Some Recommendations For A Professional Services Organisation

8measures

Telling the Truth about Time

  1. Encourage staff to record time accurately, and make it clear that time recorded and time invoiced are different concepts.
  2. Collect timesheets weekly.
  3. Record time to the nearest appropriate unit (six minutes, quarter of an hour, half an hour, etc.) that does not encourage under reporting.

Utilisation

  1. Distinguish between chargeable utilisation (based on projects that are directly charged to external clients) and utilisation (which includes valuable internal projects). These different measures are important when it comes to motivation.
  2. Exclude planned absences (holidays, training, etc.) from available time so that trends in utilisation are unaffected by seasonal absences.
  3. Adjust available time for staff who have other responsibilities besides project work.
  4. Control internal projects rigorously to avoid the ‘dumping’ of time onto internal projects that count as utilised time.

Thirteen Obstacles to Good Utilisation

Increase utilisation by:

  • Planning ahead, based on well-informed estimates, avoiding dependencies that lie outside your control.
  • Ensuring a clear view of staff availability, skills and experience.
  • Not having quite enough staff, using external staff when necessary.
  • Sharing staff between departments, business units and companies.
  • Penalising clients for postponements and cancellations, as far as good relations permit.
  • Insisting on assignments of appropriate length (whole days, half days, etc.), as far as good relations permit.
  • Finding ways to incentivise clients to buy your spare time, or to bring assignments forward.
  • Clarifying your understanding of what kinds of time are chargeable (research, travel, corrections,   etc.), and documenting this understanding in a Services Charter.
  • Analysing and improving staff time management.
  • Never do tomorrow what you can do today

Standard Fee Variance

  • Calculate standard fee rates by grade/role and business unit, these being the fee rates that you will use as a basis for forecasting revenue (but note that standard fee rate will be the rate before the effect of realisation on the forecast).
  • Record your ‘assumed’ or ‘implied’ rates for fixed price projects so that you can monitor variances from standard fee rates for fixed price projects as well as for time and materials projects

Realisation

  1. Record all time against each project honestly, even if the time is clearly not chargeable.
  2. Scope well.
  3. Estimate well.

Standard Cost Variance

  1. Calculate standard costs by business unit and grade rather than by individual, to avoid inadvertent disclosure of confidential information.
  2. Calculate standard project cost by dividing all directly allocable employment costs by available days and increase to reflect planned utilisation.
  3. Calculate standard availability cost only if you think it worthwhile to track an availability variance.
  4. Calculate standard working cost only if you think it worthwhile to track employment cost variance separately

Motivation and Measurement

  1. Recognise that everyone is motivated in different ways and that motivation is rarely a matter only of material reward.
  2. Where material motivation is appropriate:
    1. Motivate professional staff 40% by utilisation (not chargeable utilisation), 40% by team gross margin variance from plan, and 20% on qualitative measures.
    2. Motivate team leaders 40% by utilisation (not chargeable utilisatiion), 40% by team gross margin variance from plan, and 20% on qualitative measures.
    3. Motivate project managers 40% by project realisation, 40% by project gross margin and 20% on qualitative measures. Ensure that project managers and more senior staff are involved in estimating, scoping, and agreeing between themselves a reasonable project plan irrespective of the commercial decisions made by commercial and sales staff.
    4. Motivate business unit managers on the basis of gross margin variance from plan, including sales and account management costs, excluding overhead costs which they do not control.
    5. Motivate company managers on the basis of P&L variance from plan.

Intercompany and Interdepartmental Charging

  1. Don’t implement a completely ‘free market’ for the buying and selling of time between companies and departments unless you are prepared to manage the contentious atmosphere this might engender and the complex administration it will imply.
  2. Cross charges should always be chargeable from supplying to consuming entity unless the execution of work is clearly unacceptable. It is for the consuming entity to accept the risk (and associated margin) that comes with project estimation and management.
  3. Avoid situations where project management is outsourced to a supplying entity, since this confuses the responsibility and financial impact of poor management.
  4. Calculate cross charges for externally chargeable projects based on a standard uplift on standard project cost, so that there is a margin both for the supplying entity (which bears the employment risk) and the consuming entity (which bears the project risk).
  5. Calculate cross charges for internal projects based on a lower uplift on standard project cost, so that there is a margin for the supplying entity (which bears the employment risk) and a reasonable and acceptable (because unrecoverable) cost for the consuming entity.

Revenue Recognition, WIP and Provisions

  1. Calculate WIP for management accounting purposes on the basis of net realisable value, not on the basis of cost.
  2. Always calculate WIP provisions and revenue on fixed price projects properly every month to avoid unpleasant surprises.
  3. Base revenue recognition on a project manager’s estimate of days to go (reviewed by senior management) at task level as well as project level, if possible.

Expenses

  1. Record and recover project expenses as rapidly as possible.
  2. Make sure that it is clear to the client what expenses he will be charged.
  3. Make sure that all unrecoverable expenses associated with a project are properly recorded against a project so that a more accurate P&L can be created by project.

Planning and Budgeting

  1. Annual budgeting, assuming that you cannot forecast actual project work a year ahead, should be based on capacity, standard fees, planned utilisation, planned realisation and planned costs.

Profit and Loss

  1. A profit and loss statement is only of use to an individual inasmuch as it contains values that are under the control of the individual.
  2. Allocate direct costs and revenues to projects and tasks as transactions occur, including sales, account management and marketing time and cost, if possible. Don’t bother to allocate higher level overheads or variances at a lower level. Don’t allocate team overheads across projects, don’t allocate business unit overheads across teams, and don’t allocate company overheads across business units.