Thoughts on Measuring and Managing Professional Services Organisations

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Over the last three months I’ve posted several extracts from my book Eight Measures for Professional Services Management. Here’s a compilation of them all:

tape measure

Telling the Truth About Time

Four Important Design Principles

What to Measure if What You’re Selling is Time

Utilisation

Standard Fee Variance

Activity Variance

Realisation

Standard Cost Variance

Work in Progress Days

Overhead Variance and Debtor Days

Motivating Professional Staff – Team Members

Motivating Professional Staff – Team Leaders and Project Managers

Motivating Professional Staff – Business Unit and Company Managers

Interdepartmental or Intercompany Charging – Theory

Interdepartmental or Intercompany Charging – Practice

Summary of Recommendations

Download the whole thing from here:

Eight Measures for Successful Professional Services Management

Looking For a Professional Services Management System?

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I’ve posted several blogs in the last few weeks about measurement in Professional Services Organisations (PSOs), but in a sense they’ve also been about systems, since it is rare that a PSO can obtain all the measurements it needs without systems of some kind of another.

By systems, I mean all the means of recording, communicating, aggregating, calculating and reporting that together constitute the technical and human aspects of the task. I don’t necessarily mean that computer-based software systems sit somewhere inside this network of media, but for all practical purposes we might as well assume that.

which way to go

So, what kind of software systems support the kinds of measurement that I have recommended?

Well, before I can answer that question I must confess bias. As the designer of a software system expressly devised to enable the measurements I’ve described, I’m bound to be describing characteristics of time@work, the system I’ve designed. However, I’ll try to do so in ways that are partially neutral, in that other software systems (and there are many competitors for time@work) may very well share some of these characteristics.

For more about time@work see www.systemsatwork.com.

I should also point out that to my mind, at least, there is a distinction to be made between a financial system, which provides statutory and management accounting information for companies and groups of companies, and Professional Services Management systems, which provide tools for the management of professional staff.

First, I’ll begin by introducing some more general requirements of a Professional Services Management system.

General Requirements

Analysis

Some PSOs are very simple, but many, indeed perhaps most, are not. Sometimes even the smallest PSOs are complex. In my experience complexity is a more commonly found feature of PSOs than of comparably sized manufacturing or distribution companies, for whom products, prices, and methods of delivery are relatively standard.

If even a moderately complex PSO encounters financial performance problems and it becomes useful to analyse the organisation using such measures as those I’ve described in my posts, then it may well be useful to analyse them by a number of different criteria, chasing down problems by looking at these measures from a variety of different angles, slicing and dicing the data to get to the underlying problems.

For example, issues such as utilisation don’t always affect all business streams or geographies equally. In addition, issues such as realisation don’t always affect all your clients, or client types, or client sectors equally. The same goes for all the other measures.

Because of this it is essential that your system should be capable of analysing data (time, expenses, invoice values, forecasts, etc.) using a number of user-definable criteria. What could these be?

Time-based:

  • Date
  • Day of the Week
  • Week
  • Timesheet Period (usually a week)
  • Month
  • Accounting Period
  • Quarter
  • Year

Activity-based:

  • Activity (e.g. Meeting, Researching, Consulting, etc
  • Location (e.g. At Home, At the Client, At the Office, etc.)
  • Role

Employee-based:

  • Employee
  • Employee Department/Cost Centre
  • Employee Business Stream
  • Employee Company
  • Employee Grade
  • Employee Position
  • Employee Type (Internal/External/etc.)

Client-based

  • Client
  • Client Department/Cost Centre
  • Client Business Stream
  • Client Sector
  • Client Type
  • Client Duration

Project-based

  • Client
  • Project
  • Project Department/Cost Centre
  • Project Business Stream
  • Project Company
  • Project Location
  • Project Type
  • Project Duration
  • Project Sector

Task-based

  • Task
  • Task Type

These are just some of the ways you may want to analyse data. In reality, every PSO is different and it is likely you can imagine dozens of other ways you might want to analyse your organisation’s performance. Your system must allow you to define these dimensions for yourself.

Multi Company

If your PSO isn’t already a multi-company organisation, consider very carefully whether it might become so. If it does, you would probably want to treat your entire team of professional staff as one group, one pool of resources. And if so, then the system you use should enable this in ways that are completely transparent to your staff, who should record time in their timesheets without being aware of any separation of companies, employees and projects.

This surface simplicity must in fact conceal some complexity. Multi-company means:

  • That each employee must belong to one and only one company, so that appropriate accounting transactions (for example, expenses for reimbursement) can be sent to the right accounting ledger
  • That each project must belong to one and only one company, so that appropriate accounting transactions (for example, invoices) can be sent to the right accounting ledger
  • That the system must be capable of holding multiple charts of accounts, one for each company whose data are held in the system
  • That the system must be capable of managing more than one base currency, potentially a different base currency for each company whose data are held in the system
  • That the system must be capable of detecting inter-company transactions (such as when an employee of one company records time on a project belonging to another), and of generating the appropriate accounting entriesMulti Currency

Even if your organisation is comprised of a single legal entity you will probably need to manage multiple currencies:

  • You will need to calculate values in the your company’s base accounting currency
  • You may need to calculate or record values in a separate transaction currency, such as fee currency if your fees are stated in a foreign currency, or expense currency if you incur expenses in a foreign currency
  • You may need to calculate values in your client’s invoice currency. For example, your client may wish always to be invoiced in EUR, and you may need to convert your fee values or the expenses you have incurred into EUR.
  • You may need to calculate values in your own corporate currency, which may differ from your accounting currency. Especially when your organisation comprises two or more companies with two or more different accounting currencies, you will probably want to report all values together in a common reporting currency.

Multi Language & Flexible Terminology

Consider whether you will want to deploy your system in more than one language. Not all systems do this easily. It is important that if they are capable of this they hold all linguistic terms (messages, labels, and other textual items) outside program code, so that they can be modified easily. Ideally, all terms should be available to you for editing so that you can make your own substitutions for Client, Project, Task, Employee, etc.

Flexibility

In my experience, PSOs are more likely to break their own rules than most kinds of company. Whether the motives for this are laudable – the need to be commercially creative – or whether they reflect disinclination in general to be bound by rules – more flexibility is needed in software for PSOs than for most other kinds of organisation. Your software, therefore, must be very flexible. This means that it must adapt itself to new procedures, or new analytical requirements (as well as changing statutory regulations) without too much difficulty.

There is no software in the world which will do this automatically, but you must make sure that yours is at least capable of change. It may do exactly what it says in the manual, and this may be exactly what you need and all that you need it to do now, but beware of the commercial creativity to come.

What kinds of flexibility should you look for?

  • The possibility of multiple workflows
  • The possibility of multiple document types with differing characteristics: timesheets, expense forms and other forms, and different types of each form
  • The possibility of additional analysis
  • The possibility of multiple rules for fee rates and costs in any number of currencies
  • The possibility of terminological change
  • The possibility of calculating new values and measures
  • The possibility of creating new reports easily
  • The possibility of designing multiple invoice and other document formats easily

No system is unlimited in what it can do. In fact, systems are implemented precisely in order to impose discipline and control, and to restrict creativity. They are sometimes as much about limiting freedom as offering it. The most flexible invoicing medium in the world is a blank sheet of paper, but this is no strong recommendation for Word as an invoicing system.

Bear in mind also that flexibility should not be achieved through program change, since this will make it hard for you to keep up with new versions of a system (and we are assuming throughout that any system you choose is a commercially available packaged software system). It is important that flexibility be achieved through configuration or parameterisation. 

Specific Requirements

Timesheets

Every PSO is different. Even PSOs within the same sector (be they lawyers, engineers, accountants, consultants, etc.) differ, sometimes markedly, from each another. They differ in the way in which they record time, the structures (clients, projects, tasks, activities) against which they record time, and they differ in the rules they apply when validating time entries and in the periods they divide their calendars into.

What sort of flexibility should you look for?

  • The possibility of specifying your own ‘unit’ of time entry. Lawyers traditionally divide time into six-minute units. Others report by quarter hours, or hours or even days.
  • The possibility of specifying your own timesheet periods. Some PSOs demand daily timesheets (though these are hard to chase), some weekly, some fortnightly and some monthly. Best practice for most PSOs is weekly, but whether you choose to start the week on a Monday or any other day must be within your realm of control. You also need to be sure that you can close an accounting period or month rapidly, splitting the final week of the month appropriately.
  • The possibility of recording time at Project level, or at Project and Task level, as required by the Project.
  • The possibility of defining (and switching on or off at least by Project) additional fields for free form or selective data entry. These might be used for any number of purposes such as Activity, or Location. It is an extra bonus if the values associated with these can also be limited by Employee or Project.
  • The possibility of including or excluding a field allowing staff and their line managers to specify whether work is chargeable or not.
  • The possibility of multiple calendars, defining, if necessary for each employee, the length of the working day so that the entry of standard working hours can be enforced, if this is a requirement.
  • The possibility of entering unlimited free form notes against time entries with selective enforcement of notes.
  • The possibility of validating time entries using various rules, to prevent incorrect entries or the entry of time beyond specified limits.
  • The possibility of limiting projects available to an employee so that he or she may select only from an approved list.
  • The provision of easy to use project search tools so that an employee can find his or her most recent projects and any other specific project easily.
  • The possibility of pre-filling a timesheet with confirmed diary entries.
  • Flexible workflow possibilities so that timesheets can be routed to line managers or other managers (conditionally) for authorisation.
  • The option to calculate multiple values for each entered timesheet cell. These might include Standard Fees, Actual Fees (local and/or foreign currency), Standard Working Cost, Standard Availability Cost, Standard Project Cost, Cross Charges, etc.
  • The option to approve time by Project view rather than Timesheet view, so that Project Managers can see all timesheet records that have been entered against their projects, irrespective of who has recorded the time.

Expense Forms may be simple, or complex, according to the activity of the PSO. A simple domestically oriented PSO needs far less complexity than a multi-national internationally oriented one.

Some will need some, and some will need all of the following features:

Expense Forms

  • The option to create a number of different forms with different characteristics, these including, different static data entry fields (Project, Task, Activity, etc.), and different value entry fields.
  • The option to specify validation rules for data entry, to enforce expense policy.
  • The option to specify different authorisation workflows for each form.
  • The option to make workflow conditional on aggregated or specific row values in a form.
  • The possibility of managing multiple tax rates (differing VAT rates, for example, for multi-national PSOs).
  • The possibility of specifying values in many currencies, whilst converting these into local currencies for reimbursement, and potentially further currencies for re-invoicing.
  • The possibility of automating, and overriding, the provision of an exchange rate.
  • The possibility of deriving account codes from static data fields without an employee having to be concerned with these.
  • The possibility of arranging pre-approval for travel expenses.
  • The option to specify whether an expense is rechargeable to a client or not.
  • The option to manage value-based expenses, per-diem (daily allowance) expenses and mileage-type expenses separately or on one form.
  • The option to import credit card statements in a variety of formats and present these as expense forms for completion by employees.
  • The option to import recharges to clients such as photocopier expenses, telephone expenses, etc.
  • The option to record supplier-invoiced expenses such as travel tickets.
  • The option to import expense data from suppliers such as travel agencies, online retailers, etc.
  • The option to attach scanned images and documents to expense forms
  • The option to calculate values such as ‘carbon footprint’ in respect of specific expense types

PSOs differ enormously from one to another in the way they handle invoicing. For some it is a simple matter of invoicing work in progress at full value, for others there is a need to record discounts and write-offs. Others invoice in advance, or based on milestones, or percentage completion, or invoice regular values every month or quarter or year. Some combine expense and time invoicing. Others don’t.

Your needs may also change from time to time. You may at some stage need some, if not all, of these options and possibilities.

Invoicing

  • The option to create time and materials invoices based on work in progress, with specified deferrals, additions, discounts and write offs.
  • The option to track discounts and write offs against original values for the purposes of management (realisation) reporting.
  • The option to combine time and expenses on a single invoice or to keep time and expense invoices separate.
  • The option to invoice in advance, and afterwards allocate work in progress to advance invoices.
  • The option to invoice based on percentage completion.
  • The option to invoice scheduled values periodically.
  • The option to reverse invoices of any kind, fully or partially.
  • The possibility of generating all accounting entries from the invoicing process.
  • The option to separate the booking of revenue from the booking of invoices.
  • The option to format invoices in a number of different ways, at a detailed or summary level.
  • The option to produce ad-hoc invoices and credit notes of any kind, without reference to time or expenses.
  • The option, in all invoice types, to amend any textual item.
  • The option, at invoicing time, to recalculate accounting or fee values based on latest specific exchange rates.
  • The possibility of invoice authorisation workflow.
  • The option for project managers (and sometimes customers) to approve time and expenses prior to invoicing.

I assume that full financial budgeting, including total forecast revenue, total budgeted staff and overhead cost, is managed in your Financial System.

Planning and Budgeting have both an active and a passive aspect. They can be used actively to achieve optimal utilisation through the intelligent scheduling of project work, using skills, availability, cost, and preferences as inputs to the process. In addition, they can be used passively for reporting actuals against plans, and for the determination of recognisable revenue.

These are some of the planning and budgeting options you might look for in a Professional Services Management system:

Planning & Budgeting

  • The option to hold anticipated time, expense, fees and costs for a project, optionally at project, task, activity, role and employee level, so that actual values may be compared with plan.
  • The option to import a plan from an external project management tool such as MS Project.
  • The option to hold multiple plans and revisions.
  • The option to hold skills, preferences, and other attributes, against employees so that staff may be scheduled appropriately for specific work.
  • The option also to review staff availability during scheduling.
  • The option to plan at possible as well as firm level.
  • The option to integrate planning with diary systems such as MS Outlook.
  • The possibility of publishing scheduled work and availability across the entire PSO.

Some Recommendations for a Professional Services Organisation

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Recommendations from my book Eight Measures for Successful Professional Services Management:

8Measures

Telling the Truth about Time

  1. Encourage staff to record time accurately, and make it clear that time recorded and time invoiced are different concepts
  2. Collect timesheets weekly
  3. Record time to the nearest appropriate unit (six minutes, quarter of an hour, half an hour, etc.) that does not encourage under reporting

Utilisation

  1. Distinguish between chargeable utilisation (based on projects that are directly charged to external clients) and utilisation (which includes valuable internal projects). These different measures are important when it comes to motivation.
  2. Exclude planned absences (holidays, training, etc.) from available time so that trends in utilisation are unaffected by seasonal absences
  3. Adjust available time for staff who have other responsibilities besides project work
  4. Control internal projects rigorously to avoid the ‘dumping’ of time onto internal projects that count as utilised time

Thirteen Obstacles to Good Utilisation

Increase utilisation by:

  1. Planning ahead, based on well-informed estimates, avoiding dependencies that lie outside your control
  2. Ensuring a clear view of staff availability, skills and experience
  3. Not having quite enough staff, using external staff when necessary
  4. Sharing staff between departments, business units and companies
  5. Penalising clients for postponements and cancellations, as far as good relations permit
  6. Insisting on assignments of appropriate length (whole days, half days, etc.), as far as good relations permit
  7. Finding ways to incentivise clients to buy your spare time, or to bring assignments forward
  8. Clarifying your understanding of what kinds of time are chargeable (research, travel, corrections,  etc.), and documenting this understanding in a Services Charter
  9. Analysing and improving staff time management
  10. Never do tomorrow what you can do today

Standard Fee Variance

  1. Calculate standard fee rates by grade/role and business unit, these being the fee rates that you will use as a basis for forecasting revenue (but note that standard fee rate will be the rate before the effect of realisation on the forecast)
  2. Record your ‘assumed’ or ‘implied’ rates for fixed price projects so that you can monitor variances from standard fee rates for fixed price projects as well as for time and materials projects

Realisation

  1. Record all time against each project honestly, even if the time is clearly not chargeable
  2. Scope well
  3. Estimate well

Standard Cost Variance

  1. Calculate standard costs by business unit and grade rather than by individual, to avoid inadvertent disclosure of confidential information
  2. Calculate standard project cost by dividing all directly allocable employment costs by available days and increase to reflect planned utilisation
  3. Calculate standard availability cost only if you think it worthwhile to track an availability variance
  4. Calculate standard working cost only if you think it worthwhile to track employment cost variance separately

Motivation and Measurement

  1. Recognise that everyone is motivated in different ways and that motivation is rarely a matter only of material reward
  2. Where material motivation is appropriate:
    1. Motivate professional staff 40% by utilisation (not chargeable utilisation), 40% by team gross margin variance from plan, and 20% on qualitative measures
    2. Motivate team leaders 40% by utilisation (not chargeable utilisatiion), 40% by team gross margin variance from plan, and 20% on qualitative measures
    3. Motivate project managers 40% by project realisation, 40% by project gross margin and 20% on qualitative measures. Ensure that project managers and more senior staff are involved in estimating, scoping, and agreeing between themselves a reasonable project plan irrespective of the commercial decisions made by commercial and sales staff
    4. Motivate business unit managers on the basis of gross margin variance from plan, including sales and account management costs, excluding overhead costs which they do not control
    5. Motivate company managers on the basis of P&L variance from plan

Intercompany and Interdepartmental Charging

  1. Don’t implement a completely ‘free market’ for the buying and selling of time between companies and departments unless you are prepared to manage the contentious atmosphere this might engender and the complex administration it will imply
  2. Cross charges should always be chargeable from supplying to consuming entity unless the execution of work is clearly unacceptable. It is for the consuming entity to accept the risk (and associated margin) that comes with project estimation and management.
  3. Avoid situations where project management is outsourced to a supplying entity, since this confuses the responsibility and financial impact of poor management
  4. Calculate cross charges for externally chargeable projects based on a standard uplift on standard project cost, so that there is a margin both for the supplying entity (which bears the employment risk) and the consuming entity (which bears the project risk)
  5. Calculate cross charges for internal projects based on a lower uplift on standard project cost, so that there is a margin for the supplying entity (which bears the employment risk) and a reasonable and acceptable (because unrecoverable) cost for the consuming entity

Revenue Recognition, WIP and Provisions

  1. Calculate WIP for management accounting purposes on the basis of net realisable value, not on the basis of cost
  2. Always calculate WIP provisions and revenue on fixed price projects properly every month to avoid unpleasant surprises
  3. Base revenue recognition on a project manager’s estimate of days to go (reviewed by senior management) at task level as well as project level, if possible

Expenses

  1. Record and recover project expenses as rapidly as possible
  2. Make sure that it is clear to the client what expenses he will be charged
  3. Make sure that all unrecoverable expenses associated with a project are properly recorded against a project so that a more accurate P&L can be created by project

Planning and Budgeting

  1. Annual budgeting, assuming that you cannot forecast actual project work a year ahead, should be based on capacity, standard fees, planned utilisation, planned realisation and planned costs

Profit and Loss

  1. A profit and loss statement is only of use to an individual inasmuch as it contains values that are under the control of the individual
  2. Allocate direct costs and revenues to projects and tasks as transactions occur, including sales, account management and marketing time and cost, if possible. Don’t bother to allocate higher level overheads or variances at a lower level. Don’t allocate team overheads across projects, don’t allocate business unit overheads across teams, and don’t allocate company overheads across business units.

Eight Measures for Professional Services Organisations – No. 2 – Standard Fee Variance

In this series of articles I am looking at how to measure the performance of a professional services organisation (PSO). I assume, perhaps ambitiously, that all PSOs engage in some kind of planning, forecasting or budgeting process, so that a certain level of profit can be anticipated.

  • Actual results may differ from the plan due to:
  • Lower or higher than planned utilisation of staff
  • Lower or higher fee rates than planned
  • Lower or higher realisation (conversion rate of fee value to revenue through invoicing)
  • Lower or higher overall activity than planned
  • Lower or higher staff costs than planned
  • Lower or higher overheads than planned

It is important to understand which of these factors are at play in your actual results. This article deals with ‘standard fee variance’.

std fees

The idea of ‘standard fees’ may be an alien one. What I don’t mean by ‘standard fees’ is a price list that you might optimistically publish to your clients. What I mean is the fee rates on which your financial plans are based, and which, if you exceed them, could mean more profit (all other things being equal), and which, if you fail to meet them, could mean lower profit or even losses. They are central to budgeting, financial planning, and revenue planning in a professional services organisation.

One of the reasons for reticence about standard fees is that budgeting costs is a much easier task than forecasting revenue, especially if you’re assuming that your professional service team is fixed in number. But your finance director and your shareholders aren’t likely to be satisfied with a cost budget without a revenue forecast.

How can you approach forecasting?

The first thing is to understand the constraints:

  • You cannot achieve what is physically impossible. By this I mean that you cannot earn more revenue than your staff are capable of earning. Their working days are limited and utilisation has an upper limit.
  • You cannot charge fees that the market will not support.
  • You must make a profit.The first constraint sets an upper limit on the number of days your staff can work, and therefore the number of fee-days that can be charged.

Standard Fees can be defined in this way:

Standard Fees, usually associated with grades, roles, and business streams, are target fee rates on which revenue forecasts have been built.

They should take no account of any effects of realisation (of failure to realise, as revenue, the full value of time). Realisation is a separate measure.

There are two approaches to the determination of standard fees:

  •  You can start with cost and multiply it (assuming a target gross margin %) to arrive at fee rates, or
  • You can start by considering what the market will bear.In reality, whichever method you start with, you will have to look at the numbers from both points of view.

Starting with costs and an assumed utilisation rate you may arrive at a rate that the market will not sustain. Starting with what the market can bear you may discover that your gross margin (after realisation has increased or decreased your revenue) is insufficient.

In these cases there are only two alternatives:

  •  Reduce costs
  • Increase revenuesHow?CostsAssuming that overhead costs are under control, the only costs we can be seriously concerned with are the costs of professional staff. How can these be reduced?
  • By increasing utilisation. If this can be done then more fee days can be achieved to offset costs, but this is only possible if the market allows it, and if realisation is unaffected.
  • By increasing realisation. If this can be done then more revenue will be achieved from the same fee days.
  • By employing staff at lower salaries. This takes some time to achieve, and can only be a long-term goal. It may also threaten the quality of the work you do and, in turn, the realisation you achieve.
  • By changing the balance of fixed salary and bonus so that employment costs reach budgeted level only if utilisation and revenue increase.Revenues
  • By using more sophisticated fee rate structures. Fee rates are usually associated with employee grades, and are even published, on occasion, to clients. They are like hotel ‘rack rates’ in that they represent the highest rate the PSO charges. They should usually be pitched higher than the average fee rates that you’ve assumed in your forecasting, since most clients see them as the starting point for downward negotiation.But you can set your rates more cleverly if you break the fixed link between an employee’s grade and the rates you charge. It is often better to charge on the basis of role since an employee may be capable of more roles than one, and you may thus be able to increase the average fees you charge.

Whatever techniques you adopt in anticipation of challenging margins, or in search of increased profit, you will forecast on the basis of an average or target or standard fee rates that you believe can be achieved. This fee rate will probably be associated with an employee, or more typically, with a group of employees, by grade or default role.

In complex PSOs that work across international boundaries, and which may contain more than one business stream, you will probably associate standard fees with combinations of grade, business stream and company (or country), especially if markets are substantially different in each of these. But you may choose any other meaningful combination of criteria against which to hold your standard fee rates, as long as comparison with actual rates remains possible. As with all systems, however, it is sensible to keep complexity at bay if possible. This is no exact science. Think always in terms of what you will do with the information that you hope to obtain.

As long as you can achieve actual fee rates that are close to your standard fees then your PSO should meet its planned profits (as long as all other measures are as planned).

If your rates are higher or lower than planned then a variance will emerge between the value of your fees if they were calculated at standard fee rates, and your actual fees.

Standard FeeVariancecan be defined as follows:

  • Standard Fee Variance measures the difference between actual fees charged to clients and the standard fees that would be charged for the same work, these also being the rates on which revenue forecasts have been built. They may usefully be analysed by Grade, Role, Business Stream, Department, Company and any other useful segmentation.
  • Actual Rates on fixed price

This definition of standard fee variance depends on the concept of actual fee rates. So let’s look in a little more detail at this concept. Actual rate is a simple enough concept in the case of time and materials projects, when every second of professional work is potentially chargeable. But how do we handle fixed price projects when there is typically a lump sum for a project or subdivision of a project?

You might think that it is meaningless to associate standard rates with fixed price projects. After all, revenue doesn’t depend in any way on how much time you spend on the project. Nor does it depend on who executes the work.

But this is a fallacy. If you are not imagining notional rates associated with the staff you plan to deploy on the project then you’re entertaining a very risky proposition, because you have arrived at a price without any calculation at all. True, you could claim, on the other hand, that you are fully aware of costs. And in this case, that’s fine, since you’re relating potential revenue to potential costs, and effectively defining rates as marked up costs. This is a slightly different method, but the result is the same.

You can think of it in two different ways:

You can determine a discounted or uplifted rate proportional to standard fee rates and apply this to estimated days.

Alternatively, you can uplift costs in proportion:

It doesn’t much matter which method you choose. Both deliver a notional fee rate that can be compared with standard fee rates to determine standard fee variance.

And once you can monitor standard fee variance you can act on it. Because, all other things remaining constant, if your actual fees are lower than standard fees then your profits are under threat. If they are higher, then you’re doing well.

Standard Fee Variance is a useful leading indicator of how well you’ve judged the market. If you have overestimated your rates then you must use all the tools at your disposal, as listed earlier, to claw back profitability:

  • By increasing utilisation
  • By increasing realisation
  • By reducing staff costs
  • By reducing overhead costs
  • By negotiating fees more aggressively and cleverly