Choosing a Professional Services Management System

Choosing A Professional Services Management System

Professional Services Management (PSM) systems are ERP systems for organisations that ‘sell’ or need to record the cost of time. This puts it crudely, but planning time, recording time, and turning time into revenue and cost are at the heart of professional services organisations.

ERP systems for professional services are by no means ubiquitous, and there is no single software package that has the global penetration that systems such as SAP, Oracle or Microsoft Dynamics AX and NAV have in the manufacturing, financial and distribution sectors. This may be because professional services organisations are generally smaller or because they must be almost indefinitely flexible. Indefinite flexibility and idiosyncrasy certainly don’t suit systems. Or it may be because the ‘subjects’ of a PSM system aren’t machines, or boxes, or widgets, but human.

It may also be that an attempt to create a single software system that can handle the particularities of all the different professions is impossible. But even so, whether you are a lawyer, an engineer, a software developer, a management consultant, an accountant, a research chemist, a PR consultant, a creative consultant at an advertising agency, or a charity worker, you are almost certainly familiar with timesheets, expense forms, hourly costs, fee rates, and so on. There are certainly elements that are common to all professions.

I believe that if your organisation is larger than around thirty employees, and if you follow some rules, at least, you will probably benefit from a PSM system despite the constraints it might impose on your freedom.

Why?

There are some basic operational reasons, some of which are almost certain to apply to you:

  • You need to capture time spent on projects and activities accurately and speedily
  • You need to capture expenses associated with projects accurately and speedily
  • You need to plan the activities of your staff
  • You need to record the different hourly or daily fee rates that you charge to your clients
  • You need to invoice your clients
  • You need to keep careful track of your work in progress (un-invoiced time and expenses)And there are more sophisticated reasons:
  • You need to know how busy and productive your employees are
  • You need to know how profitable your projects are
  • You need to know where you are giving away time for free (discounting work in progress value)
  • You need to track project time against planned time, especially if your projects are contracted at a fixed price
  • You need to work to an overall budget and analyse your performance against plan
  • You may need to determine charges between companies or departments when an employee of one works on a project that belongs to anotherAnd there are some reasons that justify systems of all kinds:
  • You want to avoid rekeying data
  • You want to automate document workflow so that timesheets, expense forms and draft invoices don’t spend days on the wrong desk
  • You need to be able to recall the history of everything, to know who did what and who authorised whatThese are some of the things that Professional Services Management systems do.

    Integrated or Best-of-Breed

    Professional Services Management systems come in all shapes and sizes. Sometimes they meet all of your needs with a single integrated system, including accounting, document management, and customer relationship management needs, in addition to the requirements of professional services management.

    Sometimes they provide only one or more of these options. In searching for a PSM system it is one of the most difficult initial choices that you must make, to decide whether to adopt a single integrated system or to choose from a number of best-of- breed solutions and to integrate them.

    Sometimes this choice is made for you on the basis of cost, or if you plan only to implement one set of functions. Many organisations choose, or already have, a separate accounting system before they consider professional services management software.

    Organisations generally achieve competitive differentiation not through their accounting systems but through their ‘business’ systems, so it is important not to compromise essential business functionality only for the sake of ready-made integration. Best-of-breed can be the right choice.

    To my mind, at least, there is a relatively clear distinction to be made and a relatively easy line to draw between financial functionality, which provides statutory and management accounting information for companies and groups of companies, and Professional Services Management functionality, which provides tools for the management of professional staff. Accounting systems are back-office. Professional Services Management systems are front-office.

    It is less easy to separate document management features from professional services features, so if you need both of these in your PSM system you should probably look at software that integrates at least these two features.

    Customer relationship management features, on the other hand, can perhaps be more easily separated, and it is common to provide interfaces, between such systems as Microsoft CRM and PSM software, for the coordination of client data, project data, and so on.

    In these notes I will not attempt to describe the characteristics of a financial system. If you are reading this you must already have a good understanding of what such systems do. These notes are designed to help you choose a professional services management system.

    Professional Services Management software systems, leaving aside accounting, document management and customer relationship management software for the moment, must:

  • Provide operational tools for the direction of staff and the collection of data (planning, timesheets, expenses, etc.) as well as invoicing and the management of inter-company or inter-departmental charges
  • Provide reporting and analysis. Typical analysis includes:
    • Work in Progress (WIP)
    • Utilisation
    • Realisation
    • Fee variance against budget standards
    • Project Profitability
  • Enable integration with other systems

General Requirements

Analysis

Some PSOs are very simple, but many, indeed perhaps most, are not. Sometimes even the smallest PSOs are complex. In my experience complexity is a more prevalent feature of PSOs than of comparably sized manufacturing or distribution companies, for whom products, prices, and methods of delivery are relatively standard.

If even a moderately complex PSO encounters financial performance problems and it becomes useful to analyse the organisation by various measures such as utilisation, realisation, standard fee variance, activity variance, cost variance, overhead variance, etc., then it may well be useful to analyse them by a number of different criteria, chasing down problems by looking at these measures from a variety of different angles, slicing and dicing the data to get to the underlying problems.

For example, issues such as utilisation don’t always affect all business streams or geographies equally. In addition, issues such as realisation don’t always affect all your clients, or client types, or client sectors equally. The same goes for all other measures.

Because of this it is essential that your system should be capable of analysing data (time, expenses, invoice values, forecasts, etc.) using a number of user-definable criteria. What could these be?

Time-based:

  • Date
  • Day of the Week Week
  • Timesheet Period (usually a week) Month
  • Accounting Period Quarter
  • Year

Activity-based:

  • Activity (e.g. Meeting, Researching, Consulting, etc.)
  • Location (e.g. At Home, At the Client, At the Office, etc.)
  • Role

Employee-based:

  • Employee
  • Employee Department/Cost Centre
  • Employee Business Stream
  • Employee Company
  • Employee Grade
  • Employee Position
  • Employee Type (Internal/External/etc.)

Client-based:

  • Client
  • Client Department/Cost Centre
  • Client Business Stream
  • Client Sector
  • Client Type
  • Client Duration

Project-based:

  • Client
  • Project
  • Project Department/Cost Centre
  • Project Business Stream
  • Project Company
  • Project Location
  • Project Type
  • Project Duration
  • Project Sector

Task-based:

  • Task
  • Task Type

These are just some of the ways you may want to analyse data. In reality, every PSO is different and it is likely you can imagine dozens of other ways you might want to analyse your organisation’s performance. Your system must allow you to define these dimensions for yourself.

Multi Company

If your PSO isn’t already a multi-company organisation, consider very carefully whether it might become so. If it does, you would probably want to treat your entire team of professional staff as one group, one pool of resources. And if so, then the system you use should enable this in ways that are completely transparent to your staff, who should record time in their timesheets without being aware of any separation of companies, employees and projects.

This surface simplicity must in fact conceal some complexity. Multi-company means:

  • That each employee must belong to one and only one company, so that appropriate accounting transactions (for example, expenses for reimbursement) can be sent to the right accounting ledger
  • That each project must belong to one and only one company, so that appropriate accounting transactions (for example, invoices) can be sent to the right accounting ledger
  • That the system must be capable of holding multiple charts of accounts, one for each company whose data are held in the system
  • That the system must be capable of managing more than one base currency, potentially a different base currency for each company whose data are held in the system
  • That the system must be capable of detecting inter-company transactions (such as when an employee of one company records time on a project belonging to another), and of generating the appropriate accounting entries

Multi Currency

Even if your organisation is comprised of a single legal entity you will probably need to manage multiple currencies:

  • You will need to calculate values in the your company’s base accounting currency
  • You may need to calculate or record values in a separate transaction currency, such as fee currency if your fees are stated in a foreign currency, or expense currency if you incur expenses in a foreign currency
  • You may need to calculate values in your client’s invoice currency. For example, your client may wish always to be invoiced in EUR, and you may need to convert your fee values or the expenses you have incurred into EUR.
  • You may need to calculate values in your own corporate currency, which may differ from your accounting currency. Especially when your organisation comprises two or more companies with two or more different accounting currencies, you will probably want to report all values together in a common reporting currency.

Multi Language & Flexible Terminology

Consider whether you will want to deploy your system in more than one language. Not all systems do this easily. It is important that if they are capable of this they hold all linguistic terms (messages, labels, and other textual items) outside program code, so that they can be modified easily. Ideally, all terms should be available to you for editing so that you can make your own substitutions for Client, Project, Task, Employee, etc.

Flexibility

In my experience, PSOs are more likely to break their own rules than most kinds of company. Whether the motives for this are laudable – the need to be commercially creative – or whether they reflect disinclination in general to be bound by rules – more flexibility is needed in software for PSOs than for most other kinds of organisation. Your software, therefore, must be very flexible. This means that it must adapt itself to new procedures, or new analytical requirements (as well as changing statutory regulations) without too much difficulty.

There is no software in the world which will do this automatically, but you must make sure that yours is at least capable of change. It may do exactly what it says in the manual, and this may be exactly what you need and all that you need it to do now, but beware of the commercial creativity to come.

What kinds of flexibility should you look for?

  • The possibility of multiple workflows
  • The possibility of multiple document types with differing characteristics: timesheets, expense forms and other forms, and different types of each form
  • The possibility of additional analysis
  • The possibility of multiple rules for fee rates and costs in any number of currencies
  • The possibility of terminological change
  • The possibility of calculating new values and measures
  • The possibility of creating new reports easily
  • The possibility of designing multiple invoice and other document formats easily

No system is unlimited in what it can do. In fact, systems are implemented precisely in order to impose discipline and control, and to restrict creativity. They are sometimes as much about limiting freedom as offering it. The most flexible invoicing medium in the world is a blank sheet of paper, but this is no strong recommendation for Word as an invoicing system.

Bear in mind also that flexibility should not be achieved through program change, since this will make it hard for you to keep up with new versions of a system (and we are assuming throughout that any system you choose is a commercially available packaged software system). It is important that flexibility be achieved through configuration or parameterisation.

Specific Requirements

Timesheets

Every PSO is different. Even PSOs within the same sector (be they lawyers, engineers, accountants, consultants, etc.) differ, sometimes markedly, from each another. They differ in the way in which they record time, the structures (clients, projects, tasks, activities) against which they record time, and they differ in the rules they apply when validating time entries and in the periods they divide their calendars into.

What sort of flexibility should you look for?

  • The possibility of specifying your own ‘unit’ of time entry. Lawyers traditionally divide time into six-minute units. Others report by quarter hours, or hours or even days.
  • The possibility of specifying your own timesheet periods. Some PSOs demand daily timesheets (though these are hard to chase), some weekly, some fortnightly and some monthly. Best practice for most PSOs is weekly, but whether you choose to start the week on a Monday or any other day must be within your realm of control. You also need to be sure that you can close an accounting period or month rapidly, splitting the final week of the month appropriately.
  • The possibility of recording time at Project level, or at Project and Task level, as required by the Project.
  • The possibility of defining (and switching on or off at least by Project) additional fields for free form or selective data entry. These might be used for any number of purposes such as Activity, or Location. It is an extra bonus if the values associated with these can also be limited by Employee or Project.
  • The possibility of including or excluding a field allowing staff and their line managers to specify whether work is chargeable or not.
  • The possibility of multiple calendars, defining, if necessary for each employee, the length of the working day so that the entry of standard working hours can be enforced, if this is a requirement.
  • The possibility of entering unlimited free form notes against time entries with selective enforcement of notes.
  • The possibility of validating time entries using various rules, to prevent incorrect entries or the entry of time beyond specified limits.
  • The possibility of limiting projects available to an employee so that he or she may select only from an approved list.
  • The provision of easy to use project search tools so that an employee can find his or her most recent projects and any other specific project easily.
  • The possibility of pre-filling a timesheet with confirmed diary entries.
  • Flexible workflow possibilities so that timesheets can be routed to line managers or other managers (conditionally) for authorisation.
  • The option to calculate multiple values for each entered timesheet cell. These might include Standard Fees, Actual Fees (local and/or foreign currency), Standard Working Cost, Standard Availability Cost, Standard Project Cost, Cross Charges, etc.
  • The option to approve time by Project view rather than Timesheet view, so that Project Managers can see all timesheet records that have been entered against their projects, irrespective of who has recorded the time.

Expense Forms

Expense Forms may be simple, or complex, according to the activity of the PSO. A simple domestically-oriented PSO needs far less complexity than a multi-national internationally-oriented one. Some will need some, and some will need all of the following features:

  • The option to create a number of different forms with different characteristics, these including, different static data entry fields (Project, Task, Activity, etc.), and different value entry fields.
  • The option to specify validation rules for data entry, to enforce expense policy.
  • The option to specify different authorisation workflows for each form.
  • The option to make workflow conditional on aggregated or specific row values in a form.
  • The possibility of managing multiple tax rates (differing VAT rates, for example, for multi-national PSOs).
  • The possibility of specifying values in many currencies, whilst converting these into local currencies for reimbursement, and potentially further currencies for re-invoicing.
  • The possibility of automating, and overriding, the provision of an exchange rate.
  • The possibility of deriving account codes from static data fields without an employee having to be concerned with these.
  • The possibility of arranging pre-approval for travel expenses.
  • The option to specify whether an expense is rechargeable to a client or not.
  • The option to manage value-based expenses, per-diem (daily allowance) expenses and mileage-type expenses separately or on one form.
  • The option to import credit card statements in a variety of formats and present these as expense forms for completion by employees.
  • The option to import recharges to clients such as photocopier expenses, telephone expenses, etc.
  • The option to record supplier-invoiced expenses such as travel tickets.
  • The option to import expense data from suppliers such as travel agencies, online retailers, etc.
  • The option to attach scanned images and documents to expense forms
  • The option to calculate values such as ‘carbon footprint’ in respect of specific expense types

Invoicing

PSOs differ enormously from one to another in the way they handle invoicing. For some it is a simple matter of invoicing work in progress at full value, for others there is a need to record discounts and write-offs. Others invoice in advance, or based on milestones, or percentage completion, or invoice regular values every month or quarter or year. Some combine expense and time invoicing. Others don’t.

Your needs may also change from time to time. You may at some stage need some, if not all, of these options and possibilities:

  • The option to create time and materials invoices based on work in progress, with specified deferrals, additions, discounts and write offs.
  • The option to track discounts and write offs against original values for the purposes of management (realisation) reporting.
  • The option to combine time and expenses on a single invoice or to keep time and expense invoices separate.
  • The option to invoice in advance, and afterwards allocate work in progress to advance invoices.
  • The option to invoice based on percentage completion.
  • The option to invoice scheduled values periodically.
  • The option to reverse invoices of any kind, fully or partially.
  • The possibility of generating all accounting entries from the invoicing process.
  • The option to separate the booking of revenue from the booking of invoices.
  • The option to format invoices in a number of different ways, at a detailed or summary level.
  • The option to produce ad-hoc invoices and credit notes of any kind, without reference to time or expenses.
  • The option, in all invoice types, to amend any textual item.
  • The option, at invoicing time, to recalculate accounting or fee values based on latest specific exchange rates.
  • The possibility of invoice authorisation workflow.
  • The option for project managers (and sometimes customers) to approve time and expenses prior to invoicing.

Planning & Budgeting

Planning and Budgeting have both an active and a passive aspect. They can be used actively to achieve optimal utilisation through the intelligent scheduling of project work, using skills, availability, cost, and preferences as inputs to the process. In addition, they can be used passively for reporting actuals against plans, and for the determination of recognisable revenue.

I assume that full financial budgeting, including total forecast revenue, total budgeted staff and overhead cost, is managed in your Financial System.

These are some of the planning and budgeting options you might look for in a Professional Services Management system:

  • The option to hold anticipated time, expense, fees and costs for a project, optionally at project, task, activity, role and employee level, so that actual values may be compared with plan.
  • The option to import a plan from an external project management tool such as MS Project.
  • The option to hold multiple plans and revisions.
  • The option to hold skills, preferences, and other attributes, against employees so that staff may be scheduled appropriately for specific work.
  • The option also to review staff availability during scheduling.
  • The option to plan at possible as well as firm level.
  • The option to integrate planning with diary systems such as MS Outlook.
  • The possibility of publishing scheduled work and availability across the entire PSO.

Eight Key Measures

What is needed in a Professional Services Management system if it is to support the following eight measures, which I believe are essential for good professional services management?

Utilisation

Not everyone agrees on the definition of utilisation. That doesn’t much matter as long as you have a clear and consistent definition for your own purposes that allows you to track trends in utilisation from month to month, and which you can use in your financial planning.

So, whatever software system you use, it should not impose its own rules on you, such as, for example, its own inbuilt concept of utilisation, without allowing you to make changes.

That said, you will need at least the following kinds of possibility:

  • The possibility of multiple calendars, so that standard hours can be set appropriately for each employee. Remember that standard hours can differ even within one country, with regionally different public holidays.
  • The possibility of distinguishing between unavailable and available time, unutilised and utilised time, chargeable utilised and non-chargeable utilised time.
  • The possibility of aggregating only standard hours in respect of available time, and actual recorded hours in respect of utilised time
  • The possibility of defining upper limits (by employee) on utilisation at different grades and positions so that utilisation figures are not unduly swayed by inclusion of managers’ data, where lower utilisation is expected.
  • The possibility of excluding ‘non professional’ staff from utilisation reporting.

If you need to report utilisation variance, effectively a financial gain or loss that results from utilisation rates that differ from the rates you have assumed, then you must be able to hold standard availability cost at the appropriate level in your Professional Services Management system. Each recorded ‘available’ hour will be costed at this rate and subtracted from each recorded ‘utilised’ hour costed at employee standard project cost.

For example, if 80% utilisation has been assumed, then:

Employee Availability Cost

=

A

Employee Standard project cost

=

A / 0.8

If, in a 40-hour week, 32 hours are utilised, then Utilisation variance will be: (32 * (A / 0.8)) – (40 * A) = 0

If, in a 40-hour week, 36 hours are utilised, then Utilisation variance will be: (36 * (A / 0.8)) – (40 * A) = 5 * A

Because more time has been utilised than planned there is a positive utilisation variance, increasing the organisation’s profit. Project standard cost has been overestimated.

In overcoming the obstacles that impede good utilisation you will need:

  • The possibility of viewing availability of professional staff easily and rapidly across your entire PSO (however many companies it comprises and however many countries it operates in), with a distinction between firm and tentative allocations. You will need to be able to make rapid decisions about reallocations.
  • The possibility of viewing skills, aptitudes and costs when making decisions about employee allocation to projects.
  • The possibility of staking a claim to an employee’s time in a controlled way so that allocations can be made appropriately.
  • The possibility of setting rules in the system for the rounding of short times to longer times (by contractual agreement with the client, and allowing exceptions) without employees having to record time inaccurately. Original and rounded values must both be visible in the system.
  • The possibility of analysing average assignment times.
  • The possibility of tracking internal projects against plans as assiduously as client projects.
  • The possibility of imposing cancellation and postponement fees on clients who cancel with unreasonable notice.

Standard Fee Variance

Your budgets will reflect the ‘standard’ or average fees that you aim to charge, these being expressed in your accounting currency or corporate currency. In order to track actual negotiated fees against these you will need:

  • The possibility of recording standard fees appropriately in the system, whether by employee, grade, role, business stream, company, country, depending on the structure of your operation.
  • The possibility of reporting a multiplication of charged hours by standard fee in variance reports.
  • The possibility of recording actual fees appropriately in the system, in a variety of currencies, whether by employee, grade, role, business stream, company, country, client, client type, project, project type, activity, task, or location, exactly as your fee structures require.
  • The possibility of reporting a multiplication of charged hours by actual fees.
  • The possibility of converting actual fees from transaction currency to accounting or corporate currency for comparison with standard fees.
  • The possibility of reporting variance of actual fees against standard fees, analysed by any number of criteria, such as client, project, client sector, project type, activity, location, company, business stream, country, etc.

Activity Variance

Activity variance is the value difference (profit or loss) that emerges when overall professional activity exceeds or falls short of a PSO’s overall budget. I assume that a complete budget is held in a Financial System, and that a Professional Services Management system will supply data for actual activity.

Activity Variance is a value that ‘emerges’ (through calculation) as follows:

Plan/Budget

P

This contains all anticipated revenues and costs for a period.

Actuals

A

This contains all actual revenues and costs for a period.

Actuals at Planned Values

AP

This contains revenues and project costs calculated on the assumption that fees are at standard rates and realisation is as planned.

Performance Variances

(A-AP)

These are the variances that emerge due to differences in: actual fees, realisation, utilisation, availability, actual employee cost and actual overhead cost.

Activity Variance

(AP-P)

These are the variances between actual and plan that are not explained by performance variances.

Note that saying that:

Activity Variance = Actuals at Planned Values – Plan

is the same as saying that

Plan + Performance Variance + Activity Variance = Actuals

P + (A-AP) + (AP-P) = A

is self-evident.

To take an example, assuming that:

  • Standard Fees are 1, 000
  • Realisation is planned at 90%
  • Utilisation is planned at 80%
  • Activity is half of planned activity (in other words half the number of employees are working for the PSO in this period)
  • Utilisation and realisation are a little worse than planned
  • Fee rates are a little lower than planned
  • Overheads are higher than planned

 

Plan/Budget

Actuals

Actuals at Planned Values

Performance Variances

Activity Variance

Fees

10, 000

5, 000

5, 000

-5, 000

Standard Fee Variance

-200

-200

Discounts

-1, 000

-1, 200

-500

-700

500

Net Fees

9, 000

3, 600

4, 500

-4, 500

Standard Project Cost

-5, 000

-2, 500

-2, 500

2, 500

Gross Margin

4, 000

1, 100

2, 000

-2, 000

Utilisation Variance

-150

-150

Availability Variance

-50

-50

Employee Cost Variance

-100

-100

Overheads

-800

-800

-800

Overhead Variance

-50

-50

Profit

3, 200

-50

1, 200

-1, 250

-2, 000

 

Your Professional Services Management system will enable the calculation of performance variances and actuals at planned values.

Your Finance system will hold the overall plan for the period.

The determination of Activity Variance from these is simple.

Realisation

Realisation is a complex measure, involving the comparison of values calculated before invoicing with values created by invoicing. This essentially means that you must be able to track discounts created during the invoicing process. In order to be able to do this your system will need:

  • The possibility of relating timesheet and expense transactions to invoices, on a line-by-line, project, task, activity, employee and other bases.This relationship is often explicit, in that when a time and materials basis invoice is produced each timesheet or expense transaction is eventually either invoiced or written off, and, if invoiced, invoiced at equal, higher or lower value.But when time and expenses are related only in a more general way to particular invoices, as when invoices are created in advance, or based on milestones, or are for part or parts of a fixed price project, the relationship is more complex. Nevertheless, in these cases too, it may be necessary to relate groups of transactions (say, time records for a particular activity or task on a project) to particular invoice values in order to be able to calculate realisation at that level.

Standard Cost Variance

Standard cost variance is something that you will measure in your financial system, since it is there that you will gather all direct costs associated with employing your professional staff. If you’re to be able to analyse by useful criteria such as department, business stream, location, company, and so on, just as you might in your Professional Services Management system, then you must make sure that your financial system is set up to do this.

Note that whilst costs of project time can be tracked at project level in your Professional Services Management software you will not record actual direct standard working costs in your finance system at this level, though you may, indeed should, record it at the level of department, business stream, grade, etc.

Standard cost variance is calculated by comparing the cost of standard hours recorded by your professional staff (using standard working cost) with actual direct

costs. Your system must therefore be capable of holding standard working cost at the level of detail you need.

Note that if you record actual direct costs at the same level at which you hold standard working costs (by department, business unit, etc.) in your Professional Services Management system then you will be able to respond to significant variances by making adjustments to standard working costs (and by implication costs of project time).

The final goal is to produce useful reports from your Professional Services Management software that are as accurate as reasonably possible and at least accurate enough to encourage action.

Overhead Variance

Overhead variance is a measure for your Finance system and imposes no constraints on your Professional Services Management system.

WIP Days

Your system must be able to track Work in Progress and provisions and compare these values (by a variety of analytical dimensions) with revenue.

Debtor Days

Debtor Days is a measure for your Finance system and imposes no constraints on your Professional Services Management system.

Other Requirements

Project P&L

If your Professional Services Management system is to be capable of reporting gross margins then it must hold an employee standard project cost against each employee (or, should you be worried about issues of confidentiality, at grade, company and other levels, without risking the identification of an individual). If yours is a moderately complex PSO then you will probably have calculated different average costs of project time for each combination of department, business stream, company, location and grade, and you will want to reflect this in your system.

Cross Charges

If your professional staff regularly work ‘outside’ their own department or company then you may want to calculate cross charges between departments and companies so that the supplying entity can be reimbursed by the buying entity.

Your system should:

  • Be capable of detecting when cross charges must be calculated by comparing employee company or department with project company or department.
  • Be capable of a number of different possibilities for the calculation of charges, these being based sometimes on a percentage of revenue, sometimes on a specific negotiated charge and sometimes on a mark up of standard project cost.

Interfacing to Financial Systems

Whilst they may be separate, Finance systems and Professional Services Management software must communicate in many ways.

The accounting process for a professional assignment can be broken down into these elements. They do not, of course, follow one another in strict sequence:

Time Example

Timesheets

Provisions

Revenue

Invoicing

Work in Progress

@ Standard Fees

1000 D

1000 C

Standard Fee Variance

100 C

100 D

Provisions

50 C

Employee Standard Costs

500 C

Accrued Revenue

900 C

900 C

Accrued Revenue Provisions

50 D

50 C

50 D

Accrued Employee Standard Costs

500 D

500 C

Sales Tax

100 C

Debtor

950 D

Revenue

900 C

Revenue Provisions

50 D

Employee Standard Costs

500 D

You may choose to take some shortcuts in this process and combine some steps. In terms of analysis of variances this scenario may be at the ‘control-freak’ end of the spectrum.

Expense Example

Non- rechargeable expense

Rechargeabl e expense

Invoicing

Work in Progress Expenses

200 D

200 C

Employee Standard Costs

Employee Liability

165 C

220 C

Accrued Revenue

Purchase Tax

15 D

20 D

Sales Tax

20 C

Debtor

220 D

Expense Costs

150 D

Note that in some countries it is a statutory requirement that recharged expenses be shown as revenue but this is not shown here.

There may also be some provision accounting for expenses held as Work in Progress.

These, then, are the typical points of contact between Professional Services Management system transactions and your Finance system:

  • Timesheet transactions may result in:
    • Work in progress values, with separable standard fee values and standard fee variances
    • Standard cost values (with separable standard project cost, standard availability cost and standard working cost values)
    • Cross charge values (if at cost) between departments and companies
  • Provision transactions may result in:
    • Discounts against Work in Progress values
  • Revenue transactions may result in:
    • Revenue values being posted
  • Expense form transactions may result in:
    • Non-rechargeable expense values being posted as costs to the P&L account
    • Rechargeable expenses being posted as Work in Progress values
    • Reimbursable values being posted to employee liability accounts
    • Tax values on purchases being posted appropriately
  • Invoicing transactions may result in:
    • Debtor, tax and revenue values being posted

Finally, let’s look at the way in which performance variances emerge from timesheet transactions. This is worth explaining in some detail since these are the most complex transactions to move between your Professional Services Management system (or modules) and your Finance system.

Timesheet Transactions

Timesheet records create potential value. This is the work in progress value of work done for clients, or the intangible asset value of work done for an internal purpose.

Timesheet records also create cost. Depending on the ways in which you want to record costs for the purposes of variance tracking, you may use a number of different cost concepts. These standard costs have already been described, but it’s worth reminding ourselves of what they mean:

  • Standard Working Cost (SWC).This is the cost of each working hour, irrespective of whether it is an available hour or a utilised hour. This value is used for the determination of standard cost variance.
  • Standard Availability Cost (SAC)This is the cost of each available hour, irrespective of whether it is a utilised hour. This cost will be typically around 15% higher than SWC due to the exclusion of holiday, training and other planned unavailable hours. This value is used for the determination of Utilisation Variance.
  • Standard Project Cost (SPC)This is the cost of each project hour and is calculated by taking SAC and adjusting upwards so that the cost of unutilised time is spread across utilised time. SPC is used for calculating Project Gross Margin.

There are also fee values that we will use in generating accounting entries:

  • Fees at Standard Fee Rates (FAS)This is the value of fees at the standard fee rates that have been defined by role or grade for each department or business unit
  • Actual Fees (FA)This is the value of fees at the rates negotiated with your client

Timesheet data will create transactions that may look something like this (note the different treatment for externally charged ‘client hours’ and ‘internal hours’):

Account

Client Hours Utilised

Internal Hours Utilised

Other Available but Unutilised Hours

Unavailable Hours

BALANCE SHEET

Projects in Progress

SPC (D)

Work in Progress @ Std Fee Rate

FAS (D)

Work in Progress Fee Discounts

FAS (C)

FA (D)

Work in Progress Provisions

Accrued Revenue

FA (C)

Cost @ Std Project Cost

SPC (D)

Cost (Utilisation Variance)

SPC (C)

SAC (D)

SPC (C)

SAC (D)

SAC (D)

Cost (Availability Variance)

SAC (C)

SAC (C)

SAC (C)

SWC (D)

SWC (D)

SWC (D)

SWC (D)

Cost (Std Cost Variance)

SWC (C)

SWC (C)

SWC (C)

SWC (C)

PROFIT AND LOSS

Revenue @ Std Fee Rate

Revenue Discounts

Cost @ Std Project Cost

Cost (Utilisation Variance)

Cost (Availability Variance)

Cost (Std Cost Variance)

Project Cost

In this example, we assume that you will value the time you spend on internal projects at standard project cost rather than at a revenue rate. However, you may want to do this differently, showing a margin between cost and value. This may be appropriate when cross charging between departments for internal work.

Conclusions

  • In choosing a system, consider:
  • How you want to measure the performance of your organisation. What measures? What analysis?
  • What are your essential needs and what you can do without
  • How your organisation will develop in the future (multi-company, multi- currency, multi language?)
  • The advantages of a single integrated system against integrated best-of- breed solutions
  • The dangers of writing your own code or modifying the source code of a software package

About the Author

Adam Bager studied philosophy and psychology at Oxford University before working for BBC Radio 3 and the Bank of England. Embarking on a new career as programmer, technical consultant and business consultant for Hoskyns (now Cap Gemini) he was subsequently sent as a consultant in manufacturing systems to Central and Eastern Europe in 1987. Following the collapse of state socialism in the Soviet bloc and a brief spell at Coopers & Lybrand in Budapest (now PWC) he founded consultancy and business software reseller LLP in Prague in 1992. The Group now comprises ten companies in ten countries and works globally. More recently, he founded systems@work, author of time@work, specialist software for the management of professional services organisations.