I was in my office, I came to work, I put in my time, I went home. If you're going to be fully remote, it's all about results. It's 100% about results, and I think a lot of firms that build by the hour. They are a commodity because the product that they're selling or the service they're selling is a commodity and the unit of that commodity is number, is hours. A rate notes, hourly rate times. Number of hours equals what you charge me, and a lot of the work which I know you've done as well has been trying to remap what the offering is, where the value is and where it's not. But for me, everybody's asking this question and in many ways the answer is in front of them, like hey, you're a commodity, that's why clients pull by the hour. Answers in front of them like oh, you're a commodity, that's why clients pull by the hour. By the way, if you're not that productive or you don't produce results for those 10 hours, guess what? You still get to bill it. The client's not saying hey, you billed me 10 hours. Tell me what you did in those 10 hours and I want to make sure you gave me the most value. Yeah, right, um, it's funny enough. I um this project. I'm working on that.
Speaker 3:I put on pause back in October and I got a bill from my lawyer that was helping me on it for 0.9 hours and my response to them was this is fraud. I haven't been working with you guys. I haven't been doing anything. Why did you send me an invoice and I'm sure it's some junior person that had been working on the project that forgot to put in a time sheet, or you know, or it's fraud, you know, or just made a mistake, right.
Speaker 3:But now what? Now? Me being me, what the hell are you doing for 0.9 hours on this project that I put on pause back in October? And now I'm going to dig in. And now I'm going to dig into the old invoice. So now what you've done is it's blood in the water for a guy like me. Right, like 0.9,? Like what's this about? What were they doing exactly? You know, what did they produce for 0.9 hours? And now I'm going to go pull the old invoice and go line by line. I didn't want to talk to those people. Like, what the hell did you do for three hours? Yeah, right, but that doesn't happen often, because most people are not crazy like me that they would go do that. A lot of times the client just says, oh, it took what it took, it took the number of hours.
Speaker 2:It took the number of hours? Yeah, it doesn't. But, to your point, it opens the door Right when I'm, when I'm working with people on on decommoditization, right, anytime you, you open that door for them to walk through. They may, right, and you should expect that they might, and I, I think and be interesting to get your take on this. But I think there are a couple of things. Number one we're billing hourly right.
Speaker 2:So we're billing as a commodity right. When we're able to quantify those units and basically, on one hand, say that our value proposition is the number of hours that we spend on that, that's problematic, that is commoditization, right, you're being commoditized. That is commoditization right, you're being commoditized. The other thing is, if, if you're, if you're billing in that way, if your agreement is set up in that way, then you're being penalized for getting better at what you do or using better tools. So if, if I can get this job done faster, 10 hours faster this time than I did last time, I lose.
Speaker 3:Yeah, you know what, jeff? I think here's what we're going to do at the, at the next mastermind in Phoenix, when we're together. Yeah, I'm going to hire three different masseuse, one that's inexpensive, middle of the road and very expensive, and I'm not going to tell you. It'll be like a blind examination of a massage.
Speaker 2:You might want to run this by legal, by the way, just just saying the business expense wellness.
Speaker 3:Okay, and then then.
Speaker 2:I'll reveal. Possibly go wrong.
Speaker 3:I'll make you rate them, right, I'll make you rate them all and then at the end of it I'll tell you how much they were and then you can tell me like, man, that was worth it. Like that $200 30-minute massage was worth it compared to the $50 massage, right, yeah, and that's an hourly rate business right, but there's lots of variability and quality and capability. Same thing with haircuts. I go to these, my wife makes me go to these fancy hair places where it's it's not the same price for a haircut.
Speaker 2:It depends on which hair artisan.
Speaker 3:I pick Interesting Right, and one of them is 85. And the other one's 25. And when I asked the question, I'm like because my wife wants me to do 85. And I'm like what's wrong with the 25? And they say things like well, he'll give you a solid haircut. And I'm like what does that mean? Like what?
Speaker 1:does that mean? Like what does that?
Speaker 3:mean right, like sure he'll, he'll use scissors and not make me bleed, like I mean. What does that mean? Right? And so you start to see these variations, right, and I think a lot of times you know the question is and back to our world, right, if you're a staff architect, say, $75 an hour billable, or you're a principal architect, $250 an hour, what's the difference? Does that mean that the $250 an hour architect is faster, more productive than the 75 hour, I would argue? Probably less productive.
Speaker 2:Definitely less productive if we're talking about deliverables.
Speaker 3:So then why am I paying more if it's about productivity?
Speaker 2:Exactly? And I think, no, it's not. And I think one of the fundamental problems too that we've had for generations now in the AEC world professional, you know, across professional services world is, you know, again, my background's architecture. So if I take the architect's point of view, many times the architects are thinking, okay, I'm designing this thing, it's a pizza shop, or it's a museum, or it's a cold storage facility, or it's a data center or whatever it is, and they think about, or they think that the value that they're creating is the design of that thing, which is absolutely incorrect. The value that they're creating is what that thing allows their client to do, what that thing allows their client to create or experience.
Speaker 2:Or you know there's other variables in there as well, right, budget and time. And you know things that are in the performer, et cetera, but operating expenses and whatnot. You know things that are in the performer, etc. But operating expenses and whatnot. But but I think we've, we have, for I'm going to argue for 100 years um, that we've placed the value proposition in the wrong spot, and then gone even further down that road with this hourly building go. Okay, well, it's, it's the number of hours that I spend on this and it's this thing that I design, and both of those are wrong. Yeah, and it's all.
Speaker 3:It all collapses into this black hole of commoditization yeah, and we I get in this debate a lot um, you know, clearly we're. We're a niche, we're a boutique advisory firm, which is just code for saying small and expensive. So I get a lot of people wanting to negotiate fees with me and I'm like look, I'll work for no fee, I'll just take 10% of your company.
Speaker 2:How's that go?
Speaker 3:It's like, well, I mean what? And I'm like I'll risk everything. Your company might be worth zero, or I'll make it on the upside, or I'll take 20%. We'll build a new product together. I'll take 20% of the revenue from now on forever. And so then they look at that and they're like, well, no, how about we just do a project right? And, by the way, I've done all those types of arrangements right Back with startups. I've taken equity to do work. But you have to really, you know really kind of be aligned on what you're trying to do. And I think a lot of times with these firms, when they ask me to help out, they're really looking for coaching. They don't want me to come in and do it.
Speaker 3:They don't want me to come in and do it. They don't want me to come in and spend time with them and create a playbook and train them on the playbook and they really want to do it themselves. They're not looking to kind of outsource that part. I think it's just they don't know what to do to build that next product or build that next service because, honestly, they've never done it before. Nobody practicing architecture invented the practice of architecture. Those people are dead. They are. But the point of that post was kind of the irony and a little bit.
Speaker 3:You don't even know how to buy a service differently than how you sell your service yeah and maybe that's the starting point and I think someone posted in the comments which I think we're gonna start having people that post in the comments on the pod right, so you're not always talking to me about it. So you had an interesting idea but someone put you know, kind of posted a comment like well, it looks like you already created value just by giving them the proposal. Like that was the training, like you've already trained them. Here's the first, the first chapter of the first phase of the engagement is like you understanding my proposal, Right, Something like that. So I thought that was pretty funny.
Speaker 2:Yeah, you did get a comment that said crazy, they shouldn't pay you unless you produce a result, and then you should share in the gain. I'm sure that's how your proposal was structured and I actually I mean, this came from a management consultant, right?
Speaker 2:So they have most of the time management consultants have a little bit different mindset about proposals and value creation et cetera, than an engineering firm does. So it you know it comes from a little bit different perspective, but I think that's also pretty interesting because you know, coming from the management consultant, are they offering to work for free?
Speaker 3:No, no, no. Their value prop is we have talent that you can't afford to keep on full time.
Speaker 2:You don't have the methodology and process for you to do it yourself, and uh, so we're gonna do it for you and we're gonna charge you a million dollars a month to do it right, right, but you know, back to your point about the you know this is that hourly billing, trading hours for dollars concept is so ingrained in the profession, in in the industry, that, um, one, you know, this is the way we've always done it sort of thing, certainly, but, um, but it is, it is showing up in not understanding how to buy, which I think you would probably point to and say this is, this is part of the disruption that's coming, or you know a signal in the disruption that's coming.
Speaker 3:Yeah, and you know I I kick around lots of. You know I have the benefit of having lots of a great network Right, and so I'm always kicking around different business model ideas and I met this company years ago and they were a legal financing company.
Speaker 2:I was like what Like?
Speaker 3:you know, when someone gets a settlement they're like no, no, no, we back law firms. And I didn't realize this. I just always assumed that law firms they had the hourly rate side of the house and then they had the contingency, like the litigation, like if we win this lawsuit we get 20%, 30% side of the house, and I just always assumed that the hourly rate people kind of paid the bills for this contingent group. It turns out there's financing companies for this. So what you do is you say, hey, we got this new client. They think they have this great big lawsuit against this pharmaceutical company.
Speaker 3:It's going to take us $10 million of hours to do the work in 10 years or whatever, and they get it financed, they get it financed. And so I found that really interesting, because that is architecture advisory client of ours. It's an architect Tell me like I would be a partner in the development of every client I had if I could Meaning if I could afford to front the payroll and everything else until I got paid, until I'm just making it up a shopping center, right.
Speaker 3:We're going to develop a shopping center, I'm going to not charge fees. I'll be a partner in the deal, which means I'll also play out of scope, right, I'll go to all the meetings, I'll have a voice in how we spend our money. Like I'll be a partner in the deal, right. But you know, it takes 12 months to design and build it and then it's got to get leased up. So maybe I recoup my money and then we're going to flip it to a private equity group or whatever. It's a 24-month cycle, right, I can keep my payroll up for 24 months, so to speak. And so you know, their point was like, that's why we do billable work, so we can fund and and.
Speaker 3:So I was talking to some friends and I'm like, maybe we should do that. Maybe that's a business model for designers to say, look, you should work as an equity partner in the deal, I will finance your team to deliver and I'll take a slice of the equity and I'll take an interest rate and all those things, right. But, um, but that gets interesting, right? Like, be a developed, be a part owner in everything that you do that builds, that builds balance sheet, that builds value, that that aligns the interests too. Yeah, yeah, are you designing it? Because you're trying to interests too, yeah, yeah, are you designing it because you're trying to win an award?
Speaker 3:are you designing because you want to get at least out?
Speaker 2:yeah that. So I'm once again this semester. I'm a thesis advisor and usually when a student comes to me or gets pointed to me to be a thesis advisor, it's because they're working on a project where they they're they're exploring the concept of architect as developer, and so it's this exact scenario. And you know what? What has always amazed me is that there are plenty of people around, and also some some capital people that I know, that say, oh, no, architects should not be developers. Yeah, okay, there's, there's some, there's some decent stereotypical reasons behind that at times, but at the same time, there are examples out there of you know there's. There's one in particular that has, uh, kind of coined the the term architect as developer. That's self-financing something like 190, some million dollar project, right, and it's been years, right, they've been, they've been self-financing. They started small and built up. You know that kind of thing it's been. They've been at it for maybe 30 years at this point, but they're self-financing $197 million project. There's a tremendous upside to this.
Speaker 3:Yeah, so my dad was chief engineer for John Portman and John Portman started off doing architectural work and then he got into the development business and all of his business became the development business Right and he did very well at it. He did very well, almost went bankrupt a couple times, but that's just part of the game.
Speaker 2:Yeah, it's part of the game, right, it is. Yeah, so you know, bringing it all back around, right? You posted this on linkedin and it was this interesting conversation between you and a advisory engagement client or prospect, I guess. So I'll just I'll recap it here really quickly. You said the prospect says we'd like to hire your firm to help our engineering firm get out of the billing for hours business and into more of a value add business. Great goal to have. You said great, we'll have our team put together a proposal and the prospect gets the proposal. And they said hey, we reviewed it, we're comfortable with the experience, the track record, the methodology and the fee that's inside our budget, but we don't understand the pricing. Can you provide an hourly rate and the number of hours for the engagement? And another comment was you know on this post was send them back the definition of irony. You know that's, that's part of it, Right?
Speaker 3:I will tell you, sometimes I write these posts and I laugh at myself, but the comments are really what gets me Right. Some of the comments are just so good.
Speaker 2:Yeah, the comments are still where it's at, I think, across all the platforms. But, yeah, I mean very good points here, I think, right, it's ingrained in the industry, so much so that we have trouble getting out of our own way and thinking about new business models, to the point that we're asking for the only thing that we know, I guess. Yeah, all right. Well, kp, thank you for unpacking this post for us again today. For those of you that are out there, if you don't follow KP on LinkedIn, you should Just look up KP Ready R-E-D-D-Y, and he posts at least once usually two, maybe three times a day thought-provoking, a lot of AEC industry, aec innovation insights there to learn from, and it's great to be able to sort of pull the curtain back and find out where these posts come from. So, kp, thanks again for joining us and for all of you out there, we'll be back again next week with another episode of KP Unpacked.
Speaker 2:Kp actually mentioned, as we were talking and I don't know when it is that you're listening to this right now but we're going to be gathering in Phoenix on February 25th for our next in-person one-day mastermind event. You can go to kpreadyco slash events to find out more about that and join us in Phoenix. There'll be plenty of people. There are current mastermind members, many of whom are directors of innovation, chief renovation officers, construction technology leaders. There'll be some startup founders and some VCs there and we're throwing the doors open. You want to join us? Want to dig into topics about innovation and business models around the AEC industry and more topics? Go to kpreadyco slash events and apply to join us there in Phoenix in February. I'm sitting here looking at 10 inches of snow. That sounds pretty good to me right now.
Speaker 2:All right, everybody, we'll see you next week. Thanks, kp.
Speaker 3:Thanks, Jeff.
Speaker 1:Thanks for listening to another episode of KP Unpacked. You can connect with KP Ready today at kpreadyco that's K-P-R-E-D-D-Yco, and additionally follow him on LinkedIn at wwwlinkedincom. Slash I-N slash KP. Wwwlinkedincom. Slash IN slash KPReady Until next time.