Once we have an understanding on the capacity of your professional services firm, we then work to understand the ‘gap’ between the capacity in your professional service firm, against what it is actually billing.
We call this gap the ‘black hole’ in a professional service firm.
You need to calculate the billing capacity of your firm using the information in chapter one. The first thing to do here is obtain your billings for the last 12 months. This figure should then be coupled with WIP that is over and above normal WIP and is recoverable.
For example, if WIP at the beginning of the 12 moths you are comparing against capacity was $300,000 and WIP at the end of the period was $600,000 (and that WIP was all deemed recoverable), add this $300,000 difference onto actual billings.
This total figure is then compared against your capacity. If there is a gap between billings and capacity, this is what we call ‘the black hole’ in a professional service firm.
That is, capacity calculated in chapter 1 versus actual billings (plus abnormal WIP that is recoverable)
Note, this does not include write offs. Write offs are usually part of the reason why there is a gap – we’ll cover this soon.
It is likely there may be a gap between capacity and billings. It can be normal to have a gap, because the firm is growing or you have added in some more staff and they are not yet hitting expected performance. An assessment needs to be made on the size of the gap and at what point you start to go about fixing the problem. I’d say anything over 10% needs attention. But if you are high performing, you may say anything at all.
Understanding the difference between Capacity and Billings
To understand the difference, staff need to track their time. This is not about billing from a timesheet. This is not necessarily about how you invoice (fixed fee, value based, success based, etc). This is about measurement and accountability.
The great management thinker Peter Drucker has been credited saying ‘what you can’t measure, you can’t manage.’ If you want to understand and fix the black hole you may have in your professional service firm, you need to measure where the gap is occurring.
The first place to start is accessing inputs of time by staff and matching this against billings. This information will build up with teams and the firm and will give you a clear picture of teams or individuals who may need attention.
Of course, this assumes that staff are inputting time and write offs are being recorded appropriately. If this is not occurring, it’s going to make measuring difficult. If staff aren’t recording time, it’s usually because they don’t have to: poor culture of recording time, no accountability around time recording, staff self regulating time entered against clients, the firms invoices on fixed fee and so staff aren’t required to track time, ect.
What are likely reasons for having a ‘Black Hole’
If there is a gap between billings and capacity, the reason may be one or many of the following:
- Staff not recording time appropriately
- Over staffing
- Fixed fee under quoting
- Write offs arising
- Client fee pressure
- Un-recoverability of fees
- Inefficiencies of staff doing the job
- Training junior staff
- Hourly rates too high
- Scope creep
- Poor systems and processes
- Lack of capability on the particular matter (staff learning the topic on the job)
At this stage of the guide, you hopefully have an understanding of the capacity of the firm, you are aware of the difference (or not) between billings and capacity and you are going some way to understanding the reasons why there may be a gap, or as we call it, the ‘black hole’.
Its important at this stage to focus on the reasons why there may be a ‘black hole’ between billings and capacity and as discussed, in our view, this starts with measuring the inputs.
The Black Hole Solution
The solution is going to depend on the correct identification of the issues that are giving rise to the black hole. Often, the reasons for the black hole will be many and not just one, however, there is often one or two approaches that can have a dramatic positive impact.
We strongly suggest you first need to understand capacity and thus billing capacity per individual and then match this up against what is actually occurring and keep asking questions to uncover why, this is not about making your workplace a misery of time sheet compliance. It’s about being high performing, removing barriers and unknowns so you can support your team to perform at their best – effectively empowering them through clarity of role and expectations matched with accountability.