As we have seen, it is critical for professional service firm owners to understand, track and manage against all three metrics — utilization, realization and profitability. By doing so, you will gain a comprehensive and accurate view of your business, the talent working in it, and the best pathways to growth and scalable success that you can pursue.
Interesting article. How does this work in practical terms? Can you direct me to any resources for how I might incorporate this approach in my business. The part on the profitability made me think about the problem in a different way as you intended. Previously I mostly thought about utilization. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Subscribe for Blog Updates. Email Address.
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And if you are using the right software to track time, you will be able to better understand how your employees are using their time:. There are many reasons to record non-billable hours in a Professional Services Organization: the employee can be working on a commercial proposal or working on an internal project.
In both cases, it is important to have metrics about his non-billable time, because it would be a mistake to see that his realization rate is low and jump to conclusions that his time is not optimized. In many cases, commercial activities and internal projects have high returns.
Recording precisely and looking at the right reporting is the first step. The next step is to optimize your resources, and this will be the topic of another post. It takes everything into account past and future time, expenses and tells you if you can anticipate to over perform or under perform the project.
Of course the denominator takes into account the different daily rates of each member involved in the project. Billing for additional time could strain the client relationship to the point where it is not worth it to bill the extra time this year.
If a job does not meet certain realization targets it might not be worth taking on because the firm is putting too many resources into something that does not yield an appropriate return. While utilization is a generally a personal metric, realization is an engagement metric. For many firms it is not possible to accurately calculate an employee's realization because hours that are written off are not usually traced back to the person who billed them.
Managers tend to be evaluated on how well their engagements go and realization is one of the key areas. Therefore, it's in an engagement manager's interest to have the least amount of chargeable hours within reason to show that they can get the engagement done more efficiently and come in under budget. At the same time, not charging all hours to an engagement can hide some of the key issues from the Partner, who likely needs to know about those issues when considering how to justify a fee increase for the client.
When comparing the practicality of these two metrics, we can see that there is a conflict. With utilization, staff want to charge as many hours as possible to make themselves look good and busy which can sometimes lead to inefficient work.
On the other hand, good realization on the job depends on spending fewer hours to get the work done. As a result, you could end up with the following:.
Realization rates should not be a sign that the job was done poorly but instead as an indication that the job could be more efficient. The main distinction is the use of realization rates as an indication for change instead of a means of evaluation. Secondly, if time is being cut from a job year after year then this is an indication that the price of the job is not being appropriately reflected in the billing. This has more to do with pricing then it has to do with efficiency.
Poor realization on a job could likely mean that the ceiling on the job is too low and a conversation needs to be had with the client. Traditional billing for accounting services usually comes in the form of hourly billing. The work performed during the course of the engagement is charged to the job and at the end of the engagement the partner decides how much to bill the client.
This is like taking your car to a mechanic and finding out how much you owe after the work is performed; not the best system for pricing.
The main drawback to this form of billing is the lack of consideration of the value of service provided to the client. Traditional pricing of accounting services focuses on inputs rather than outputs and charges based on the cost of time rather than the value of service.
Instead, accounting firms should give clients pricing options for different levels of service instead of one flat billing rate. If the price of accounting services are already determined ahead of time and the incentives of the engagement are structured around providing value to the client then management and staff will have the same motivations. Accounting firms should focus more on the price the client is willing to pay for a service and find ways to provide this service using the appropriate amount of capital.
By aligning these incentives and rethinking the way accounting firms bill clients, accounting firms can increase both value to the client and profits to the partners. Looking for more articles related to tax policy and accounting? Well be sure to check out our article archives! What is Realization?
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