NONFINANCIAL TERMS AND CONDITIONS.
As noted earlier, financial
terms are only part of the equation in negotiating a mutually beneficial contract. Certain clients demand that the firm adhere to its “standard vendor agreement,” ignoring the fact that most of those agreements are written to cover the procurement of materials, not services. Accordingly, the firm that recognizes that everything is negotiable will insist on the negotiation of a contract that is applicable to the type of work being performed. In many situations, the client’s procurement team will try to accommodate that request, generally to a lesser rather than a greater extent. Whenever these types of contracts are being negotiated, the firm should employ legal counsel to ensure all terms and conditions are acceptable and understood. At a minimum, the firm’s negotiations should address the following issues:
• Liability and indemnification: Terms of the contract should identify the circumstances under which each party will indemnify and defend
the other party in the event a claim is made against it, often in the form of a lawsuit. The firm should be careful to insist that, in cases where the client will indemnify the firm, it will also defend it against any claim as well as indemnify a judgment or settlement. The difference here is that, without such a provision, legal costs to defend the firm against the
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claim remain with the firm and only the judgment, or settlement, is
paid by the client. In many cases, legal costs to defend may be significant and may even exceed the amount being sought by the plaintiffs. By including the words “and defend” in the terms of the agreement, the
firm can minimize its exposure against potential claims.
• Timing of payment and billing frequency: As noted earlier, the timing of payment from the client should be actively negotiated. Payment of fees ideally should coincide with the firm’s payroll cycle (e.g., two times per month) and, when appropriate, include a provision that allows the firm to prebill certain types of approved estimated costs.
• Notice period: Every contract, by definition, has a termination date.
The extent that the firm can negotiate a longer termination period
while fees continue to accrue can provide a significant contribution to the firm’s profits. For example, if the client is willing to initially offer the firm only 30 days’ notice (which should always be required to be in writing) and the firm is able to extend that termination period to 90
days, it may have been able to improve its revenue and profit position by simply asking for and justifying a longer termination period. Many professionals are reluctant to ask for such terms, but many clients are willing to agree to them in exchange for other contract provisions.
• Scope creep—getting paid for everything you do: One of the most vulnerable areas of professional firm management is the definition of
scope. Invariably, clients expect the firm to produce much more than the firm ever envisioned when originally accepting the assignment.
Professionals, always eager to please their clients, may be reluctant to ask for additional funding if their actual work borders on a gray area not well defined in the original agreement. The key here is to ensure that the original agreement defines fully, and in objective terms to the extent possible, all the work that will (and in some cases won’t) be performed. If well conceptualized and well written, it will be reasonably clear when the client has asked for something that is out of scope and thus entitles the firm to additional remuneration.
Administrative Efficiency
Administrative functions in professional services firms normally are not the focal point of executive management attention, nor should they be. Finance, accounting, human resources, IT, and facility management, the so-called
“back office” functions when well managed, require little executive management attention. However, when back office functions receive little oversight, they may become suspect if their accomplishments are not well publicized.
To ensure that such functions are productive and their results easily understood by executive management, tasks should be quantifiable and results measurable. If every staff person’s position were organized in such a way
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that at least one major function is quantifiable, workload and results could be charted and graphed to portray an accurate picture of the relative efficiency of each department over time. Examples of quantifiable functions include:
• Accounts receivable: Total dollars past due by month
• Billing: Number of bills issued each month and on-time payment statistics
• Cash collection: Total cash collected
• Accounts payable: Number of invoices processed (also percentage processed without error); cash discounts achieved
• Financial planning: Percentage variance of actuals versus forecasts by quarter
• Human resources: Number of candidates interviewed versus positions accepted; number of separations processed; annual staff turnover rate
• IT: Number of help desk calls taken; average time to resolve a call
• Facilities management: Electricity consumption per headcount; maintenance costs per square foot and per headcount
By monitoring these key activities and rewarding excellent results with spot bonuses or other types of recognition, the firm can secure better than average productivity. However, in spite of these measures, as the firm grows, at some point additional administrative staff will be required. When to add that staff is a key question.
As a rule of thumb, a new position should be added once existing staff routinely is required to work more than 50 hours per week. With respect to financial staff, they normally may work 50-hour weeks during the monthly close and fall back to an average at or just slightly above 40 hours in other weeks. However, if existing staff are unable to close the books in five or fewer working days, either they are understaffed or their procedures are insufficient. If it is determined that their procedures are adequate (which the graphs noted earlier may help illustrate), additional staff may in fact be needed.
Mergers and Acquisition: Time to Revisit
Policies and Procedures
When a firm acquires another firm or it is acquired itself, this action provides management with an excellent opportunity to take a fresh look at policies and procedures at both firms and, when appropriate, take the best from each or simply upgrade them to meet identified needs. For example, if cash f low is insufficient to meet the combined firm’s objectives, it may use the announcement of the merger as an opportunity to implement a semimonthly billing process. Similarly, treasury functions can be merged, including the implementation of credit limits for each client. Human resource functions can be consolidated and redundancies eliminated. Merger transition plans
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should also set forth the goals for the IT team and plans for integrating networks and eliminate unnecessary redundancies. As difficult as it may be to integrate two firms, if done well, clients from both firms may benefit from reduced administrative costs and improved systems.
Summary
In this chapter, we have discussed a wide range of issues that professional firm executives need to understand in order to provide their firm with sound fiscal leadership. HR functions are an integral component of the firm’s financial management as the majority of costs are tied to compensation and related perquisites. Because so many of those HR issues involve interpretation of complex legal issues, HR professionals should be capable of recognizing when to utilize competent legal counsel and have the budgetary support to tap those resources as needed throughout the year. Employee performance should be evaluated in writing at least once per year and excellent results rewarded within an equitable market-based compensation system.
Executive management of the firm must ensure that GAAP are enforced, particularly by being conservative in its revenue and expense recognition policies. Long-range planning should be well documented and form the foundation for the annual budgeting process. Annual revenue, expense, and capital budgets that are developed from the bottom up by line managers within a set of high-level targets established in the long-range planning process are more likely to be effective than those set from the top down. Monthly updating of all budgets and forecasts helps to keep executive management well informed as to the fiscal health of the firm. A monthly briefing book, or executive reporting package, that includes historical financial statements, forecasts, and trend reports can expedite the review process and highlight key managerial issues. Finally, contract negotiations with both clients and vendors should focus on key terms and conditions as well as pricing. The masterful execution of these component principles is critical to a well-managed professional services organization.
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Purchasing, Procurement,
Vendor, and
Asset Management
JOHN BASCHAB AND JON PIOT
People who work together will win, whether it be against complex football defenses or the problems of modern society.
—Vince Lombardi1
If, after the first twenty minutes, you don’t know who the sucker at the table is, it’s you.
—Unknown
This chapter outlines management practices for ensuring that the professional services firm selects and manages outside vendors in a manner that delivers the most value to the company in exchange for consideration paid to the vendors, all the while working in a partnership with the vendor to further the aims of both the company and the vendor.