There’s been a lot of buzz recently around the idea of a four-day, 32-hour work week. The concept is to keep the same weekly pay, work fewer hours, and deliver the same output that you previously delivered in a 40-hour work week.
I’m curious to see how this concept plays out in reality. It’s interesting to reflect that we’re less than 100 years removed from Henry Ford announcing the five-day, 40-hour work week. Is there another shift coming?
Every organizational decision comes with pros and cons. There are some obvious pros and cons associated with this concept.
- More individual time outside of work
- Recruiting and retention
- Marketing buzz
- Less time for building relationships
- Pressure to deliver results faster
- Financial viability
This is certainly not an exhaustive list.
In this post, I’m only going to focus on the financial viability for a service company.
To demonstrate the financial impact, I’ve created two simplified, fictitious income statement models. One model will represent a five-day, 40-hour schedule, and the other represents a four-day, 32-hour schedule.
The models use the following simpfying assumptions.
- We’re selling a fixed budget, scope-controlled billing model. It’s not a fixed-price model.
- The consultancy is currently charging a market rate for their work.
- Most clients will be skeptical that a firm will be able to provide the same output for less input. For worst case modeling, let’s assume clients that pay by the iteration will demand to pay 20% less for four-day iterations, and clients paying an hourly rate won’t be willing to increase the hourly rate.
- The consultancy is paying a competitive salary for the team members.
- The SG&A team can complete their work in four days without adding capacity (additional salary).
- Billable utilization rates remain consistent for both four-day and five-day schedules.
- Expenses stay the same for both four-day and five-day schedules.
5-day, 40-hour Work Week Income Statement
|COGS (Cost of goods sold)||$6,000,000|
|Gross Profit||$4,000,000||40% Gross Margin|
|SG&A (Sales, general, and administrative) and operating expenses||$2,000,000|
|Profit||$2,000,000||20% Net Margin|
4-day, 32-hour Work Week Income Statement
|Revenue||$8,000,000||80% of 5-day Income Statement|
|Gross Profit||$2,000,000||25% Gross Margin|
|SG&A and operating expenses||$2,000,000|
|Profit||$0||0% Net Margin|
In the above example, the $2M reduction in revenue results in a full $2M reduction in profit. This happens because the cost structure remains the same.
Running a service firm with a low margin puts the organization at risk of small market fluctuations causing painful consequences (e.g. layoffs, aggressive cost-cutting, etc.). Running a firm with zero margin is not viable.
To regain the five-day margin using the four-day model, you’d need to increase your rate or service cost by 25% (since you only have four days to make five days of revenue).
There are a few legitimate ways to recover the lost margin. You could either prove to the market that you can deliver 25% more value in the same amount of time or provide a more valuable offering. Both options are difficult to achieve.
In a market that’s hungry for your services, clients might be willing to pay the premium. In that same scenario, I would expect the employees would also want an increase in pay since they’ll see their peers at other organizations getting it (i.e. competitive market pay).
It’s logical to assume that some of your competitors will not adopt the four-day model. In a more competitive business environment, the five-day firms will be in a stronger position to have lower rates and leverage their margin to win work.
Assuming the market needs your services, it’s fair to assume that the rates would naturally increase by 25% if all the supply in the marketplace changed to a four-day model.
Until then, it’s financially risky for service providers to be the first organizations to make the leap. Just as in the past, massive employers will need to be the ones that set the standard for the new normal.