The Digital Project Manager

Beyond the Billable Hour: How AI Is Making Time & Materials Irrelevant

• Galen Low and Kelsey Alpaio

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In this episode, Galen Low sits down with Brian Kessman of Lodestar Agency Consulting to tackle a big question: is AI finally the deathblow to billable hours? Brian argues yes—and not because AI “broke” the model, but because it’s exposed just how misaligned hourly billing has always been with the real value agencies deliver. Instead of rewarding efficiency and innovation, time-based pricing incentivizes dragging things out and commoditizes expertise. The real shift, Brian says, isn’t just about swapping billing methods—it’s about fundamentally rethinking what you sell, how you position it, and how you prove its impact.

They dig into the Agency Value Model—a framework for moving from selling time to selling outcomes. Brian explains how to define your best-fit clients, identify their high-value problems, and design structured solutions that command higher prices while delivering measurable impact. Along the way, they unpack how to navigate the “race to the bottom” fueled by AI, nearshoring, and automation; why confidence in your positioning can help you turn away misaligned clients; and how to operationalize repeatable, scalable value delivery without falling back into chaos.

Resources from this episode:

Brian Kessman:

Billing by the hour never reflected value and it rewards inefficiency and penalizes innovation. There's an agency that we worked with, we moved from charging hours for both their strategy services, packaged that with their design services, they were able to sell that back to the same clients and they sold it at a 66% higher price point.

Galen Low:

Is AI the nail in the coffin for a billable hours model?

Brian Kessman:

It absolutely is.

Galen Low:

Hey folks, thanks for tuning in. My name is Galen Low with the Digital Project Manager. We are a community of digital professionals on a mission to help each other get skilled, get confident, and get connected so that we can amplify the value of project management in a digital world. If you wanna hear more about that, head on over to thedpm.com/membership. Alright, today we're talking about whether billing by the hour is being made irrelevant by AI and what agencies should be doing about it to focus on the value being created rather than the time being spent. With me today is Brian Kessman, founder of Lodestar Agency Consulting, where he helps independent agencies and multinational networks move their firms beyond billable hours and commoditized services. He works with leadership teams to reposition their expertise, productize their value and price based on impact building scalable, high margin models, centered on client outcomes. Brian, thanks for being back with me today.

Brian Kessman:

Oh, it was my pleasure. Thanks for having me back. This is always a lot of fun.

Galen Low:

I always love having you on the show. You've been doing such interesting stuff lately. You and I, we've been collaborating for years and what is happening right now is just so of the essence. I teed it up at the top, but my community is buzzing about this idea of what becomes of time and materials, what becomes of billable hours in a world where AI is getting things done faster. It's not the only question. I know that some of the work that you've been doing to work on different pricing models. In some ways predated the sort of big wave of AI that we're dealing with right now. I thought I would just dive in with the hot question and for me, like I personally have had some issues with time and materials contracts and like the whole billable hours model because there's never any incentive for my teams to work faster. Either they lie on their time sheet 'cause they got something done faster and then we still wanna bill for the whatever, 5, 10, 15, 40 hours that we said it would take. Or they're just billing their time as less time being spent, and then they're getting the whip because they're like how come you're not billing out as much as we thought you would? So my hot question is this, is ai the nail in the coffin for a billable hours model?

Brian Kessman:

It absolutely is. It's not that AI is actually breaking the model that we've all been using, right? That model is working exactly as it was designed. It's just not built to capture the strategic value that agencies are actually providing. And so what we're seeing is what AI has done is to make that misalignment just impossible to ignore any longer, impossible to tolerate. Billing by the hour has really never reflected how clients perceive value anyway. And it rewards inefficiency and penalizes innovation completely misses the impact that great agencies deliver. It's just that it's the wrong model and AI has really exposed just how outdated it really is. But I gotta say, the shift isn't just about changing our revenue model, essentially. It's about changing what we sell, how we sell it, and how we deliver it. Ultimately it's how we scale the value that we create. And that's what I'm excited to dig into with you today.

Galen Low:

Awesome. Yeah, I love that. And like the quintessential billable hour for me is like lawyers. And for some reason that value makes sense 'cause I'm like, I have no idea where the law might take me. I'm in your hands, right? I trust you. The value for me is that you'll take the time and your knowledge of the law to help me navigate towards my goal. And I'm not like nickel I mean I personally am not the person like, show me the time sheet. Yes. Show me the half hour you spent where you drafted this paperwork is typically not how I look at it. Whereas agency, it's been that model where it's almost been just convenient because I think it started that way, right? Where it's we're not sure what we want. We trust you bill us by the hour and let's like try and stay within this budget. And now it's like far more scrutinized. I think folks do it because it's easier in theory, right? You get paid for every hour of work that you do and it's not like super high margin stuff, but at least you're like covered. So in some ways it's seen as less risky than like a fixed price engagement where like an agency would have to manage the profitability within that fixed amount. But I guess it begs the question, which is beyond fixed price and like time and materials. What is the alternative? Are we talking about value-based pricing or are we talking about another model that might make more sense? Where do we go from these models that we've been like sitting on resting our laurels on for years?

Brian Kessman:

Yeah. The hourly model has been easy and convenient for sure. It hasn't really forced agencies on a large scale to rethink their value, right? We've seen a lot of comfort around defining our value based on the billable hour, but we need to go past that. And we've seen leading agencies shift their models well before ai and they've been, doing extremely well by pricing their impact. Now we're just seeing there's no choice. Everybody has to go in this direction unless they want to compete on price, and that's not a winning situation. So you asked if value-based pricing is the way forward and it's part of it, but the deeper shift is really moving from selling time to selling solutions. And that's so that value-based pricing can actually make sense. There are multiple pricing models actually that align with this approach. We see fixed fee, performance based subscriptions, even licensing ip. And I think of these all as value aligned pricing models because the goal isn't to change how we charge, but to better reflect the value that we're actually creating. But there's a catch to use any of these models effectively. You have to first reimagine how your agency creates and delivers value. Because if you're still selling capabilities and activities, then you're right back in the conversation about time and effort, and that's what really drags you into those. Conversations that are about comparing you to competitors or having to negotiate and you're seen as a commodity. So if what you sell can just be easily compared to what other firms offer, then you're always gonna be fighting for your margins. And that's why that real shift isn't just about pricing. It's also about a couple key things, how you position your firm, how you package your value, how you deliver your expertise. That's exactly what the agency value model is designed to address, which is, I know something we're gonna talk about, but before we get into that I just want to hear what are you seeing or hearing from your audience related to this.

Galen Low:

So like the reason why a lot of the time material stuff is in contention right now, it's causing some anxiety in my community is because of exactly what you said, it sounds like a race to the bottom. So now there's like different margins you can play with. And again, not just ai, but nearshoring offshoring, like the labor costs can go down and therefore the rate that you bill at can go down. And all of the agencies who aren't. Taking advantage of that or their, maybe their thing is yeah, we're all local, we're a local boutique agency. We all live in this city, suddenly they are twice the price of someone who is like outsourcing or leveraging ai. And I think the argument is, okay, some of this, the race to the bottom stuff, you mentioned at the top, like the commodification of like digital services is basically it's changing the competitive model to just be like the lowest price, right? And that's like the only way you can survive. And then there's a lot of folks that are trying to. Not necessarily reimagine their value, but add value. I see a lot of smaller agencies arcing towards, oh, we also, maybe they were mostly like a dev build shop, right? Maybe they're mostly developers and some designers and they're like, okay, we wanna, we should do strategy'cause that's more valuable. We should have that as an offering. Which as you can imagine is like standing up a whole new offering with like staff. You don't have that is, it's risky. It's not overnight. It takes a lot. I like what you're saying though, because it's the first step is not to change your pricing model. The first step is to rethink the value you're already delivering. And I think that's like a message that I think a lot of folks that I talk to need to hear because the competition is not about, oh, the value that you're delivering isn't good enough anymore. It's just that the way it's perceived. Can either go two directions, either it's like very commodified and it should only cost $5 because I can get that, or I can build it, using an AI tool, or I can get Wix or like I don't need to pay that much for my website all the way to the other side, which is okay, we do all these things. It's an all in one sort of package. That cohesion between value is the thing that makes it cost a lot of money, and they're hanging their hat on that. I like what you're saying about the solutions and the outcomes, I come from a bit of a business development side too, where I'm like, that requires the whole pitch has to be different. The whole value proposition has to be different. Like the way we talk about our work has to be different and then the engagement model can be different.

Brian Kessman:

Yeah, you're a hundred percent right. There are agencies that are doing great work out there, but their model, their revenue model, the way they talk about themselves, they're really undervaluing. What they can do, and clients are just not seeing them for all their worth. And so that's what this is about. It's making that shift first because you can't just go and price the same work that is perceived as low value all of a sudden at a higher price point. It's just that agencies have been underselling themselves for too long. So first we need to correct that, and then we can actually build on that and then achieve better pricing.

Galen Low:

Do you have any like examples out in the wild that you can talk us through just to see how maybe that transition went and what the sort of pricing model looks like now for an organization that you've worked with?

Brian Kessman:

At a high level, I'll describe, there's a model that we recommend most often. It's a tiered fixed pricing model for what we'd refer to as a productized solution. And so if you imagine each tier is designed and priced based on the value that the tier creates, not effort at all. Not time. Certainly we use time to understand our costs, but that's not what we're pricing. And so if you were imagine as an example, a brand strategy program that has three tiers. One is focused on helping your client first achieve a foundational level of clarity on their target market. The next tier would be something more in depth, positioning, the positioning strategy around that. And then we go to the third, which would be all of what I just said, plus including the go to market strategy and activities behind that. So with that, each one leads, you can imagine the different set of outcomes behind each of those tiers. But I also, I need to say that this example's pretty simplistic just to make the point of how to structure the offerings. But we do need to push past any sort of thinking about existing services, 'cause that's what I'm describing, the traditional brand strategy type of service. What we actually need to do is not start from a place of services, but start from the problem that you're solving for your client. There's more to that. I wanna unpack that it's your best fit client, not just for any client, but who are the clients that value your expertise the most, that gain the greatest benefit and impact from your services, because you're gonna be able to hone in on their problems better than others. And so when you can then extract what are the high value problems of those best fit clients, that's the next step. Again, not any problem, but the problems that live at the higher ends of the value chain.'cause we do wanna elevate agencies away from execution and production as we see that being taken over either by in-house teams or ai. So what are those high value problems of your best fit clients? And at that point we can now think what is the most ideal solution that we can design to solve that problem? And yes, we'll pull from our existing services, but what else can we do that we are uniquely qualified? To develop on top of existing services, and that leads us to how do we leverage ai? We haven't done that. This is the opportunity to build either proprietary products or a hybrid of a people powered and AI powered type of offering. And so that's where we can then start to innovate and then differentiate through these solutions and then finally put it into the tiers and frame it with the proper value and so on.

Galen Low:

You tapped into the big thing that I was thinking of, which is like for some agencies I've worked for in the past who I won't name. It's exactly as you described. They understand the service they provide, but they didn't really understand the problem they were solving. And sometimes a business model is like more clients from anywhere, right? The sort of maybe a geographic like back in the early two thousands, right? You could dominate a region. You could be like, we did everyone's website from like the pizza place to the political party, to this industrial manufacturing company, all in this city. And they come to us because we're local. And then. We didn't really develop that depth of understanding of the problem. Whereas, I've been talking with more agencies lately that are more industry aligned. They go very narrow into their niche because they can understand the problem. They have confidence that they understand what those problems are with their best fit clients. They understand their clients' business in enough depth, and they have enough confidence that they understand that's part of their pitch. And they can go, we really understand. Orthodontics. We really understand real estate. We really understand real estate in this particular market, and developing the expertise of the client business, not necessarily the expertise. In tandem, with the expertise that you offer as an agency, but fundamentally, those are your tools. To build the house, not like putting your tools out on loan for in an hourly rate.

Brian Kessman:

And so you're touching on the next evolution of the the next pattern and positioning that we're seeing across agencies. Normally agencies will have positioned either with a category focus or a service specialization. We focus only, we're a digital agency for B2B brands, right? So that's the combination of both of those and that was always strongest when you'd go into a pitch. If you can combine both a category focus and service specialization, you're in a great spot. But now most of the industry is caught up, right? Many agencies have at least one or perhaps both of those types of specializations. And so we need to go deeper than that just to stay competitive or ahead of the competition, right? So what we wanna do is go a level deeper based on the category and service specialization. Again, what are now those problems that we can solve better than other firms? And what are the outcomes that we can produce consistently because of how we work, the actual methodology, our philosophies, or rather the productized solutions that we've developed. And then we can show our proof that the proof points, the case studies, the stories that builds the overall value framework that you use to communicate to clients, to the market.

Galen Low:

Does this tie into,'cause I've been seeing some of your posts lately, and I think there was you had a piece in adage mentioning and you called it out earlier, that your agency value model, does that tie in? And if so, can you break down what it is and like why it matters for agencies right now?

Brian Kessman:

So it's not just a pricing model. It is a full framework for how agencies, again, create package price and deliver their value, but it's meant to help them do that in a scalable way. And as you said, it's the agency value model, and there's two connected systems that make up the entire model. One is the value creation system, which if you think about this, it's more about how you define what your agency does differently and better than other options out there that your clients have available. It's where you start to design your structured solutions that reflect your expertise, which is comes from your positioning. And those solutions are purpose built to solve, again, those high value client problems, which leads into then the second part of the system, which is the value capture system. And that's how do you scope and deliver and price that value consistently in a way that's scalable and we can maintain profitability. And so you're, how do you create and capture value? So within that, under those two systems, there's four, I refer to 'em as four levers that you can use to fine tune the model. And so I touched on some of these already, right? Positioning is the first one, positioning what your unique value is. You build on that. Then with productizing that value into structured solutions. And then you're preparing your people as the third step to make sure they are prepared to confidently speak to and sell and deliver that value, because that's. One of the breaking points we see people fall back on old habits of talking about costs and time and so on. And then finally, the fourth lever is pricing. Pricing based on outcomes or impact, not effort, right? But so many conversations today that I have with agencies, this starts with pricing. We need help with pricing, and we need to introduce the model so that we can see are all the other pieces aligned so that you can effectively price 'em the way that you want. And so that's how this model helps. It's really meant for the current marketplace, right? That's really driven by AI and automation. And so of course, time-based approaches don't work. And so this helps to shift away from that, from selling time to selling outcomes, making sure all the right pieces are in place first before you attempt that, and then you can start to scale your value.

Galen Low:

I like it as like a sort of transformation process, right? You need to go through these things in order to benefit on the other side. To play the devil's advocate. Some of our listeners might be thinking that sounds like brand strategy and positioning plus fixed price model. Ultimately, it's still like this, you get this price tag. Maybe there's different tiers, but functionally, my project manager audience are like, okay, we still have to manage time as our margin within this product. Is that true? What makes it more productized than just a fixed fee prepackaged offering?

Brian Kessman:

It comes down to the difference between what I've heard as productizing services versus productizing value. I think that's the starting place for the answer to your question. I think when you think about productizing services, you can think of taking all the existing services you already do today and just thinking how do we bundle them and then we put a price tag on that so that we're not pricing any one of them, but it's now it's a package. And that's great. And there are a lot of firms. Companies, even outside of agencies that have been doing this for ages. And then there's the other side, productizing value, which goes to what I was sharing earlier, rethinking what that value actually is. It's not the services that the other example was. Certainly clients are buying those services. But what they're really buying is a solution to a problem. And so that's a different starting point. We start again from the place of the problem that we need to solve and the most ideal solution, and we think very differently about how we can solve it. And then from there we frame it around the value of that solution. Whereas in the other example, if you're productizing services. It's largely, in most cases, still based on time, still based on effort to deliver those services as opposed to the impact of a problem, which is the starting point for the other example that I'm giving you, which is where we play, right? Productizing value. And it's really important to think about that. A lot of agencies that we speak with that have attempted this before we get a chance to talk, they see partway through our engagements, there's this aha moment that happens and they're like, oh, I see where we were going wrong. Because we were always coming at it from a place of. Our inputs, the process, the phases of our work, the deliverables, the actual capabilities and services. And we were always stuck in the same. We just felt like we weren't getting to that next level. And so when you can start from a different place and it's actually one of the hardest steps is really defining those problems you're uniquely qualified to solve. There are so many pieces that need to be connected to lead up to the ability to do that. And when you do, then you can design some pretty compelling solutions. We could talk about the results we've seen, in our clients' work, but in all that, but I just wanted to pause there. I think that answers your question.

Galen Low:

Oh, a hundred percent. No, it absolutely does because the scrutiny becomes different. Scrutiny is not about getting it done, getting the things done that we said we'd do. It's scrutinizing the impact. That's actually what the sort of client scrutiny becomes, and that's what's different than standard fixed price stuff. Like here's the list of stuff that you said you'd deliver, and did I get it or did I not get it? You haven't delivered that last one. I don't care if you're at budget right now, but I still want that one more thing, whether or not it's gonna change my business. Versus, Hey, I'm seeing impact and value coming outta the work being done, whatever that work is. You guys clearly understood how to solve my problem and I'm measuring it now. I'm feeling the benefits already. And I don't know if this is what you meant when you were talking about tiered earlier, but there's like almost these stages of benefit too, right? Like not just doing one big whole, yeah, this is our one mega product and probably it's gonna solve your problem at the end, and if not, we have your money. The, Hey, let's get you to a stage where you are getting value and you are experiencing the impact. And then let's go to that next thing, and then let's go to that next thing. And I've been hearing the word speed to value a lot lately, but yeah, let's getting to that impact sooner. Not having a big sort of monolithic project or monolithic offering, but let's get you to let's solve that problem. Let's put the bandage on the wound and then let's figure out like where to go next. You're gonna start feeling better right away.

Brian Kessman:

Yeah. There are so many great things about what you said there. I want to touch on a few of them and just build So one thing, even before what you had just said, you started talking about client focus. What are clients focused on in more of a service based type of model? They're focused on the service and when are they getting that next thing. And so when we see agencies try and shift away from billable hours, one of the first places they go is to price a deliverable. We'll stop pricing hours and we'll use a fixed fee for deliverable. And now we'll sell that. But if the rest of the model's not in place, it's just basically you're changing your billing methods, your invoicing, your contract, but nothing else has changed. So one, you have all of these still remaining internal chaos and operational challenges internally that we see in so many agencies. And two, there's not enough proof to have a conversation with procurement or any price driven buyer that proves. You can solve this problem better than other firms because really as they ask questions and dig deeper, you look just like any other agency. So we do need to still change that model. But in terms of where it keeps clients focused, you're absolutely right. If you're selling a deliverable, then a client is focused on when am I getting that deliverable? Is that deliverable done? Is it complete to what I was expecting? If you're selling a retainer or agency of record type relationships, which we don't see many of today, but they're still out there. Then what you're really selling is access, or at least that's where you're pointing client focus. If I have you as my agency of record, I need to be able to access you for, and it does tie to hours of course, but it's on demand, right? And so that's what they're focused on. When you say we're selling solutions that starts the client's focus and keeps it maintained on a problem that's going to be solved. And that's what everybody should be focused on.'cause that's what they've always been buying is the solution to their business problem. So that's why we see this as the most effective ways for agency to truly sell and scale their value. Because what we're really talking about is transformation work for agencies and that's what they've always been doing. Getting clients from a current state to a better future state, and what better way to do that than saying there's a problem blocking you from getting there. We have that solution. That's what we sell. Here's our expertise and how we do it, and so on.

Galen Low:

I like the sort of transformation theme because A, I think that is what a lot of projects are these days, arguably always, right? That we're trying to explore a way to change something to either do business better or serve our customers better. There's some kind of transformation that takes place. But I also like this idea that like agencies themselves need to undergo a transformation. They have to go through almost their own process, right? They're telling their client, no, you gotta go. We gotta start with discovery. We have to do this. That technical audit, we've gotta do these things. This is our process. And then, that whole like eating your own dog food thing, right? It's okay, but when it comes to our agency, we're just gonna try different things, oh, we're gonna respond to this RFP with this kind of value prop and see how that goes. We're gonna go to these networking events and drop off some business. And when there's a lead, we'll make this shoe fit. I think that's like the current state of the economy right now too, where like you said, there's not a lot of sort of these retainer models anymore. Cashflow is becoming an intensely challenging thing to manage and a lot of the clients that are walking in the door that probably aren't best fit clients, but they're the ones walking through the door are like, I only have$10,000 to do that $75,000 project you just proposed. Would you take the 10? And some agencies might have to. I'm not saying do that entire scope for $10,000 instead of$75,000, but they're like, okay, we need cash flow to keep our people working and having livelihoods and we have to follow this race down to the bottom. But what I like hearing is that they probably do have a lot of superhero powers in their category and in their service offering. They can lean into as long as they're sitting down, taking the time to reframe the value that they deliver and how they sell that and how they promise it. You said the word proof earlier, and I don't know if this is what you meant, but I was like, yeah, how can you, after you've done time, materials, or even just like fixed price, like services engagements, how can you deliver the proof that you can solve the problem that you have solved the problem in the past? I go to like case studies, but I almost go to like measurement as well. And maybe we can get there like a little bit later too in terms of like how do you become the agency that's accountable for the impact? Whereas normally it's kinda like job done, you kinda walk away and go to the next client, next project. We don't know if it had the impact and frankly no one's really held our feet to the fire there. But I think that would be like the sort of the other bit. But I wondered if first we can go into the transformation bit because. There's always friction, an agency of any size, arguably an organization of any size to get everyone rallied around that kind of change. And I know a lot of agencies, like you've probably worked with agencies who, you mentioned about the epiphany point, right? In other words, there is friction and it was hard to get up the hill. And then you get to this epiphany point, you're like, I get it now. And then it's all like smooth sailing from there. But what is some of the friction that you run into with agencies? Are there different like levels of transformation? Are there maybe four stages of transforming away from billable hours, a little four step program that kind of makes it easier for agencies to digest while also still doing business?

Brian Kessman:

So certainly there are friction points we see. Some of the most common ones, and I'll just touch on 'em quickly, is that leadership believes in value based or value aligned pricing, but yet client facing teams are still defaulting to time estimates or scope changes. Or if scopes are still built around highly customized deliverables, and most scopes in the firm are custom. That makes scalability almost impossible, right? So there's not really repeatable structure there for that to happen. Or if sales and account teams are still speaking the language of hours and cost and effort and service, not value or expertise, then things will fall apart when you have that client you mentioned that says, I only have 10,000 for that $40,000 project. What we're talking about is confidence going into a negotiation situation and believing that what you're selling is actually worth that 40,000 to begin with and not budging or finding another way to solve the problem. But for a $10,000 budget, because you're the expert, you should be able to do that to some level, or at least that person needs to respect your expertise and find that money if they wanna work with you to solve that problem otherwise. It's always a business decision, right? We never want to turn away money, but at sometimes it's also the opportunity cost. If you accept one that introduces chaos and customization again, right? And then you are starting to burn out people when you can have that next great opportunity walking in the door. And so what we see is when all the pieces are in place, right? Your positioning is clear. You know who you're for and who you're not, for what you do and what you don't do, all of that. You have your prototype solutions, you have all of the other pieces. And you're priced appropriately. You attract the right clients, right? You attract more of those right clients or those clients that come to you that may not be the perfect client. They start to see it your way, and it's a lot easier to navigate them to the right way to approach this and at the right price point. And I've heard many firms say they somehow magically find the dollars to do it the right way as after they have this conversation with their clients. So all that aside, let's talk about the shift that has to happen internally. So there are four shifts that we talk about a lot. And so the first is the philosophical shift. And so it's really about mindset. And some of the tensions I described before are based on not having that right mindset. And so we need to redefine and we've touched on this, what your agency actually sells, or more accurately what your clients are really buying from you. I think I said some of this, that they're not buying strategy in media or creative reproduction and they never were. Despite what we see on so many agency websites for years, what clients are actually buying again, is that solution to a problem or a desired outcome, A new capability that you're gonna build for them or give them the knowledge to gain. So it's really ultimately tying to the positioning piece and it's taking that stand and saying, this is, these are the problems we are uniquely qualified to solve based on our strengths. This is who we are as an agency. So that's the first shift and it's really foundational to everything else. But does that line up with some of the challenges in the industry when that's not in place?

Galen Low:

Oh, absolutely. In fact, like I see that as being like where the friction is because of that. Like I think that knowing who we're for and knowing who we're not for is like super sound advice. Then that temptation of there's money on the table is like always a bit of that, like retrograde. It's that thing that's always gonna pull folks back. There's almost like a discipline to it, but I like what you said about confidence in negotiation because I think that's ultimately what it comes down to, where it's are you confident enough to say that, listen, I can turn this one away. This is gonna cost us money. It's like an opportunity cost, and it'll also, this is not our best fit client. I just need to have confidence in the fact that how we've positioned ourselves, we've made the right decisions, that there is a better fit client coming our way that we can chase down and frankly not wait for people to walk through the door. Go you know who to go after and it's going to be, I was gonna say lucrative. Lucrative isn't really the word, but Yeah. Like a good, healthy client relationship for your agency. That's a really interesting one, but that's where I see a lot of people struggle.'cause they're like, but this person has $10,000. And you're like, yeah, but it's gonna cost you$40,000 to get the job done. It's a very hard shift to get into that discipline.

Brian Kessman:

So that confidence builds over time, right? Even right after a positioning engagement with an agency. It's not a, an instant flip of the switch where all of a sudden you have your best fit clients knocking at your door. And so it takes time. You have to build the right collateral and the momentum to start to attract them. And sure, so you still have other clients knocking and you just decide when is it the right time to start saying no to clients that aren't a good fit? And you'll know because you have enough business from your right fit clients. And you become more comfortable and confident in that way. So it does take time. And we're also not saying, you fire the bad clients that aren't a good fit. You still work with them. You maintain that business until they decide to leave you.'cause eventually they will, right? That it's not gonna last forever. All the while you're building up your pipeline of your best fit clients and eventually that shift happens naturally, but you can move into. The next part of the transformation, which helps put you in an even better spot. And so you want me to, I can dive into that. Yeah, let's go. So that's really, it's about a strategic shift and in other words, how you package your offerings. I've called it productizing value, I think earlier. And so as an agency that went through this recently said, you helped us use productization as a strategy when we had been thinking about it all along as a tactic. And that goes to the point earlier about productizing services, not productizing value. And so let me unpack that a bit because this is exactly what we do is productization as a strategy. It's an advantage that you gain when you start to structure your unique value as these defined solutions. You're building up your credibility as the expert in this defined space, and you design those solutions to move clients across an ecosystem of offerings. Not just through one-off projects, which is one of the challenges you were describing before, in fact, even the$10,000 project example, right? That's a one-off project, not a solution to the overarching problem, whatever that may be in this big example we've been talking about. But the point is, this is how we create revenue continuity, even inside a project-based model, which is how many firms are operating today. Because what you're doing when you are so focused on a, on your right fit audience and the problems they need solved. Then you can design solutions for the first problem. They're gonna experience leading to the second one that you know they're gonna hit, that you already have a solution to solve that for them before they even know they're gonna need it. And you create this ecosystem of these solutions for the related sets of problems that these clients have. Now you're ready to have that conversation. The first conversation, you can show them the ecosystem, and this is the place that you play as the expert. You already know where they're going to go on their journey, and you have solutions for all of it, and you're quickly becoming a strategic partner, a strategic ally for them, and that there's a lot of value in that. And so what you do is you start to grow your overall client lifetime value with these clients because you have one solution leading to the next and to the next. All the while, you're also differentiating your agency from the others that don't do this. In a way that's highly defensible. And so when the solutions are also built on that positioning, now you can also price higher for these as well. And less pushback, very different conversation to have. So that's a strategic shift. There's two other shifts. I'll be a little quicker I think on these, but certainly one is operational because now how do we deliver all this value we've been talking about? And so what we need to do is train teams to speak to and sell this value, to have that confidence, as you said. But we also. We need to figure out how do we create leaner team structures? We need to move away from bloated teams that we've seen in agencies. You get in a room, a meeting for a project, you have 20 or more people in the room, five or so don't even know why they're there, and everyone's billing by the hour. And so what we need to move towards is lean, creative product teams, is how I refer to them, and leveraging agile workflows and repeatable ways of working, built on the frameworks from the solutions. And because your offerings are now so well structured. You can also start to apply AI and automation in the right places because you have this repeatability, and we're not talking about cookie cutter work product. We're talking about repeatable, underlying processes and frameworks that help you create better work to carve out the space and time for you to have the all the time you needed for strategic thinking or for production or creative. Because you can't really automate if there's still operational chaos. How do you automate that? How do you apply AI in a repeatable way? And we see that still with a lot of firms, so we need to do that. And then finally, how do we measure our value? I know you wanted to talk about this and actually there's a couple dimensions to this, but I'll start here. Where we need to first redefine what success looks like. So how do you measure performance if we're not looking at billable hours, right? We're moving away from a culture of utilization. To a more of a culture of accountability. Have we delivered the value that we said? And so the results, when we know we're doing it right, when the model's working, we see the adjusted gross income per FTE of a firm dramatically increase. We look at the margin per solution that you're offering.'cause these are repeatable solutions. You can do that. There's not custom engagements to the same degree as before. Or you look at margin per team, because the creative product teams I mentioned are typically fixed teams. They stay together to deliver a related set of solutions. We look at client lifetime value. We look at how long it takes to close deals, because deals tend to close faster. With this model, we look at percentage of recurring revenue that you're able to carve out. Most firms, they start at zero. When we work together and we start to build up to a greater percentage, we're aiming for at least 30% as the low goal there. And then. Most importantly though, is client outcomes achieved? Did we deliver what we said we would? By the time that we said, did we solve the problem? Did we hit a meaningful business goal? Did we leave them with a new capability? And so that's how we know when the model's working, 'cause you're measuring value and you see that value increasing in all the areas I mentioned.

Galen Low:

Requires some access to their side of measurement as well, like the client side.

Brian Kessman:

So a lot of the metrics that I shared are more agency performing, how do we measure our agency's performance? But you're absolutely right. For the latter part, right? For the outcomes we deliver those, yes. But that's not always available to you. That goes to value-based pricing and why that's a challenge sometimes, right? Do we know how much value we're actually creating for the client, or do we have access to their metrics? Do the clients even have the right tools in place? Are they allowed to share that with us? So there's a lot of moving parts on that side. We don't always have access to that information, and we don't always have the right people in the room to make the decisions, to give us access to that information. So again, a lot of challenges. So what we see in and advise is rather than, so two ways to create value-based pricing. One is we co-create or define what value means with our clients, with the right people in the room to create what we call a scope of value instead of a scope of work. And we do that in the form of a success workshop at the beginning of a project. And so the agencies that have done this, they call it their own thing, but it's the same type of process. We have the right players in the room to make the decisions about different types of pricing models that we can use in this work, and getting access to the right tools in the metrics. And if we know that there are gaps in the metrics and what they can and can't track, then that informs just how we're gonna structure that agreement. We're in a much better place to now have a true value-based agreement with our client. The other way to create a value-based agreement is more of, I usually refer to it as either estimated value or sort of assumed value, where you don't have the same luxury of having this conversation. You don't have those metrics. So based on your expertise in your area of focus and knowing the value of your solution and past case studies and the benefits it's provided to clients. Make an estimate of what's the range of value for this client and you price based on that. It might be completely off base. It may not be over time. You get much better at this, but you also have to consider what's the client's situation, right? What's their sense of urgency? Are you the only one that they know that offers what you do? All these other things play into your pricing leverage and how to price. Then of course we use the three different tiers, which increases your odds of closing the deal rather than losing to a price.'cause instead of a yes no answer to a single price, it's which option is right for you. And you can always, say we have some add-ons to customize. If it's not exactly what you're looking for, we can adjust some of these options anyway. That's the way to do it.

Galen Low:

What I really like about this is that the model is almost based more on like strategic partnership. It's like a partnership, like a longer term partnership with your clients. Coming back to that like sort of retainer relationship, the reason why a retainer model was attractive in the first place is was 'cause for at least in my experience was you understand our business, you're deepening your understanding of our business. And yeah, we want to be able to call on you, whenever we need your services, we're gonna treat you like one of the team. But really the value is that you get us. And this kind of is, as you mentioned, not the same as a retainer model, it's more based on like impact and value, but it really creates that partnership. From the get go, and that's part of what the value is. Not how fast can you create a wire frame, but how likely is it that you are going to create a wire frame that really connects with our customer and our strategy and our target market and what we wanna do with the experience on, a website or what have you. Therefore it's not really, the scrutiny isn't about how long is that gonna take you? It's a, okay, how are you going to make sure that it's a fit for what we wanna do for a strategy? Prove to me that you understand what the mission is, what our problem is, and how you can solve it. Which I mean, I don't know, maybe that's like an opportune time for me to ask, the elephant in the room question, which is like. Where's the project manager in all of this? Because normally we're like, oh, did we deliver the thing on time? I guess we're done. And there has been all this dialogue, especially from the Project Management Institute and others, about how we need to be accountable for the value that we deliver. We are value delivery specialists. We are not just hit the iron triangle, deliver what's on the checklist, and then move on. But I think the big question is cool. What does that look like? Not everyone has really painted a clear picture of how a project manager might go about supporting a value-based model when we've just been trained to make sure deliverables happen on time.

Brian Kessman:

Yeah, a hundred percent. This is one of the pieces I was most excited to chat with you about because obviously you know, you, I know your audience and I come from a project management background going back many years. So it's never been a project manager's job in my eyes to just manage schedules, tasks and utilization and all of that, right? It's always been about leading the team toward the successful project. And now in some firms we used to define success as well. Is it on time and on budget? And what our client's happy. But in this model, we're looking more sharply at the outcome. Did we produce the outcome? And that's what it needs to be about, right? We need to. Project managers need to see themselves less as the task managers, and many already have evolved well past that, and we need to move into the space of being outcome leaders. And so how do we lead the team toward that? And so in this model, it's so much less about how busy are we? Did we track all of our time in order to know who's actually productive? Time sheets have never told us who's productive. They just tell us someone tracked this many hours, we don't know what was actually produced in that time. And we need to measure how valuable we are, but not necessarily at the individual level, at the team level, because we're all working together. We're all sharing the accountability of producing that outcome and getting at the individual level can be helpful if the individual wants to learn, how can I work better? But we're not trying to really scrutinize anyone's hours on a project. What we're trying to do is make sure that the team is happy with how they're working and they're working as a highly effective team. If somebody's dropping the ball they're gonna hear about it or somebody's gonna hear about it, but we don't need a time sheet to tell us that. And so we really wanna look at these metrics at the team level because that's the unit of value or the system that's pushing out the value for the firm. So it shifts the role of a PM if for PMs that haven't already made this shift, I think you call it value managers, right? And so that's ultimately what it's guiding delivery around outcomes. Clarity and client impact instead of the time and budget. And there are metrics that they can use to help them do this too, but that mindset shift has to come first.

Galen Low:

Yeah. It's almost the same transformation, right? The philosophical transformation, the strategic transformation and along with measurement as well. I really like that, and I agree with you. I think a lot of, folks have moved beyond that idea that a project manager just, is a task manager. I think that actually paints a clear picture of how you can like use value as a lens to look at the quality of work being done as a team, not necessarily these like individual parts that hopefully will come together and add up to the outcome that we want. And I think we've all had those projects where we're like, okay, we have this deliverable and we're supposed to do it. We're just not sure if it's gonna is it even useful? What are they gonna do with it? I guess we should still deliver it because we're supposed to. The flip side of that is listen, we're supposed to do this. I don't think you need it. It's not gonna have the va, this is gonna have more value. Can we shift into this model, or can we do this approach instead? Because we understand the problem we're trying to solve, not because we understand the scope of work document that's sitting on our desk.

Brian Kessman:

Yes, because the client didn't buy those deliverables and is not checking boxes to say, I need this and this. They need the result. And if you're the expert and you know how to get to that result and you're seeing a need to change course, then the client should be ready to trust that if you set up, if a whole model's in place. You've set up that trust with the client and so on. Absolutely. Yeah.

Galen Low:

Maybe I'll round out with this, 'cause we talked you mentioned earlier, right? Like kind of results and I think folks listening, they're like, okay Brian, that's all fine and good. Yeah, we can go on this transformation journey. It's not gonna be easy. And we'll have to like really have a deep thought about who we're for and who we're not for, and how we position our value, how we go after business and how we manage the work. But. Is it going to make a difference to, our livelihoods as, staff within an agency? Or is it going to help agencies grow? What are the kind of results that you've seen just at a high level after adopting this model?

Brian Kessman:

Yeah it happens in at least two buckets, financial and cultural for the firm. So the firms that do adopt this model, they typically quickly see, they see their. A GI per FDE start to grow two to three times from where they started. They get stronger margins, they get longer and more valuable client relationships out of this because they're delivering outcomes clients actually care about, right? It's not about checking the boxes for activities or hours or even deliverables in certain cases. There's an agency that we worked with that shifted just one of their core offerings. We started with a pilot for them, just a pilot productized offering, and so we moved from charging. Hours for both their strategy services and by doing that, it was, they were already undervalued terribly because they were selling it the same way as execution. And we packaged that with their design services, which they were seeing clients were taking in-house, or AI was really making it hard to charge as they would for design. So when we combine the two to solve a very specific problem and frame the value with what clients really cared about, which was also speed of delivery and so on. They were able to sell that back to the same clients that they had bought this for years, individually as capabilities, and they sold it at a 66% higher price point. And because they had the solution and were able to create a repeatable system to get this work out the door, just even in the proposal, it took them two days instead of a week to deliver the proposal, which was already some proof of value or speed to value for the client because they really wanted to get their work done. This particular firm, their clients. The speed was most important to them because of the size of these engagements and the value in the market, and then also they can deliver much faster. And so they freed up, they estimated about 2000 hours just for new biz efforts alone. By reducing the proposal time, they delivered the value faster in terms of the engagement so they can deliver more productized offerings within the same timeframe. So generating more revenue. What they calculated is somewhere between 600,000 to 1.5 million in new income alone, just from remodeling already existing services. No new staff, no new clients, nothing. Just what they already do. That's one example, but there are other examples of just how quickly agencies have seen value. Just getting out the door from our program one month into market. Is usually within that one month, they're able to sell their first offering, usually at about 50% higher than average deal value. We have several case studies, but these are just some of them.

Galen Low:

And very impressive numbers. There's also this like underlying this thread of steel and you've mentioned it a couple times with like lean creative teams. I know a lot of businesses Yeah, they're looking, it is natural to look at revenue per FTE. You were talking about a case study where they hadn't changed the staff. And we're still able to grow their revenue, grow their business, even from existing clients. But does, has maybe changed the future. Here's what I'm thinking because I'm like, okay, if I was to start an agency from scratch today, who would I hire and would I hire a bunch of, lower cost sort of specialists in the service that they offer? Or would I invest in one or two people who are like. Domain and category experts who are on side with the productization who don't really wanna do heavily customized things, something that we can automate and use AI to support. And maybe they've got, a set of AI tools or agents that are helping produce the work because the value is not how fast can I draw a button on a page, or, how fast can I type code into a machine? But it's like, how well do I understand the problem that I'm meant to solve? And then do you see this as agencies getting smaller and the project's moving faster because the billing model is not about hours and there's less bloat you can move quicker? Or is it the same model that we've been seeing, just a different positioning in the marketplace, different pricing, different way of managing and leading the work?

Brian Kessman:

I think it, it could be all those things, depending on the business. I think it's certainly firms that still want to play in the execution space. And wanna leverage AI to do that. Just need to do it better than others can. And we see some there's a firm Silverside ai, they do an innovation lab and they play largely in the execution space, also strategy and so on. But yeah, so there are firms that are really owning the AI execution space and they're doing amazing things. We see examples littered throughout LinkedIn all the time of these really great creative examples. So that's one place. That's one answer. And we see other firms that are climbing the value chain, they're trying to get away from the execution or in, in the way that we advise is bundling the execution under the umbrella of a strategic outcome that takes a slice of all of their services just to, to solve that problem and produce that outcome. You're still in execution land. It's just combined as a larger solution. So it's not price sensitive anymore, and you still need to do that work, of course, to help your clients with. The activation side of things. So that's one way. In terms of talent or size of firms, I think it certainly can be smaller firms if we want it to be, because, and when we have repeatable solutions, everything's documented, or at least should be. It's easier to document because it's, everything's not custom. And by the way, we can still do custom work. We just better be charging a premium for it. But the repeatability aspect, you can document that easily. You can use AI to automate much more easily in that model, and in that way, you can onboard people much faster. You don't have to rely on senior talent as much in that case because the learning curve is shorter and you're not relying on one or just a few experts in the firm because now everybody knows how to do this. On top of that, they also can invest their time in making these solutions better, right? They can really craft something that is much better than where they started with these solutions is when the team's dedicated to that and the documentation's there and experimentation is allowed and all of that. So then it's up to the firm. Do we wanna just stay our size or do we want to. Deliver more of our creative solutions and then we expand from there. Absolutely. So it, it's really the business decision at that point, and you can always expand into other markets as well, delivering the same solutions for a new space, or focusing on a new problem in the same space, or just trying to create another model like this for a whole new category and for a whole new set of problems. So there's always those expansion opportunities, but once you've created this model, you know how to replicate it.

Galen Low:

It's so funny because it never occurred to me until just that very moment, like we talked about productization and it's like a repackaging, but like actually the folks within that kind of become product owners. What you're saying about tweaking and expanding the market and it's what can we do with this product? Not, how fast can I type, remove a mouse, but what can I do with this offering that delivers value? How can I change it? How can I tweak it? And that's what the craft becomes more than the actual execution. Like you said, the learning curve is different. You might not need the hyper senior people. Yeah, it's a very interesting landscape. It's an interesting way of looking at it. And I like your other point about the fact that, part of it is yeah, deciding who are we for and who are we not for? But the other side is true. There's people looking for different things. There's folks who are like, give me the AI agent agency. I don't even wanna deal with a human. That's fine. The, I'll do the self-checkout even though I know there's a human or the people who are like no, I'm gonna go, I'm gonna go to the bank teller rather than the atm. I really want someone to like. Co-create with me and help solve a problem. The market is not just a flat monolithic buyer. There are people who want different things and want different interactions with their agency and different models to purchase value so that they can have continuous problem solving capability.

Brian Kessman:

Yeah, absolutely. But I will say there's also a whole nother level of agency, which are the ones that are changing their business model completely in terms of what they're building with ai. Even beyond the services just done a little differently. These are proprietary AI tools or platforms and so on, and so that's a whole nother level that we'll see. The majority of agencies, I think start to go into, we just see some leaders out there already with ai sentiment analysis tools that they're selling for part of the fixed fee brand strategy sprints bundled into that. Content models, ai, augmented content models, certainly other types of tools that they're licensing for recurring revenue and so on.

Galen Low:

Fits that value model. You mentioned earlier, you mentioned subscriptions and licensing, and I was like, really? How's that gonna work? And now I'm like, oh, okay, I get it.

Brian Kessman:

Yeah. So when we talk about productizing value, it's another reason why we don't say productizing services because that implies people. We're productizing value. That could be software, it could be people, it could be a hybrid, it could be whatever. We're just productizing value, so.

Galen Low:

That's super interesting. Very interesting. Brian, you mentioned it earlier, people can reach out to you. How can people reach out and learn more about what you do and see how this can fit within their agency?

Brian Kessman:

Check out our website lodestaragencyconsulting.com. We have a newsletter there if you go to the blog section. But I'd say if you actually wanna go further than that and evaluate how well your own agency's value model is set up to do what we've been talking about, create and capture value. There's a free online assessment, which will have a linked on our website. 12 questions less than three minutes to complete, and you'll get some detailed advice back and then of course, find me on LinkedIn.

Galen Low:

Amazing. Yes, I will include all those links in the show notes. Brian, thank you so much for spending the time. It's always a pleasure having you on the show.

Brian Kessman:

Same here. Thanks so much, Galen. This was fun.

Galen Low:

Alright folks, there you have it. As always, if you'd like to join the conversation with over a thousand like-minded project management champions, come join our collective. Head over to thedpm.com/membership to learn more. And if you like what you heard today, please subscribe and stay in touch on thedigitalprojectmanager.com. Until next time, thanks for listening.