Post on 25-May-2015
description
BUILDING VALUE IN PROFESSIONAL SERVICE FIRMS
Moderated by:Brian Kennel
Performance Management Consulting, LLC
Building Value in Professional Service Firms
What do you want be a part of?
A few possibilities: Something that is consistently profitable Something that is financially rewarding personally Something that has long term value Something that is professionally rewarding
Building Value in Professional Service Firms
Some environmental reality Most professional services firms have no equity
(reserves) Most have been forced to compete in a pay me now
economy (this may be changing of late) Actual value is determined more by what the market will
pay rather than by the value of what is being produced Tax Considerations for LLC’s
Debt is often a necessary evil as earnings are taxed whether distributed to the members or not
Building Value in Professional Service Firms
Reality of ownership More difficult now than ever
Requires a level of commitment to excellence in everything you do
In most instances, owners actually work harder than non-owners A question of priorities
Building Value in Professional Service Firms
Ownership: What is it? Ability to participate in the profit of the non
owners – if you are a solo it is all about you Ability to participate in the long term value of the
firm (assuming you create the value) Level of status and prestige reserved for owners
An opportunity for you to be a part of something larger than yourself
Building Value in Professional Service Firms
Ownership: What is it not? An automatic pass to financial freedom
The firm is worth what you are An easier life Status and prestige in and of itself
Lots of people own stock in broke companies Simple
Requires a level of thinking and execution that is better than a non-owners
Building Value in Professional Service Firms
Some important points about what you earn? Compensation is a measure of value Value is a measure of success If the underlying success does not
create/support the value being paid, the firm will under perform (or go broke)
Compensation must be based on success
Building Value in Professional Service Firms
What your pay should be based on Billable work (firm and solo) Training (if applicable - firm) Recruiting (if applicable-firm) Leveraging – profit creation (firm and solo) Marketing ( necessary for any firm) Administrative contributions (firm concept)
Building Value in Professional Service Firms
Beyond the obvious, why is billable work so important? Capitalize on your high value
Remain relevant Lack of billable work will diminish skill sets Lack of billable work will diminish your
understanding of the marketplace
Building Value in Professional Service Firms
Beyond the obvious, why is training so important? Compensation requirements force the need for
profitability Profitability is created by billing junior professionals
in amounts that exceed what they are paid Training is the number one way to increase leverage
(profit on juniors)
Building Value in Professional Service Firms
Beyond the obvious, why is recruiting so important? Hours are all we have to sell No people no hours No hours to sell and clients go to people that
have hours to sell Recruiting renews the firm, stabilizes the
workforce and adds long term value to the firm
Building Value in Professional Service Firms
What exactly is leverage?Wikipedia defines as:
“ leverage (or gearing) is using given resources in such a way that the potential positive or negative outcome is magnified”
Building Value in Professional Service Firms
What exactly is leverage? Two kinds of leverage
Positive Training is an action that produces a positive result over and
over Coordinating client work and available staff maximizes efficiency
Negative Poor client service that reduces that value of the service Making someone wait for instructions or information needed to
produce a positive result Wasting someone’s time
Building Value in Professional Service Firms
Results of positive leverage? Increasing profits with less work Layered leverage
I teach you to do something profitably and you in turn teach someone else etc.
The more positive leverage the quicker profits grow Review specific leveraging examples
Building Value in Professional Service Firms
Leveraging Example: 4 man team - 1 partner and 3 professionals Solo Models
Team Partner Non
Partner Non
Partner Non
Partner Team Total
Partner
Hours billed 1,600 1,900 1,900 1,600 7,000 1,800
Billing rate $225 $185 $165 $95 $168 $225
Time value $360,000 $351,500 $313,500 $152,000 $1,177,000 $360,000
Collected amount $342,000 $333,925 $297,825 $144,400 $1,118,150 $342,000
Salary $90,000 $80,000 $50,000 $220,000 Bonus $32,678 $29,348 $5,820 $67,845 Benefits $24,536 $21,870 $11,164 $57,569
Loaded payroll $147,213 $131,217 $66,984 $345,414 Allocated overhead $82,667 $62,000 $62,000 $41,333 $324,264 $82,667
Net income $259,333 $124,712 $104,608 $36,083 $448,473 $259,333 Profit generated per owner hour worked (assume 600 non billable/400 non billable in the solo model) $204 $144
Notes:
Any number of team combinations could be applied. Results will vary with differing rate and hour assumptions.
Time value refers to billable hours multiplied by billing rate.
Collected amount assumes a 95% realization factor to account for the reality that all time worked is not normally collected
Salary is a variable depending upon firm type and industry segment
Bonus is a simple formula of 25 % of collected amount minus 2.5 times salary.
Fringe benefits are assumed to be 20% of salary and bonus
Allocated overhead is based on an assumed 40% profit margin (to include owners collections)
Net income is collected amount minus loaded payroll and overhead
Profit per owner hour worked is calculated by dividing gross collections by owner hours (billable and non billable) worked. It is assumed that a solo practice owner would work more billable hours to meet demand.
Building Value in Professional Service Firms
Limitations of a lone wolf(solo) practice style Income is limited to what you produce Rate is everything Limited long term value is created Not as profitable as a properly managed
leveraged model See profit comparisons-previous slide
Creates very little opportunity for anyone else
Building Value in Professional Service Firms
What are the ways to overcome billing rate limitations? Lower cost structure More billable hours Expanded leverage Lower compensation to the owner (s) – never popular Seek higher profit work – may be difficult in today’s
economy
Building Value in Professional Service Firms
Beyond the obvious, why is marketing so important? Account relationships deteriorate
Hedge against losing existing business Helps secure better billing rates
Rates are affected by confidence Increases confidence when bidding new work Increases self determination in customer relationships
New business allows the you to focus on win/win relationships without fear of losing business
Building Value in Professional Service Firms
What are the roles we play? Originators, Managers and Resources (also referred to as
Finders, Minders and Grinders in less complementary terms)
Originators get business Managers create leverage and improve the product Resources have the talent and training to create the product Many have to play all 3 roles
Which is more valuable? Each has its place
What is a superstar?
Building Value in Professional Service Firms
A note about Superstars Able to attract new business consistently Able to develop stable, mature and profitable
customer/client relationships Well respected by clients and peers Good internal relationships
Places high value on the contributions of others Understand their limitations
Avoid bad deals Surround themselves with others that are strong where they
are weak Share the credit and glory
Building Value in Professional Service Firms
Notes about Originators
Driven by the excitement of being attractive to someone new Driven by competition Will promise almost anything to secure new business Believe securing new business makes them indispensable Oftentimes refuse to accept their limitations
Become superstars after they recognize and account for the other essential parts of the organization in the sales process
Building Value in Professional Service Firms
Notes about Managers
Managers need quality resources Managers should see Originators as internal clients Should focus on making the Originator comfortable with
the manager being part of the client relationship Managers seek to build client relationships along
operational lines Must be careful not to become competitive with the Originator
Good Originator/Manager relationships will make you more competitive
Building Value in Professional Service Firms
Notes about Resources
Resources are most interested in doing the work Not as concerned with Originator/Manager relationships Resources comprise the leverage Quality Resources focus on becoming good at the “what”
in what they do Sometimes resources work directly with Originators
Building Value in Professional Service Firms
Basic business needs 4 basic and undeniable needs
Capital needs Growth needs Income needs Profitability needs
Building Value in Professional Service Firms
What are capital needs? Also known as working capital, equity or debt
Many firms use debt as its primary source of capital Used to support WIP, AR and Equipment
It generally takes and average of 3.5 months to turn a billable hour worked today into cash
Working capital provides consistency of cash flow
Building Value in Professional Service Firms
What are growth needs? Growth is needed to meet income needs No growth/less leverage
Not much long term value Growth is necessary to meet client demand
Short staffing creates a negative cycle Pace of growth dictates a certain capital need
WIP and AR absorb capital the could be used for growth
Building Value in Professional Service Firms
What are income needs? A want is not a need
Basic economic theory dictates that we have unlimited wants and limited resources
Wants and needs cause people to demand the highest salary they can command for their work
If the firm cannot meet these salary demands good people will leave
Choices must be balanced Income, lifestyle and workload If the firm/you cannot operate at a high level income will
suffer If the firm/you operates at a high level, a competitive
advantage is gained
Building Value in Professional Service Firms
What are profitability needs? Profitable businesses
Longer term focus Decisions can be made with proper input Opportunities can be maximized
Unprofitable businesses Driven by short term priorities Impeded competitiveness Impacts everything negatively
Profitability is a measure of success Profitable business are more desirable
Banks, Suppliers, Peers and Clients Profitability breeds confidence
Building Value in Professional Service Firms
What is stopping you from reaching your potential? Experience Training Desire Clients Working capital issues Lack of desire and/or time to train Resistance to change Other