Automated AI agents affect agency accounting

AI Agents will cure our cancers and take our jobs. That is, if the online hype is to be believed.

Tech hype is always over the top, and so is its counter-reaction. Most loud voices polarise between hailing the singularity and claiming the emperor has no clothes. Those voices, while loud, tell us nothing about the future.

It's clear that these tools will impact the software development space in new ways. No, business people won't vibe code complete apps any time soon, but that doesn't mean nothing is fundamentally changing. In the near future, developers will still code the challenging parts but offload the straightforward work to a set of agents. Software development is picking up pace, and slow bottlenecks like human code reviews and test automation are very likely to be automated soon.

While we cannot predict exactly how this will affect our business, there is one part of agency life that clearly needs rethinking: billing by the hour.

With the rise of agile software development methodologies, we've traded projects for sprints. Fixed-price projects used to be the industry standard, but nowadays, most companies apply a Time & Material approach: they bill by the hour.

Agencies charge their customers for each hour a developer has worked on their product. Those hourly rates are padded with healthy margins. After paying the developer and accounting for some downtime, the margins ensure that the agency still turns a profit.

But throw agentic magic in the mix, and that logic doesn't hold. If a feature requires 10 hours to develop, that's a good source of income for the agency. If an AI-powered dev can burn through the work in 5 hours, however, there is less money to go around. To protect the margins, sales would need to double!

But it gets even more interesting when we take into account the cost of these AI tools. Subscriptions for Cursor, OpenAI and CodeRabbit stack up. Each call to the agent burns tokens, and each of those tokens hits the Visa card. At the end of each session, Claude Code gives you a neat overview of the agent's salary. While it's great that you can buy an hour's equivalent of work for $4, you can't bill that hour, and the dollars come out of your own pocket.

As an agency, AI tools make you pay for less revenue!

Agencies are used to the race to the bottom. We've seen the outsourcing waves and know how to beat them with excellence. But, as tools get better and more agencies jump on the AI train, we might end up having to rethink the business plan.

Here are a few ways this can play out:

More margins are more better

There's a famous motivational story about Picasso charging a huge amount for a 5-minute sketch. The moral of the story is that customers pay for the 30 years of experience, not the minutes of work.

We can apply a similar approach to software engineering. We could just increase the hourly rate. But that feels off. While we can fight the race to the bottom, there are limits to what we can charge. Even if we can convince a customer to pay $5000 for a very productive hour, they aren't going to pay that for a sluggish refactoring job. Billing by the minute at higher rates doesn't feel like the way forward.

Return of the Iron Triangle

A very straightforward solution could be to return to fixed-price projects. We define a scope, estimate the work and slap a price on it. That way, we can leverage those AI tools to reduce our risk and increase our margins.

The problem with this approach is that customers have gotten used to agile software development, where feedback is fast and change is free. It's unlikely that we'll return to negotiating change requests with our customers on a daily basis.

Just sell more!

Sales solves everything. There isn't a single problem you can't solve by increasing the top line. So, if we can only bill half the hours due to productivity increase, can we fix that by doubling the number of contracts?

That seems unlikely. While agencies can definitely increase sales by hiring more business developers or even adding AI agents, there is an underlying risk. Sales aren't a constant. There are busy times and slower periods. Feast and famine. Developers are sometimes benched because there aren't any suitable projects for them. Sometimes, agencies need to refuse customers due to a lack of capacity. These waves are generally priced into the hourly margin. An explosion in sales could turn these waves into a tsunami that's hard to control.

There's also an increase in overhead. How will we pay for the legion of salespeople and account managers if the engineers' margins are low?

The enterprise option: using the customer's AI.

The first thing a developer does upon joining a multinational is to pick up a company laptop. These machines come pre-installed with the allowed software and nothing else.

It's a tried and tested approach in large enterprises. Tools are centralized, secure and vetted. The expenses are under control. But that comes at the cost of innovation. Software engineers can't leverage the latest and greatest when their toolbox is decided by HR.

A very likely option for the future of agencies is using AI tools provided by the customer. The developer might not be able to use Cursor, but they can use a customer-provided Jetbrains license. This solves a lot of problems surrounding security, privacy and cost at the expense of innovation. Hiring an agency and telling them which tools to use seems counterproductive, though.

Maybe try Time & Material again?

Instead of fixed-price projects, most agencies sell Time & Material contracts. In knowledge work, the "& Material" has just been added for show. The only thing we bill is the engineer's time. But that might change. What if we charged the burned tokens on each invoice?

What if we added a bill of materials tokens with the timesheet? What if we could add margins on those tokens? Just like an electrician doesn't charge you wholesale prices for cables, we could charge a premium for using the right AI tools.

Value pricing for all

There's a whole movement regarding charging for the value delivered instead of the hours performed. At madewithlove, we already do this for the Technical Consulting assignments. We charge a fixed monthly price for the CTOs rather than billing by the hour. We could extend this to the software engineers as well. This feels like a safe way forward. For a fixed amount of cash, you get a developer to take care of some part of the product. This could be feature-based, but it could just as well be some kind of concierge service. The agency can leverage the best AI tools to reduce the time spent on the account.

As baseball guru Yogi Berra famously said, it's tough to make predictions, especially about the future. We don't know the extent and speed at which this new wave of tools will change our field.

It feels unlikely that billing by the hour will remain the norm for agencies. Founders and leaders are pushing their teams to leverage tools to deliver faster. Why would they continue working in a way that incentivises agencies to do more hours?

While we don't need the definite answer anytime soon, it can't hurt to start thinking about what's next.

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