Professional staff training is a necessary part of the development and growth in any professional services firm. But it is important to evaluate the training need by level or department. For example, CPAs and attorneys need a certain number of hours of continuing professional education within a given year to maintain their licenses. The controller and others on the accounting staff may need to use outside training and courses to ensure the firm’s CPAs adhere to Sarbanes-Oxley training requirements. As an executive seeking to control costs, your job is to ask about the necessity and reasonableness of such expenditures.
When nonclient travel is required, the same policies and procedures
should be enforced as they would be in client travel. Consider bringing outside consultants into the office to conduct training for a group of employees, versus the cost of sending those employees outside to attend an accredited course. And, by all means, encourage the professional staff to present to one another to promote learning and continuing education. This can be a worthwhile, cost-effective, and enjoyable way to educate and train. Chapter 10
covers the topic of professional staff training, development, and career tracks in greater detail.
34
Managing and Governing the Professional Services Firm
PROFESSIONAL COSTS. A major cost in a professional services firm is personnel cost for the professional staff whose primary responsibility is to serve clients and generate revenue. Determining appropriate compensation is a multifaceted process that includes analysis of the industry, a firm’s rank within its sector (including industry/benchmarking studies), current market rates (what it would take to replace the level of experience and expertise that a certain professional has), and compensation ranges within your organization.
For law firms and financial consulting firms, compensation varies significantly based on the following factors:
• Size of the organization
• Industry specialty
• Geographic location
• Target utilization of staff
For example, a law firm may expect first-year associates to charge 1,800
billable hours in a typical 2,080-hour year (based on 80 hours of holidays and 120 hours of vacation time). Thus, an associate is expected to work 50
hours per week on average, which could vary from 40 to 100 hours, based on client needs.
In most professional services firms, billable hours play a significant role in the overall performance assessment of a professional, affecting promotions and compensation. While each organization has a required number of billable hours for each staff level, cultural expectations of the organization play an equally weighted role in measuring performance. For example, the dynamic of “face time” is a crucial measurement within law firms and other professional services organizations. Even if not engaged in billable work, legal associates are expected to stay in the office, seek additional work, and provide assistance to others in need. These parameters vary from firm to firm, so each organization should establish its own billable hour requirements and measurement standards.
The two most important measurements regarding professional staff in a services firm are the generation of revenue by billing time to clients (billable hours) and total compensation of the professionals generating that revenue. Chapter 10 covers compensation issues in more detail.
Billable/Nonbillable Hours by Employment Level (Average Hours per Week).
As Exhibit 2.7 shows, billable hours vary between 45 percent and 75 percent for management consultants. Consultant-level professionals achieve the highest percentage, while project managers are billable roughly two-thirds of a workweek. Partners, who have additional selling and firm management responsibilities, average roughly 45 percent billable time per week. Associates are billable 56 percent of the workweek.15
Professional Services Firm Benchmarking
35
40
37.7
30
30.9
20
23.5
24.0
22.0
Billable hours 10
0
10
13.2
13.8
17.4
18.0
20
Nonbillable hours
28.7
30
Partner
Project
Consultant
Associate
Support
manager
staff
Exhibit 2.7
Billable/Nonbillable Hours by Employment Level
(average hours per week)
Total Compensation.
Exhibit 2.8 summarizes total compensation for the
various levels of employees at law firms. The average compensation across all levels is $172,000. Equity partners/shareholders’ average total compensation is $299,391, which is significantly greater than that of other levels.16
Median Total Compensation by Firm Size.
Similar to hourly billing rates,
the median total compensation increases at all staff levels as the firm size increases, as shown in Exhibit 2.9. The higher partner levels are rewarded more significantly as the firm size increases in comparison to the average and lower partners.17
PROFITABILITY.
The senior executives of professional services firms are
responsible for the overall profitability of the organization. This can be measured in many ways, but one helpful statistical tool is the average income and expenses per professional.
Average Income and Expense per Lawyer as a Percentage of Receipts.
The
majority of expenses per lawyer as a percentage of receipts are allocated to employees’ compensation—approximately 60 percent to lawyers, 15 percent to support staff, and 4 percent to paralegals (see Exhibit 2.10).18
NINTH
474,580
265,000
163,749
138,471
264,089
DECILE ($)
TILE ($)
UPPER
AR
342,125
191,997
133,087
118,365
201,622
QU
TION
96,788
246,799
159,051
149,648
MEDIAN ($)
109,4196
OMPENSA
TILE ($)
AL C
WER
T
O
91,635
79,919
L
AR
181,692
134,116
118,142
tion
TO
QU
ompensa
GE ($)A
otal C
299,391
175,447
116,585
102,841
165,641
T
VERA
WYERS
139
349
Exhibit 2.8
A
6,986
1,133
4,203
NUMBER
OF L
56
615
290
540
160
NUMBER
OF OFFICES
eholder
tner
er
TUS
y
A
w
ST
tner/shar
y par
er
e la
yw
y par
ounsel
ssociat
c
Equit
Nonequit
A
Staff la
Of
36
Professional Services Firm Benchmarking
37
800
Highest partner
Lowest partner
700
Managing partner
Executive partner
Average partner
600
500
400
te (in thousands of dollars)
300
200
100
Median hourly ra
0
5 to 14
15 to 29
30 to 49
50 to 99
Over 100
Number of attorneys in firm
Exhibit 2.9
Median Total Compensation by Firm Size
Average Total Expenses per Lawyer.
Contrary to intuition, there appear to
be no economies of scale in a private legal practice, as Exhibit 2.11 demonstrates. Larger firms almost always spend more per lawyer on staffing, occupancy, equipment, promotion, malpractice and other nonpersonnel insurance coverage, office supplies, and other expenses than do smaller firms.19 This is Paralegal
Other
4.0%
Occupancy
Promotional
10.2%
7.0%
1.6%
Support staff
Reference material
14.8%
1.1%
Equipment
2.3%
Lawyer income
58.9%
Exhibit 2.10
Average Income and Expenses per Lawyer
as a Percentage of Receipts
38
Managing and Governing the Professional Services Firm
200
160
120
80
40
Total expenses (in thousands of dollars)
0
<9 9 to 20 21 to 40 41 to 75 76 to 150 Over 150 Number of attorneys in firm Exhibit 2.11 Average Total Expenses per Lawyer likely due to firms spending more on such things as their size increases to improve productivity, firm perception, and so on. For example, a successful firm may move into a more upscale office space. Benchmarking the Finance Department The finance and accounting department in a professional services firm provides nearly the same functions as that of any other industry. In a professional services firm, a well-functioning department is critical to delivering outstanding client service. The primary business objective of a finance department is to provide accounting services and financial information in an efficient, accurate, and timely manner. A finance department includes the following processes: • Accounts receivable • Accounts payable • Billing • Payroll • Travel and entertainment accounting • Financial reporting (closing the books) Professional Services Firm Benchmarking 39 • Budgeting and analysis • Fixed assets accounting • Internal audit • Tax The objectives of a highly efficient and effective finance function are to provide users (senior management, board of directors/partners, operations, and outside constituencies) with the right information, at the right time, and in the right format. PricewaterhouseCoopers’ Global Best Practices® created a benchmark report profiling companies in the $7 million to $486 million range with the average at $195 million. This report attempts to understand the multifaceted characteristics of a finance department through benchmarking. Their report includes the following critical best practices benchmarking data: • Total finance department cost as a percentage of revenue • Total finance head count as a percentage of total • Finance department cost as a percentage of revenue by process As ref lected in Exhibit 2.12, if the percentage is above the benchmark group’s median, it may indicate:20 0.0 Benchmark Group 0.5 1st Quartile Min .14% Median 1.57% 1.0 Max 3.79% 2nd Quartile 1.5 ge 2.0 3rd Quartile ercentaP 2.5 3.0 4th Quartile 3.5 4.0 Exhibit 2.12 Total Finance Department Cost as a Percentage of Revenue 40 Managing and Governing the Professional Services Firm • Revenue is disproportionate to the cost. • Compensation to the finance and accounting staff may be high. • Excess staffing exists. • Processes are highly decentralized. • Technology is underutilized. Exhibit 2.13 represents the most favorable percentage in the benchmark group.21 Firms can improve performance on these measures by reducing costs to operate the departments. Strategies to accomplish this may include redesigning work processes to eliminate the causes of errors and wasted time, implementing technology that speeds the transactions, and addressing excess labor costs.