Better Forecasting Might Be the Answer to the Fixed vs. Hourly Billing Debate

There are two things you need to know about Sparkbox: They’re passionate about helping their clients build great online products, and they’re really, really good at forecasting.

What’s their secret? Over the past nine years, Sparkbox Vice President Rob Harr has been behind the scenes, ensuring their growing agency runs like a well-oiled machine. Rob’s success with Sparkbox is a shining example of the foundational role that operations and finance play in guiding agencies toward sustainable growth.

We talked with Rob about pricing models, forecasting, and his empathetic approach to putting people at the center of his company’s success.

How did you transition from software engineer to operations and finance?

I'm a second generation software engineer. Probably one of the first. My dad graduated with a degree in Computer Science in the late 70's. And I knew I wanted to build software from an early age. He taught me how to write code when I was about ten and I fell in love with it. I was sure that was what I wanted to do from that point forward. So, I went to school for computer science.

Much later, I met some guys who were trying to get small studio set up. That's how FORGE started. We were an agency trying to be everything for everybody. We did marketing, design, branding, and web stuff. Then about two years in, we decided to split that into two separate brands. One of those brands became Sparkbox, and we only did web.

After running that way for about a year, I decided somebody had to learn the operations and finance side. I was pretty good with spreadsheets at that point, and I just jumped in and learned everything I could.

My favorite part of working in software was always the people problems. I was always attracted to people problems because projects don't fail for design or software reasons — they fail because you can't get the people on the same page.

Those are the same problems I deal with now: From operations to finance, running the business, and figuring out how we translate sales into profit, those are all people problems. It’s just different ways to look at them.

That's the biggest translation. I've always loved the people side of things and I think that's been the key for me.

Why and how did Sparkbox transition from fixed pricing to hourly?

I think most studios start out doing some kind of fixed pricing. It’s the kind of work they can get and they're willing to under-promise and over-deliver. That’s how most of us start, and that's okay.

In my opinion, value pricing is just a fancy fixed price. The thing I don't like about fixed pricing or value pricing is that you're still promising to deliver a thing for the price. I don't like the abuses it sets up between the leaders of a studio and the person doing the work.

The humans doing the work suffer because the studio is incentivized to get things done by a given date — no matter what it takes — so they can make their margins. They're still paying people a salary for some unit of time. Time is always a factor when it comes to your cost. The only way we make money is to make sure that costs are less than the money we're charging for the work.

It always felt broken to me to say to a team, “I need it done by this date or we don't make money. Get it done no matter what.” How do we create a situation where we can respect the hours that employees are putting in?

We can tell our client that this stuff takes time. What I see over and over again in a fixed model is the incentive for the client is to get as much as they possibly can for the agreed upon price. The agency is trying to do as little as possible for that agreed upon price. That sets up this competitive tension, where they're always telling the client, “that's a change order” or “that's out of scope.”

That's not what our customers want. They want business problems solved. And they're willing to give us money to solve those problems because they see the value. Having the problem solved is more important than the money they're paying us.

If we can put ourselves on the same team and talk about, "Is the juice worth the squeeze? This is what it's going to take to solve this problem," we can be better aligned and work together. Hourly pricing can actually help put ourselves on those client teams. It sets us up for better long-term partnerships.

Have you seen any other agencies do fixed pricing in a way that worked?

I think the trick to using any kind of fixed pricing is to be able to really accurately predict what it's going to take to do a project. I had a business partner back when we were at FORGE who did all of his branding work at a fixed price. He’d been doing it for 20 years and knew exactly what to expect. He was able to predict the margins and the revisions and scope it in the appropriate way.

But it’s both impossible and irresponsible to do that with software, because we never know where we're going to end up. It's a learning process. Software estimates are so hard for a few different reasons. One being, we're really optimistic. Developers and designers are really bad at thinking about all the things that could go wrong.

Clients are also bad at describing what they want versus what they need. They'll tell you what they want, but won’t talk about their needs, and that warps the whole thing.

And three, business needs change over time. We're talking about delivering software that's a living thing. The end of your software project is not at launch — that’s the beginning. That's when you start iterating. Instead of trying to wrap everything into three months, maybe you should take a month, put it in production, and then learn something.

How do you accurately forecast your projects?

We typically start with a half hour call with a prospect who's looking for a project. Out of that half hour meeting, we're able to then turn around and say, based on having done this for almost 20 years, the first phase of this project is probably somewhere between $150,000 to $250,000.

Usually the reaction is, well that's a big range. How can we do that?

When we talk about ranges like that, the best picture I can draw is building a house. I can build you a 2,000 sq ft house for $150,000 or $2 million, depending on the finishes and exactly what you want and need it to do. Without knowing more, it's really, really hard to zero in on a number.

After we've given that big range, we tell them, “What we’d really like to do is start a discovery project with you. We'd like to learn more about your goals for the project together with your team.” These discovery projects take about a month.

The biggest risk on any software project is building the wrong thing. So, the whole point of a discovery project is to make sure the first thing you start building is the right fit.

One of the biggest things we get out of those discoveries is a set of goals. Then we try to limit them to three to four goals that the entire team rallies behind, that we get executive buy-in from, and that becomes the North Star. Everything can be judged by those goals.

In that discovery we also talk about scoping and about bringing that 50% swing from a high to low down to a 20% swing in an estimate. That swing is just a roadmap for those decisions that the team and the client make together every single week. Typically, there are 20% new things that we didn't find out in discovery that needed to be done, and 20% of the things we did estimate don't need to be done.

How do you train your team to fight optimism bias?

We forecast in hours, because time is the universal constraint and that's how we do our billing. When we forecast things out, we know how many people are going to be on this project and how many hours we expect them to work.

We also use an iterative approach, where all of the tasks have points associated with them. It's been a lesson learned for us that we should not estimate tasks in hours because we're going to be wrong. Having those abstract points allows us to track the velocity inside of a week or two-week long iteration. We can then look at how many hours we put in and how many points we got for that time.

If you do hourly billing, you need to have a really disciplined cadence. When does the sprint start? When does the iteration start? When does it end? When do we do reporting? And the client should be intimately involved. We have those priority conversations on a weekly basis as we go.

We do weekly invoicing too, so clients are crystal clear where they are every single week on budget, how many hours we’ve spent, what we've accomplished, what we're predicting is left, and so on. It’s constant discovery and prioritization. It becomes a partnership where we’re iterating together to get things done.

And, it's a shared risk model. Our client owns the problems we encounter and we’re helping them slay those dragons. It becomes a group effort to get the thing done and to prioritize the important things first because the budget might not last.

How can other agencies get better at forecasting projects?

A business that you’re in control of is a business you can forget. But so many studios are in a reactionary mode. Like, "I'm busy, I'm busy. Life is great. Oh crap, there's no more work! I guess we'll just let some people go, or make adjustments, or just suffer for a quarter as we ramp things back up."

That's a crazy way to live, in my opinion. I want to optimize for sustainability and be able to sleep at night. That's more important to me than making every single last dollar I can.

Agencies can start by getting really good at their reporting. If you can start saying, okay I'm really, really good at reporting. I know what happened last week. Let me try to guess what's going to happen next week. Then I can use that reporting to judge how my forecasting is. Use that data to make adjustments along the way.

As soon as you can get to a place where you’re accurate and confident about forecasting, you can start predicting cash flow, and cash flow is king in this business.

Good cash flow is like deodorant. It covers up lots of other problems if you have money constantly coming in. Being able to predict that cash flow — knowing what your bank balance is going to be on any given day in the future — helps you make better decisions today.

It’s about financing your own freedom. Times are going to be good in three months. If I know that, I can make different decisions. And more importantly, if times aren't going to be good in three months, I know I need to make impactful decisions today. I can start looking for new opportunities and leads or lower our rate if I need to. Or, take a project that I wouldn't otherwise take, because the biggest priority has to be staying in business.

If we really want to have an impact and do the work we think we're called to do, it means living to fight another day.

Editor’s note: A version of this interview originally appeared on the 10,000ft blog. In 2019, Smartsheet acquired 10,000ft to enhance resource management capabilities for Smartsheet customers. Learn more Smartsheet Resource Management