Practice Profitability Provides More Opportunities
The profitability of a professional practice, and therefore the ability to fund and provide opportunities for:
- growth
- innovation
- technology investments
- career development and succession planning
- conferences
- remuneration increases and bonuses, and
- overall good working conditions
Key Drivers of Practice Profitability
Whether it is an accounting, architectural, engineering, legal, software development or other professional practice, the drivers can be summarised down to:
- engaged and committed people with a client centric mindset
- a risk and value based approach to every assignment (in other words, time costing is just one measure and the pricing of a client assignment should reflect the risk of the client and/or assignment to the practice and the value of the professional work done to the client)
- an "intrapreneurial" mindset by everyone in the practice knowing their individual annual chargeable hour targets and their connection to the overall practice profitability (please see sample template files for 2020-21 attached below for both 7.5 and 8.0 hour standard days)
- good practice management disciplines by everyone in the practice (partners, professionals, practice management teams) including:
- clear letters of client/assignment engagement with identified scope of work - what's included and not included
- an understanding by all team members on a client assignment of that scope
- a habit of DAILY recording of time incurred on activities against client assignments - with further delineation against work that is within scope and outside of scope, the latter providing potential opportunity for additional billing of a client [This to me is the biggest issue yet opportunity for revenue/profitability improvement in professional practices - time is not entered until the end of a week or month when there is a forced timesheet submission deadline and people are relying on memory as to what they did - and results in client time effectively being added into non-chargeable codes and never being billable.]
- time being entered against a client assignment even if in excess of what has been budgeted or what was incurred in previous years i.e. - a recognition of the reality of actual work being done and a "billing decision" NOT being made at that point by the individual who may think he/she has been inefficient (and I am not suggesting that there be padding or inclusion of time not legitimately worked on a client assignment)
- good project management by assignment leaders including regular meetings with the teams (daily huddles, Scrum etc) as to progress and obstacles
- timely communication to clients of progress on work, particularly work that is outside of agreed scope and could be additional billing
- timely billing on a progress basis as soon as stages of work are completed - whilst the agreed work, and additional scope work, is fresh in the client's mind
- follow up of cash collections once work has been completed in accordance with agreed payment terms.
- regular discussions around career development and performance reviews including review of an individual's practice KPIs, establishment of objectives and development plans
Frequently Asked Questions
Doesn't timesheet accountability provide increased stress?
It is probably fair to say that not many professionals, no matter what sector, enjoy the regular rigour and accountability that comes with the need to record and account for hourly/daily/weekly/monthly hours (and even after 35 years of doing it personally, I can't say I love it!). However, these hours are very often the only way that we can track the time spent on client related and other activities and demonstrate to a client if asked what we have done. If you can make a sufficient profit by adopting fixed fee non time based billing and have other KPIs to measure individual performance, go for it - but in my experience, most professional firms have not been able to successfully use this approach and therefore have to still rely on traditional hour based billing.
The stress that is raised as an issue will normally arise from one of a few factors:
- unreasonable target billable hours per day
- too high salaries for practice staff meaning they have to generate large chargeable hours to cover their costs, overheads and a profit margin
- staff not entering time into timesheets as they do the work - then spending excess time 'remembering' what they did
- poor time management practices including not controlling distractions like smartphones, social media etc
- the focus on individual accountability which fortunately or unfortunately is a hallmark of professional life
Some of these factors are controllable to mitigate perceived stress - and some of it requires an attitudinal shift.
What levels of revenue should individual practice professional staff be generating?
The traditional rule of thumb for revenue to be generated is 3 x the individual's annual remuneration - measured as total annual chargeable hours x hourly rate. This model assumes that 1/3 of revenue goes to the staff member, 1/3 to practice overheads and 1/3 to practice owners as return for labour and risk incurred.
For example, an individual earning $80,000pa should be generating $240,000pa in revenue to the practice. At an hourly rate of say $160 per hour, the individual would therefore need to generate and bill 1500 chargeable hours per year to arrive at this revenue of $240,000pa. .
What risks should we consider when pricing a client assignment?
The fees to be billed to a client should reflect a number of factors including the time to be incurred in delivering the assignment, the complexity of the assignment and therefore the level of people required, the value provided to the client and the risks in doing the work. These risks may include
- scope creep - the risk that the client has not informed or does not know the extent of work required
- litigation risk - the risk of the client suing for incorrect or incomplete advice
- reputation risk - the vicarious risk of being associated with the client
- financial risk - of the client not being able to pay for the work or arguing about the work done
- strategic risk - being work that is not on firm strategy or negatively impacts other client work
A professional judgement needs to be made as to the appropriate level of pricing of an assignment to account for these risks.
How do we determine and articulate value for a client?
Value always needs to be seen through the eyes of a client - but in my experience, sometimes the client may be "blind" to the value of a professional services firm's work. Therefore, it is important that the firm can identify how their work has achieved one of the following outcomes for the client, and an estimated dollar value thereof:
- Saved the client time by outsourcing of services or prevented other time investment
- Increased or maintained a client's revenue
- Reduced, maintained or mitigated potential costs, including potential penalties for non-compliance
- Made a client look good in terms of corporate or personal reputation
- Made a client feel good in terms of being able to secure financing, compliance, reduced cost of capital or overall comfort/peace of mind.
Each of these factors will sometimes require an exercise of professional judgment - the most important aspect though is ensuring that the professional firm considers this value at the outset and articulates as best as possible to clients.
How do we reconcile fixed fees requested by clients and time based recording?
Clients often request or require fixed fee quotes for work to be done to be able to approve a purchase order or to have certainty around costs. These fees may be set by reference to an estimate of hours to be worked at certain hourly rates - but may be well below or above the hours x hourly rate calculation.
Ultimately, fees have to be set by reference to a number of factors including the strategic importance of the client, competitive market conditions and the work required to be done. Time based fees provide one benchmark and professional and commercial judgement needs to be exercised to arrive at the final level of fees.
