In the early years of building my accountancy business I was only too aware that I was not as equipped or as streetwise as I needed to be to manage a fast-growing professional enterprise. I had learnt, by osmosis, the basics of client management but managing audits and learning by observing others left me somewhat short of the capability benchmark. I had minimal commercial experience to speak of. To address this, I decided to enrol on a 5-day Practice Management Conference in the US. It was here that I first heard someone advance the proposition that a ‘firm makes more money realising 85% than it does achieving 100%’. I sat there in silence pondering what I had heard and trying to process and compute why this was. “Surely if you bill out 100% of time-on you could not make more?” This was contrary to everything I had been taught by the firms I had served. I was in the US so I sat there “doing the math” (Brits always would say maths). It was, in effect, presented as a fact that everyone else seemed to accept.
A year later my cousin (who was partner in a 400-person firm in Albany, New York) invited me to spend 3 days with his Managing Partner, Steve. I decided this was not an offer to pass on, so I made the commitment to take a week away from the business and head back to the US. In many ways, looking back, this was the beginning of my consulting career. During my time with Steve, I enquired further regarding the ‘85%’ rule. “Very straightforward,” he said. “If you recover 100% you will never know how much you have left on the table.” There, in an instant, I had the answer I had been searching for.
A FINE-TUNED ENGINE
Many years ago, when I used to decoke my car engine, I would ensure that the engine’s idling tick over was between 600-800 rpm. That told me that I had reset the engine to its optimum performance. Similarly, what I came to realise was that in recovering 85% I was not losing 15% but gaining maximum revenues with the firm ticking over at peak performance levels.
So, steps for you to take? You need to consider making ‘balanced’ changes. You can increase effective charge out rates by maintaining the same realisation and increasing your average standard charge out rate or by maintaining the same standard charge out rates and increasing realisation. Often, the best way to produce a desired increase in effective charge our rates with the least change in operations is to make balanced changes taking into the account each of the following two factors:
CURRENT REALISATION LESS THAN 85% – REMEDY – INCREASE PRICES
Your current realisation is less than 85%. I would agree that an increase in charge out rates may not be appropriate, provided you target an immediate increase in realisation of at least 5%. Thus, you are moving, hopefully over not more than 3 years, to the 85% benchmark.
It may well be that there are a number of clients where realisation is really low and as a consequence the firm’s overall realisation rate is being adversely impacted. ACTION: Open a spreadsheet and in Column A enter client name. Column B enter the realisation percentage. Column C enter the value written off.
Now, with this data firstly carry out a ‘high to low’ sort. Highest write off first. Then with these results do a further ‘high to low’ sort by value. This is, of course, an application of the Pareto (80:20) rule.
Consider: Is there a reason for such a high level of write down? This might be pro bono work or not for profit discounts or other specific factor that influences the lower billing level.
Meet with partners to discuss possible approaches to improving realisation. This could include…
- Asking the client to improve their record keeping. Or maybe their time in responding to queries.
- Can the time-on be reduced? Are we over auditing? Can we more efficient?
- Are the right staff levels engaged with the job?
- Next – should you meet with the client to discuss adjusting the price (as opposed to increasing the fee)? Note, there is a massive difference in this terminology – the former will likely have the client on the defensive from the get-go.
If none of these approaches work then the Managing Partner, should either sanction the approval of the ongoing write down level or take the decision that the client will be better served at another service provider. It is a fact of life that most accounting firms grow and the longer served client might no longer be with the most appropriate service provider.
CURRENT REALISATION ABOVE 85% – REMEDY – INCREASE CHARGE RATES
If your current realisation is at or above 85% your entire increase in effective charge out rate should be from higher charge rates. Let your realisation remain where it is or even drift down a little to the low 80s. My empirical observation is that the highest effective charge out rates seem to be achieved with higher standard charge out rates and realisation in the low 80s.
If you do this the right way, you can normally increase charge rates 10-15% for employees and 10-20% for owners without clients necessarily noticing the change.
Do you have a minimum fee? It is a fact of life that your firm is not necessarily able to serve all clients. Just because they can pay you does not mean they are a good client. The principles of ABC accounting inform us that even if charge rate is recovered, the firm may still be sustaining a loss.
We will return to this topic and explore other routes to improving realisation. For now, my last two blogs have explored firm owner time-on. If you have missed them – you will find Blog 1 here and Blog 2 here.
In the future we will also explore the myth of the charge out rate – I know you will find this of real interest.