Regardless of the size of the firm, managing partners spend approxi-
mately 10 percent of their time on business development to ensure a steady f low of new prospects and revenue stream (see Exhibit 2.2).10
Partner Billable/Nonbillable Hours.
Regular partners/vice presidents have
large time demands similar to the managing partner; however, the driver of these demands will be more client focus and staff development. Each firm will have its own economic model for partner target utilization. Time spent
28
Managing and Governing the Professional Services Firm
100
90
80
70
ge of time
60
50
40
30
Median percenta
20
10
0
Less than 5
5 to 14
15 to 29
30 to 49
50 to 99
Over 100
Number of attorneys in firm
Firm management
Business development
Practicing law
Exhibit 2.2
Managing Partner Time Allocation (average hours per week)
on other areas such as professional development, administrative tasks, and marketing will all depend on the partners’ strengths and the needs of the firm. Typically, time spent is 50 percent on billable activity, 10 percent on client relationship development, 20 percent on sales activities, 10 percent on personnel development, and 10 percent on administration. As the firm grows and the administrative management time increases, the partner will typically work more hours to keep the same number of hours in the other activities. Exhibit 2.3 demonstrates this trend.11
Partners in smaller consulting organizations spend approximately 50 percent of their time on billable work and 50 percent of their time on nonbillable work. Partners at midsize management consulting firms spend the same number of hours as their small company counterparts, yet the percentage of billable time decreases to 36 percent. Hours have been added to manage the overhead of a larger company. The trend continues to a great degree for partners of larger size firms. Again, these partners spend the same number of hours billing, yet that billable time is now only 31 percent of their workweek.
REVENUE DRIVERS.
What differentiates professional services firms
from other industries is that they bill clients for the time incurred by their
Professional Services Firm Benchmarking
29
30
20
24.2
23.4
20.3
10
Billable hours
0
10
20
27.3
30
36.2
Nonbillable hours 40
49.6
50
Small
Midsize
Large
firms
firms
firms
Exhibit 2.3
Partner Billable/Nonbillable Hours by Firm Size
(average hours per week)
professionals instead of charging for delivering a packaged product. The billing can be based on an hourly rate, a set fee for performance of a project, or a set fee for a recurring service. Revenue is a factor of the following: 1. Bill rates
2. Billable hours
3. Professional staff leverage
In addition, the following definitions of firm size are useful:
• Small: Less than $5 million in annual revenue
• Midsize: Between $5 million and $25 million in annual revenue
• Large: Greater than $25 million in revenue
Primary metrics besides these factors are used to understand revenue trends, including:
1. Utilization: Billable hours divided by hours available
2. Realization: Actual hours billed times actual bill rate divided by billable hours times standard bill rate.
3. Sales pipeline: Initial contacts through bids/proposal submitted
30
Managing and Governing the Professional Services Firm
While it doesn’t drive revenue, accounting efficiency can have a dramatic impact on it, notably:
• Are the proper billing rates being used?
• Has all time and expense incurred during a particular billing period been accurately captured?
• Was the project profitable (billed versus incurred)? If not, it is crucial to identify why and how the project could have been approached
differently.
• Is the client paying its bills? If not, do we continue working on the account?
There are two methods to develop bill rates. Most firms develop billing rates by professional staff level (e.g., consultant, associate). In the first method, they start with the level’s average direct labor cost (average salary); burden this cost with taxes, benefits, and overhead (i.e., occupancy, general administrative, technology); and add on a target profit margin. The billing rate for a particular professional staff is generally fully loaded with certain costs and a built-in profit margin.
The second method used by firms with better brand recognition or proprietary services (e.g., bankruptcy processing services) may set billing rates based on a tradition pricing curve or supply/demand approach—basically setting the bill rate as high as the market will bear. Law firms and financial consulting firms operate in a competitive marketplace with little regulation and thus may set bill rates at the level their clients will pay. However, in some professional service areas, rates may be regulated, such as the health care industry or services for the government, which dictates acceptable rates and guidelines for billing structures.
We next examine several recent studies on bill rates.
Standard Hourly Billing Rates by Staff Level.
Standard hourly billing rates
vary among different staff levels at law firms. As a general rule, equity partners/shareholders and of-counsel attorneys typically bill at the highest rates.
The biggest jump in billing rates occurs between the associate and partner levels, as shown in Exhibit 2.4.12
Median Hourly Billing Rates by Firm Size.
As the size of a law firm grows,
the median hourly billing rates increase at all staff levels. However, as Exhibit 2.5 demonstrates, equity partners’ rates increase at a greater rate than associates’ rates as the firm size increases.13
Quartile Analysis of Billing Rates by Position for Management Consulting Firms.
As Exhibit 2.6 illustrates, billing rates vary significantly: up to 25
375
315
250
231
350
NINTH
NINTH
DECILE
2,236
2,203
2,194
2,044
2,067
DECILE ($)
TILE
TILE ($)
300
275
200
200
300
AR
UPPER
AR
UPPER
1,969
1,990
2,031
1,855
1,840
QU
QU
250
230
170
165
245
MEDIAN
1,729
1,773
1,869
1,628
1,544
MEDIAN ($)
ET
RA
HOURS
ed
TILE
WER
TILE ($)
200
190
140
135
200
WER
O
ork
O
AR
1,486
1,501
1,674
1,391
1,219
tes
L
AR
W
L
a
QU
QU
tes and Billable Hoursa
GE
GE ($)
A
A
261
237
178
171
254
VER
1,744
1,751
1,842
1,630
1,534
VER
A
d Hourly Billing R
A
t (Billable) Hours
d Hourly Billing R
Standar
WYERS
355
692
WYERS
160
302
A
7,384
1,531
6,572
nnual Clien
A
Standar
A
6,466
1,098
4,322
NUMBER
NUMBER
OF L
OF L
58
Exhibit 2.4
626
324
606
101
256
588
284
544
144
NUMBER
NUMBER
OF OFFICES
OF OFFICES
eholder
eholder
tner
er
tner
er
TUS
y
TUS
y
A
w
A
w
ST
tner/shar
y par
er
ST
tner/shar
y par
er
e la
y
e la
y
w
w
y par
y par
ounsel
ounsel
ssociat
c
ssociat
c
Equit
Non-equit
A
Staff la
Of
Equit
Non-equit
A
Staff la
Of
31
32
Managing and Governing the Professional Services Firm
400
375
350
325
300
275
te (in dollars)
250
225
200
175
Median hourly ra
150
125
100
Under 9
9 to 20
21 to 40
41 to 75
76 to 150
Over 150
Number of attorneys in firm
Equity partner
Nonequity partner
Associate
Exhibit 2.5
Median Hourly Billing Rates by Firm Size
percent between the 50th and 75th percentiles and up to 44 percent between the 50th and 25th percentiles. The distribution of rates around the median is fairly tight for partner and project manager positions, although consultant and associate rates fall across a wider range.14
CONTROLLABLE COSTS.
While labor consumes 50 percent to 70 percent
of the firm’s costs, managing other costs in SG&A can still provide dramatic improvements in profits. There are specific criteria and guidelines that will assist a prudent businessperson in keeping down costs, which have PROJECT
QUARTILE
PARTNER ($)
MANAGER ($)
CONSULTANT ($)
ASSOCIATE ($)
Twenty-fifth percentile
184
144
100
70
Fiftieth percentile
(Median)
250
200
160
125
Seventy-fifth percentile
300
250
200
150
High value
750
500
350
250
Exhibit 2.6
Analysis of Billing Rates by Position
Professional Services Firm Benchmarking
33
an impact on the bottom line. Critical areas of focus in cost management opportunities are:
• Internal meetings, seminars, and training
• Travel time and expenses
• Staff expense reimbursement
As a professional services firm, it is important to train, develop, and communicate with professional and administrative staff. Staff meetings—by practice group, office, department, or firmwide—are critical, but the methods and costs of these meetings can be managed. Some suggestions for cutting meeting costs include: holding internal meetings in the office rather than at hotels or resorts; if multiple locations are involved, holding the meetings in the city where the majority of the participants reside; consolidating multiple areas/topics to eliminate multiple trips; and using videoconferencing/
web-based meetings for both internal and clients.
Although there are capital expenditure costs to videoconferencing, in the long run, it saves time and relieves employees of burdensome business travel.
Companies with multiple locations or clients in remote or difficult-to-reach locations often find videoconferencing helpful and much more personal than conference calls.
A recent analysis of a multioffice management consulting firm with revenues of $200 million determined the optimal target for meeting expenses to be 1 percent of revenue. To maintain such a ratio, managers must make specific decisions about implementing policies that reduce expenses.