The first thing we do when working with a professional service firm is to calculate the billing capacity of that firm.
In this guide, we will explore these so you can apply to your business, but note, every professional service firm is different and these should be used as a guide only.
Fees Generated per Full Time Equivalent (FTE)
First, a rule of thumb. A professional services business, a good measure of performance is the fees generate per FTE. FTE’s include all staff (admin, professional and owners).
If you add up all your staff and divide into your fees, this will give you a figure. If that figure is below $140,000 your professional services firm is likely under performing, Reasons for a low figure could be:
- Incorrect staff levels/structure (too many staff, too many admin, not a great mix of junior to senior staff)
- Not billing properly
- Not enough work
- Large disruption within the year (move premises, merged with another firm, new systems or software introduced)
- Growing staff or new services that are not yet fully efficient… think investing in the future
If your figure is between $140,000 to $160,000 your firm is performing well, but still has some room for improvement and anything above $175,000 to about $200,000 is elite.
The reverse of dividing your number of staff into your fees billed, is to take your FTE’s and multiply by a number greater than what you have or an aspirational number and then start to understand how this may be achievable. This isn’t a straight answer and could likely take some analysis, however, for a rule of thumb, it’s a great start in understanding what the billing capacity of your firm maybe.
How to Calculate the Capacity of your Professional Services Firm
To calculate capacity, you need to understand (and in some cases agree with your other partners or staff) the following:
- The number of staff in your firm and their employ and FTE status
This is across admin and fee earners. We find that some staff members will have dual roles and its important to understand this and document it. For example, a staff member may undertake non billable admin duties for 2 days a week and professional billable duties for three days per week. This staff member would be classed as a 0.6 FTE.
- The chargeable hours you expect over a full year
This is the starting point. Then, depending on the culture of your firm, your staff expectation for productivity. Most will say, we want to be 80% to 85% productive, but have no idea what that means. I want to get away from a meaningless % and talk hours. Hours per day, per week and per year that are productive hours.
So, here are the secret herbs and spices:
There are 1,950 total hours in a year, over 52 weeks. We then merge this into “available” weeks in a year. Holidays (150 hours), sick leave (75 hours), public holidays (75 hours), etc, means 44 weeks of the year are available. Your firm may have staff retreats, days out of the office, which may bring this number down further, but stay with me in this generalisation.
This brings “available” hours down to 1,650.
Then from your 1,650, you can observe the following table (with %’s of the 1,650).
You can see at 85% productive (of the 1,650 hours), that equates to 1,377 billable hours or 31.30 per week or 6.26 per day. No one firm is the same, so its important to rationalise your staff expectation, which may be different per individual. Whatever is settled upon, this should be the aim and forms part of the capacity calculation.
A note on daily hours. This is not a daily target, and is a common mistake made. This means, staff should not log 5 billable hours and then don’t log anymore for the day. This is the average required over the whole year. So, in a normal week (at work for 5 days with no PD or like distractions), you should be logging several hours a day or more. Its common for this to be miscommunicated and staff see the daily target as a goal and don’t realise it is an average across the 44 weeks.
When you break the hours down, for example, a common expectation for a legal firm is 5 hours per day. . This does mean, from the available 1,650 hours per year, only 1,100 hours are going into a timesheet as billable (and amounts could still be written off this), that is 550 hours a year or about a third, that is available time, being used for PD and other non billable work.
3. The charge out rate per staff member (which usually means understanding their salary
This is an area that ‘depends’ on a number of factors and clearly, when calculating capacity is very important. Factors to consider when assessing charge out rate:
- Industry average for that staff members experience.
- Wage and on cost reference. Rule of thumb, apply the following: Wage + all oncosts (super, payroll tax, work cover, allowances) /500. If the charge out rate is less than that figure, that persons rate is too low for the wage you are paying.
- Another wage reference may be to take the wage + oncosts and multiple by 4 and then divide by 1,650.
This is a tough area to gain consensus on. Its not uncommon to match rates with competitors or the market. As an absolute minimum, as described above, take the total package and divide by 500.
Lots of consideration needs to go into the pot with this, there is no right answer, it is a sense check across many factors and inputs.