As AI moves from experimentation to adoption at scale, we are beginning to understand how it will change the way organisations operate. The knock-on effects for finance are significant.
The professional services industry is facing a period of major transformation. Some clients are reconsidering whether they even need external consultants if AI can automate the work. Others argue that if firms use AI to cut their costs, some of those savings should be passed on to customers.
AI-driven efficiencies are eating into billable revenues
There is a deeper problem too. When a firm bills by the hour and uses AI to finish a task faster, it bills fewer hours, so efficiency cuts its own revenue. The unit of measure, not the value delivered, sets the price. This is prompting firms to rethink how they charge.
Project tracking
The most radical response is a completely different, outcome-based model for running projects. On paper this looks like an attractive way to reset client relationships. In reality, it means more work for finance leaders and raises a big question about revenue recognition. If a firm moves from billable hours to milestones, it must meet them before it can recognise revenue, so how does the finance team track a project? Is finance ready to manage budgets, forecasts and revenue streams this way?
Outcome-based pricing is not the only answer and does not suit every project. Time and materials, lump sum and subscription models each still fit some work. But outcome billing raises the hardest questions for finance.
Outcomes must be delivered in a way that appeals to clients
Unit4 recently commissioned Pierre Audoin Consultants to survey professional services firms around the world. Its findings included some worrying operational and technological challenges that could make moving to outcome-based models more difficult. For example, 68% of respondents say they are working longer hours due to monthly or quarter-close bottlenecks, 47% are spending time correcting timesheets and 37% are working overtime on accounts reconciliation.
So how do finance teams recognise revenue in an outcome-based model amid such inefficiencies? How can they price outcomes confidently? Finance teams must work even more closely with the business to track performance against metrics agreed with clients.
Unit vs outcome billing
One solution is to lean on technology. We are finding that more customers want software that can handle both outcome-based billing and per unit billing, to deliver the accuracy that revenue recognition needs.
They are not the same thing, and the difference matters for revenue recognition. Unit billing ties the fee to a count of delivered items. Finance tracks progress against milestones, agrees the amount for each unit with the customer, and recognises revenue as each unit is delivered and accepted.
When revenues flow in peaks and troughs, cashflow and profitability are impacted
Outcome-based billing ties the fee to a result the client values, such as a cost saving, a shorter delivery cycle, or a clinical endpoint a trial must reach. The firm does not fully control that result, so the fee is uncertain. Under IFRS 15 and ASC 606, a firm recognises revenue as it transfers control of the work to the client, not when it sends an invoice or collects cash. An outcome fee is a variable consideration, which a firm can recognise only when it is highly probable that the revenue will not later reverse. In practice, this delays recognition until the outcome is reasonably certain.
Margin protection
If consultancies want to implement an outcome-based model, they must deliver in a way that appeals to clients and still protects margins. This requires detailed planning and a deep understanding of the customer’s business and industry. The best approach is to engage in transparent, frank dialogue with the client to ensure consensus on what is achievable within an acceptable timeframe. Finance should be involved in these discussions, as setting the parameters of what lies within and outside the project scope will be crucial to maintaining client satisfaction.
Forecasting when phases will complete is another key consideration for finance. The implementation team could say the project is 40% complete and can be billed. But what if the client feels the project is only 20% complete? This quandary can be averted with a robust approach to designing the project plan from deployment to go-live, agreeing the milestones or outcomes to be completed at each stage.
In turn, this could affect revenue recognition. Moving to an outcome-based model can result in revenues flowing in peaks and troughs, so how does the finance team manage the impact on cashflow and profitability? They must work closely with the project management team to ensure transparency on payment schedules. Potentially, each delivery phase could include an initial deposit with the remaining payment based on the outcome at the end of the scheduled timeframe.
Data clarity
Data management can also improve visibility of project delivery and utilisation. In our study, 88% of respondents said a single, consistent data management platform would most likely improve performance, while 86% want to improve the predictability of business performance. The two areas are closely aligned. If the finance team has greater clarity on all the data within the organisation, this will enable greater predictability of revenue recognition against outcome-based measures of project completion.
It is vital the client understands and accepts how success is measured
The customer’s readiness to join its delivery partner must be carefully assessed. It is vital the client understands and accepts how success is measured. From a professional services perspective, the finance team must set clear ground rules in the contract to reflect the outcome-based approach. This raises questions such as who owns the AI model that trains the data. Plain words carry hidden risk. Terms like ‘done’, ‘support’ and ‘pilot’ often mean one thing to the firm and another to the client. All this needs to be agreed upfront to avoid fee-rollback risk.
Implementing an outcome-based model requires tight fiscal discipline to ensure the parameters are clearly set, and both the client and the delivery team buy into what is required to achieve the deliverables. Collaboration with the project management team is essential, but finance must be closely involved in every stage of designing and delivering outcomes. This increases the burden on finance, but it is the only way to make an outcomes-based model work in professional services.
