As anyone who has worked in a consultancy, law firm, accountancy practice, or the like will know only too well, to keep your position you have to bill as many hours as possible. Managing a firm that runs a consultancy or partnership model relies on balancing order intake, sales, utilisation, and margin.
Order intake and its balance with sales is all about keeping the ‘cliff edge’ of billable work sufficiently far into the future to give stability. Sales is about how fast you’re converting your order book to cash. Utilisation is all about sweating your human assets to the maximum. And, margin is about ensuring that you have as much as possible to pay the partners, shareholders or owners.
As with other businesses, the four measures are interdependent, however, what is different to other models is that being a people business adjusting your work in progress or stock is a little more challenging.
In the current economic climate with organisations of all types and sizes feeling the pinch, being a professional services company and balancing the 4 KPIs has never been more challenging. As organisations cut back, professional services companies are increasingly challenged to do more for less and often on a different risk basis, a fixed price one. To maintain their balance they therefore need to price more keenly which then leads to either lower margins or the need for higher utilisation.
As a recent Times article, based on recent research collaboration between Andre Spicer of the CASS business school and Johan Alvehus or Lund University, highlighted, often under such pressures big advisory firms become obsessed with the number of hours their employees bill at the expense of their traditional partnership values, eroding professional ethos.
Interestingly when you look at the metrics that professional services firms often use, at the lower/middle levels it is almost exclusively utilisation, whilst at the upper levels it is more about order intake/sales. In good times this combination drove good margins and therefore happy partners, however, with current challenges the business model it is increasingly out of balance.
The tensions built-in by the focus on utilisation can drive the creation of solutions that require as many billable hours as possible and deliver ‘gold plated’ deliverables. This can be at odds with and often way exceed what the client really needed. The client, whilst appreciating the solution, sees it as in excess of what it required and is often disappointed by the size of the bill as they wanted a just adequate solution and a smaller bill.
There are a new band of professional services organisations that are becoming more ‘margin centric’, managing their fixed cost base and their efficiency. In doing so they are resetting the balance of their organisation to one that is more sustainable for the future. As I mentioned in an earlier post, this requires a different mindset, skillset and toolset from the traditional professional services organisation. It also requires a different environment, processes, and metrics at the enterprise level.
Looking at metrics it is hard to see how an organisation can really prosper in the modern environment without explicitly measuring and incentivising margin creation. After all with a fixed price, which is better to successfully deliver a £100k order which provides utilisation of 100% at a margin of 0%, or that provides 50% utilisation at a 50% margin? There is no one answer but what is increasingly essential is the ability to dynamically manage a portfolio.