So far we’ve looked at two measures: utilisation, and standard fee variance.
Measuring Standard Fee Variance (see Standard Fee Variance) is all very well, but if a low standard fee variance is your only goal then you’re in danger of not missing the bigger picture. A low variance on a value that’s lower than planned may be more dangerous than a higher variance on a value that’s much higher than planned.
If a low standard fee variance is your paramount goal then you can simply reject work when your fees are challenged by prospective clients, fire your superfluous staff as expeditiously as the law allows, and maintain a smugly high level of utilisation. Never mind that your gross margin will fall and that it won’t even cover your overheads.
The important point is that your forecast isn’t just based on standard rates. It’s also based on target volumes.
Activity Variance can be defined as follows:
Activity Variance is the excess or shortfall on activity when compared with forecast activity. It is best measured as a monetary value.
Why ‘monetary value’?
Well, in practice we might compare actual fees at standard rates against forecast fees at standard rates. The difference in value reflects a difference in the number of days of professional work that have been delivered. So, why not compare actual days with forecast days?
It’s true that thinking in terms of days is often helpful, and it is well worth making sure that you are able to report variance in days as well as value, but it is value that matters more, and value that is the true measure of deviance from forecast. This is because you might execute the same number of days as your forecast predicts, and yet, because proportionately more days are worked by staff at lower grades at lower standard fee rates, an activity value variance might still emerge. In the end, it is value that has the stronger relationship to profit and to cash.
Eight Measures for Professional Services Organisations – No. 6 – Work In Progress Days – Adam Bager
Eight Measures for Professional Services Organisations – No. 7 – Overhead Variance & No. 8 – Debtor Days – Adam Bager
Thoughts on Measuring and Managing Professional Services Organisations – Adam Bager