In my conversations with firms over the years, the idea of a new business model keeps popping up. Whether it’s for a particular service or a comprehensive overhaul of the firm, a new business model is definitely top of mind.
What I find interesting is that for many firms the switch to a new business model is impeded by the antiquated metrics we use to manage our practice. I hear this in many of our client accounting conversations, and it definitely gets in the way of pricing transformation.
Things Change, and Metrics Should Too
Thirty years ago I was taught that the “billing rate” was derived by taking 1/3 payroll cost, plus 1/3 overhead, plus 1/3 partner income. I’m sure that this approach to generating how firms charge had been around even 30 years prior to when I learned it.
Fast forward to today, and every year firms are arbitrarily raising the “rate.” Some are discounting more and still coming up with the same fee. Fact is, there are many things changing inside of payroll, technology, and overhead that haven’t kept up with the rate. So to say that we need rates and time for “cost accounting” purposes really isn’t effective—not to mention all the things that go wrong with time as our metric.
Measuring Profitability without Time
I don’t want to turn this into a pricing discussion, but it always comes up. After all, pricing considerations are key to rethinking any business model. So I’ll leave you with one thought: Shifting pricing away from any connection to costs could increase our profitability tremendously. Then, if we treat all our costs (including payroll) as fixed, we can look at a job by job basis or at a department by department basis to determine profitability.
As I look forward to how the business model is evolving, I see three things (likely many more) that will change our metrics, probably forever. They are:
- Increased technology and automation. I don’t think this is a news flash. We all know it. But because of it, job profitability has shrunk. Firm profitability has grown because we’re able to do more work. But who really wants to work more for less? That’s in essence what we’re doing. Firms have to put out more clients to produce the same income result.
Some firms say they’ve fixed this by implementing a “technology charge” on every bill. Why focus on nickels and dimes while we leave dollars on the table? R&D costs to test technologies will grow, and with them there will be a need to evaluate technologies in real time. All of this should be factored into our metrics. Technology needs to be a different metric with a dedicated budget and accountability. Should it be 10%? Perhaps, meaning that payroll should be reduced by 10%. Challenges finding people makes that easier.
- Increased need for outsourcing and offshoring. I’ve received more calls and emails in the last year from firms looking for outsource options. I wrote a blog about this topic and the great firms we have at Allinial Global to outsource to. But again, this idea cuts into the 1/3 theory of payroll being included in a rate. So how do we charge for this, and how do we measure success?
It could very well be that we mark up the cost of outsourcing and charge the client accordingly. We will certainly have to look at profitability differently on these engagements.
- Changes to overhead. In shifting toward a more flexible workforce, many firms are interested in reducing their real estate footprint. As rents are reduced, we’ll be able to reallocate those costs toward other things. Or, the cost may be eliminated for good, allowing firms to redeploy overhead expenses into salaries and technology.
There’s no doubt we are in different times that challenge us to find success metrics in a different way, most likely by shifting from hourly success metrics to job and departmental success metrics. By doing so, we can reduce the number of engagements it will take to attain the same success.
At Allinial Global we have revamped our financial survey to focus more on the 10–15 key metrics it will take to achieve success. Our upcoming Executive Team Conference will include a session with highlights from this year’s financial survey and an opportunity to discuss and compare results with peers. This session will be a great opportunity to dig deeper into the application of new metrics, and we hope to see you there.
