We are now both witnesses and participants in redefining how business costs are analyzed and estimated. For example, consider NFTs:

In an article by Daniel Phillips and Stephen Graves titled “The 15 Most Expensive NFTs Ever Sold,” we learn that the CryptoPunk #7523 pixel face sold for $11.8 Million. Really? Someone valued this NFT in a way that had no correlation to anything, including labor hours. This redefinition of value requires the death of time. Let me explain.

Cost ≠ Labor

If Abha’s average time for finding and fixing a software bug is six hours, and Chris’ average time is nine hours, should Abha be required to work the same number of hours as Chris if their pay is the same?

Back in my day, I remember when the Phoenicians in Carthage traded with people in Spain. 😉 They continually adjusted their prices because selling something is usually better than not selling it. Price was often established by the perceived value that a buyer placed on an item. Labor was not a factor.

Even today, many companies sell their products or services based on perceived value instead of (cost + profit margin). Consider software. If you are a hobbyist, you get a crippled, free version. If you’re a developer, you get a complete Pro version. There are higher prices for Enterprises and Agencies, which have little to do with labor costs. Innovative companies have a single code base and turn-off features for lower tiers. So, value has little to do with labor costs.

Visiting the Past

Beginning with the Industrial Revolution (circa 1760), companies became increasingly able to calculate their costs since each worker was required to produce a certain amount per workday.

In the Industrial Revolution 1.0, hours worked were a reliable way to understand a company’s costs. This heuristic was used successfully to build everything from steam engines to the Brooklyn Bridge to microwave ovens. However, it’s becoming increasingly difficult to derive the cost of stuff from the number of hours worked by labor. Labor hours are inadequate to calculate cost, yet companies continue to use this arcane heuristic.

Revolution 4.0

As technology continues to terraform business, 1.0 tools are ineffective when determining how business should be performed and how costs should be estimated.

We don’t live during the Industrial Revolution 1.0. For us, we live in the Industrial Revolution 4.0. And we see that our 1.0 version is deeply flawed. One indicator of this difficulty is the growth rate of project managers. This profession’s labor force is expected to expand by 33% globally from 2017 through 2027.[1]

The problem of predicting what something will cost is a small but significant contributor to companies increasingly enlisting project managers not just to facilitate an efficient implementation but to eliminate every activity that cannot be directly tied to defined cost drivers.

Stuck in 1.0

More about cost drivers in a moment, but first, we need to understand that nearly all big companies maintain a 1.0 mindset that demands that cost is based on how many hours a person works. For example, the hours worked paradigm remains firmly ingrained in Microsoft®. Consider a comment by Mr. Nadella, Microsoft’s CEO.

“Over the past year, no area has undergone more rapid transformation than the way we work. Employee expectations are changing, and we will need to define productivity much more broadly — inclusive of collaboration, learning, and wellbeing to drive career advancement for every worker, including frontline and knowledge workers, as well as for new graduates and those who are in the workforce today. All this needs to be done with flexibility in when, where, and how people work.” Satya Nadella, CEO at Microsoft

Notice that Mr. Nadella says, “flexibility with when, where, and how people work.” He does not mention changing how many hours people work or if compensation will be based directly on what I call effective terseness.

Effective Terseness

Effective terseness is shorthand for people performing tasks that are good enough. We’ve all been bludgeoned by Jim Collins’ Good is the enemy of great. However, in business, we need most employees to learn what good enough means.

Effective terseness means that any more of anything that a task requires is waste. If I need my lawn mowed, then mowing my lawn is good enough. If I proceed to rip out all the sod and replant my yard, I’ve not accomplished great. I’ve just accomplished waste.

When discussing the price of something, we are taking a leap of faith. We assume that the price is somehow connected to cost, but we’re wrong, of course. I may pay $6,000 for a 1969 Fender® Stratocaster. To me, its value is $6,000. But if I go to a pawn shop to sell my guitar, they will look at it and see that it was manufactured when CBS bought Fender®, so its value to the pawnshop is less than what I paid. Neither the pawnshop nor I give the manufacturing cost a second thought.

Cost Drivers Lead Us Astray

The challenge for companies is that predicting what something will cost is entangled with the accounting mechanism of cost drivers.

A cost driver is the direct cause of a cost and its effect is on the total cost incurred…Total production costs are used to set the selling prices for particular products. Thus, if the costs are inaccurate, the profit forecasts will not be accurate, and the whole accounting system of the particular organization will be subject to errors. — What is a Cost Driver?

Notice that the idea of cost drivers is easy to understand and seems intuitive. The problem is that labor costs, as a cost driver, assume Graphic Artists “A,” “B,” and “C” can all do the same work in the same amount of time every time. Obviously, this is flawed logic.

Within The Great Reset, we must reach a consensus on what is a fair metric to understand how a person should be paid for the work they perform. As mentioned earlier, if Ahba finishes the same task as Chris but in a shorter time, what is an acceptable compensation? And what if next time, Chris completes the same task as Ahba but in dramatically less time? The precision of business has reached a point where guessing is not good enough.

If I’m reading the tea leaves correctly, AI-based accounting will jettison the hours worked paradigm within many sectors of our economy. The hours worked model is dying, and we are witnesses to the death of time.

What should replace hours worked? I’m leaning towards an innovative approach to piece-rate work. What paradigm do you think we should adopt?

Image by Stefan Keller from Pixabay

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I originally published this on Medium.

The Death of Time