Successful Professional Services Management

Successful Professional Services Management - Activity Variance

Doing nothing is better than being busy doing nothing.

Lao Tzu (6C BCE)

Measuring Standard Fee Variance is all very well, but if a low standard fee variance is your only goal then you’re in danger of not seeing the wood for the trees. A low variance on a value that’s lower than planned may be more dangerous than a higher variance on a value that’s much higher than planned.

 

If a low standard fee variance is your paramount goal then you can simply reject work when your fees are challenged by prospective clients, fire your superfluous staff as expeditiously as the law allows, and maintain a smugly high level of utilisation. Never mind that your gross margin will fall and that it won’t even cover your overheads.

 

The important point is that your forecast isn’t just based on standard rates. It’s also based on target volumes.

 

Our plan for Genesys assumes a specific number of days at standard rates:

 

	Days	Fee Rate	Fees
Managing Director	22	1400	30,800
Secretary
Salesman/Account Manager
Senior Scientific Officer	110	1100	121,000
Research Scientists	1,760	950	1,672,000
Total	1,892		1,823,800

 

Let’s look at two alternatives.

 

Scenario 1:

 

The first is a scenario where actual fee rates are 10% lower than planned:

 

	Days	Fee Rate	Fees
Managing Director	22	1260	27,720
Secretary
Salesman/Account Manager
Senior Scientific Officer	110	990	108,900
Research Scientists	1,760	855	1,504,800
Total	1,892		1,641,420

 

Assuming other costs remain constant, and assuming for convenience a gross margin of 50% on standard fees, then total gross margin is lower by 182,380 than was forecast, reflecting the 10% discount on fee rates.

 

Gross margin:            1,641,420 – 911,900            =            729,520

 

Scenario 2:

 

The second alternative is a scenario where actual fee rates are 10% higher than planned, but we have cut our team of research scientists by 25%, and maintained the same level of utilisation.

 

	Days	Fee Rate	Fees
Managing Director	22	1540	33,880
Secretary
Salesman/Account Manager
Senior Scientific Officer	110	1210	133,100
Research Scientists	1,320	1045	1,379,400
Total	1,892		1,546,380

 

Assuming the same 50% gross margin on standard rates:

 

Gross margin:            1,546,380 – 702,900             =            843,480

 

The second scenario is very likely to be the more profitable one when overheads have been taken into account.

 

Note that activity variance is a variance not only on fees but also on costs.

 

In these two examples, we can show Activity Variance and Standard Fee Variance as follows:

 

	Scenario 1	Scenario 2
Forecast Activity	1,823,800	1,823,800
Activity Variance	0	-418,000
Standard Fees	1,823,800	1,405,800
Standard Fee Variance	-182,380	140,580
Actual Fees	1,641,420	1,546,380
Forecast Cost	-911,900	-911,900
Activity Variance	0	209,000
Actual Cost		702,900
Gross Margin	729,520	843,480

 

In reality, these numbers don’t recommend one course of action or another, since long-term strategy will often dictate the choices you make, but understanding whether a variance is due to discounted fee rates, or to lower levels of overall activity is important. These measures are the raw material of your decision-making.

 

Activity Variance can be defined as follows:

 

Activity Variance is the excess or shortfall on activity when compared with forecast activity. It is best measured as a monetary value.

 

Why ‘monetary value’?

 

In these examples, we have compared actual fees at standard rates against forecast fees at standard rates. The difference in value reflects a difference in the number of days of professional work that have been delivered. So, why not compare actual days with forecast days?

 

It’s true that thinking in terms of days is often helpful, and it is well worth making sure that you are able to report variance in days as well as value, but it is value that matters more, and value that is the true measure of deviance from forecast. This is because you might execute the same number of days as your forecast predicts, and yet, because proportionately more days are worked by staff at lower grades at lower standard fee rates, an activity value variance might still emerge. In the end, it is value that has the stronger relationship to profit and to cash.

This is an excerpt from "Eight Measures For Successful Professional Services Management by Adam Bager Chairman of systems@work.

Successful Professional Services Management - Standard Fee Variance

Anybody who thinks talk is cheap should get some legal advice.

Franklin P Jones (1887 - 1929)

The idea of ‘standard fees’ may be an alien one. What I don’t mean by ‘standard fees’ is a price list that you might optimistically publish to your clients. What I mean is the fee rates on which your financial plans are based, and which, if you exceed them, could mean more profit (all other things being equal), and which, if you fail to meet them, can mean losses. They are central to budgeting and financial planning, and revenue planning in particular.

 

One of the reasons for reticence about standard fees is that budgeting costs is a much easier task than forecasting revenue, especially if you’re assuming that your professional service team is fixed in number. But your finance director, and your shareholders, aren’t likely to be satisfied with a cost budget without a revenue forecast. They won’t sanction cost without justifiable revenue to cover it. So if you’re managing a PSO then it’s unlikely you can avoid forecasting consulting revenue alongside consulting cost. Nor should you avoid this.

 

How can you approach forecasting?

 

The first thing is to understand the constraints:

 

·      You cannot achieve what is physically impossible. By this I mean that you cannot earn more revenue than your staff are capable of earning. Their working days are limited and utilisation has an upper limit.

 

·      You cannot charge fees that the market will not support.

 

·      You must make a profit.

 

The first constraint sets an upper limit on the number of days your staff can work, and therefore the number of fee-days that can be charged.

 

Taking our notional PSO, Genesys, and what we already know about the upper limit on utilisation for each employee, and assuming 220 available working days per year, and an average utilisation of 80%:

 

	Number	Limit on Utilisation	Days	Utilisation	Days
Managing Director	1	0.1	220	0.1	22
Secretary	1	0	220
Salesman/Account Manager	1	0	220
Senior Scientific Officer	1	0.5	220	0.5	110
Research Scientists	10	1	2,200	0.8	1,760
Total					1,892

 

The total fee-days we can forecast are 1,892.

 

The next step is to set average expected (or ‘target’, or ‘standard’) fee rates.

 

Standard Fees can be defined in this way:

 

Standard Fees, usually associated with grades, roles, and business streams, are target fee rates on which revenue forecasts have been built. They should not reflect any loss of revenue due to anticipated realisation rates of lower than 100%.

 

There are two approaches to the determination of standard fees:

 

·      You can start with cost and multiply it to arrive at fee rates, or

·      You can start by considering what the market will bear.

 

In reality, whichever method you start with, you will have to look at the numbers from both points of view.

 

Let’s assume the following fee rates and calculate these total revenue figures:

 

	Days	Fee Rate	Fees
Managing Director	22	1400	30,800
Secretary
Salesman/Account Manager
Senior Scientific Officer	110	1100	121,000
Research Scientists	1,760	950	1,672,000
Total	1,892		1,823,800

 

However, in reality, it’s unlikely that we’ll be able to invoice the full value of all fees (see Eight Measures - 4 - Realisation). We may have to correct some project work at our own cost, or we may spend too much time on fixed price tasks.  Overall, we will assume then that 90% of the work we do is billable. This is equivalent to predicting 90% realisation.

 

	Days	Fee Rate	Fees	Fees @ 90% Realisation
Managing Director	22	1400	30,800	27,720
Secretary
Salesman/Account Manager
Senior Scientific Officer	110	1100	121,000	108,900
Research Scientists	1,760	950	1,672,000	1,504,800
Total	1,892		1,823,800	1,641,420

 

Next comes a comparison of anticipated costs and forecast revenues. Just as when calculating standard costs we should take all direct costs associated with an employee.

 

We might arrive at a table like this:

 

	Number	Limit on Utilisation	Total Cost per Employee	Total Cost
Managing Director	1	0.1	180,000	18,000
Secretary		0	38,000
Salesman/Account Manager		0	110,000
Senior Scientific Officer	1	0.5	100,000	100,000
Research Scientists	10	1	70,000	700,000
Total				818,000

 

Note that:

 

·      We take only 10% of the Managing Director’s costs, to set against the revenue that he or she earns from 10% of his or her time. The rest of the Managing Director’s time is spent on issues other than services delivery.

 

·      However, we include the entire cost of the Senior Scientific Officer, even if only 50% of his time is spent on fee-paid work. This is because his time spent managing the services delivery team is part and parcel of the cost of services delivery.

 

·      We have calculated an average cost of 70,000 per Research Scientist. This probably conceals a range of grades and costs.

 

Considering all of these factors we have arrived at the following:

 

Revenue	1,641,420
Costs	-818,000
Gross Margin	823,420

 

This gross margin (of approximately 50%) is reasonable. It must cover all costs associated with marketing, sales, management, administration, and overheads, and provide a profit. Assuming a target profit of around 10% of revenue, this means that all additional costs must be covered by gross margin less target profit.

 

Revenue	1,641,420
Costs	-818,000
Gross Margin	823,420
Maximum Costs	-659,278
Target Profit (10% revenue)	164,142

 

In this example, margins look reasonable, and we can therefore accept the suggested standard rates. But what if they are not reasonable? In this case there are only two alternatives:

 

·      Reduce costs

 

·      Increase revenues

 

How?

 

Costs

 

Assuming that overhead costs are under control, the only costs we can be seriously concerned with are the costs of professional staff. How can these be reduced?

 

·      By increasing utilisation. If this can be done then more fee days can be achieved to offset costs, but this is only possible if the market allows it, and if realisation of 90% is maintained.

 

·      By increasing realisation. If this can be done then more revenue will be achieved from the same fee days.

 

·      By employing staff at lower salaries. This takes some time to achieve, and can only be a long-term goal. It may also threaten the quality of the work you do and, in turn, the realisation you achieve.

 

·      By changing the balance of fixed salary and bonus so that employment costs reach budgeted level only if utilisation and revenue increase.

 

Revenues

 

·      By using role-based fee rates cleverly.

 

Fee rates are usually associated with employee grades, and are even published on occasion to clients. They are like hotel ‘rack rates’ in that they represent the highest rate the PSO charges. They should usually be pitched higher than the average fee rates that you’ve assumed in your forecasting, since most clients see them as the starting point for downward negotiation.

 

But you can set your rates more cleverly if you break the fixed link between an employee’s grade and the rates you charge. It is often better to charge on the basis of role since an employee may be capable of more roles than one, and you may thus be able to increase the average fees you charge.

 

	Grades	Roles
Employee A	Principal Consultant	Project Director Project Manager Quality Manager Principal Consultant Senior Consultant
Employee B	Senior Consultant	Project Manager Principal Consultant Senior Consultant Consultant
Employee C	Consultant	Senior Consultant Consultant Technical Consultant Junior Consultant
Employee D	Junior Consultant	Consultant Junior Consultant

 

In this scheme, we can place an employee onto a project in a position more senior than his grade and charge the appropriate higher fees. Of course, each employee will have a default role that reflects his or her grade.

 

We can also establish special roles that attract higher fees, such as Project Director, Project Manager, Quality Manager and Technical Consultant.

 

If your system is flexible and powerful enough you will be able to track the effect of more sophisticated pricing.

 

·      By establishing sophisticated fee rates for specific clients, projects, tasks, and activities that exploit (not in any malign sense) the rarity of specific skills and experience that your staff may possess.

 

·      By completing fixed price projects in less than estimated time. But you are a brave manager if you base your profitability on this principle. Fixed price projects are usually treated with caution by PSOs for fear of underestimate and overrun.

 

 

Whatever techniques you adopt in anticipation of challenging margins, or in search of increased profit, you will forecast on the basis of an average or target or standard fee rates that you believe can be achieved. This fee rate will probably be associated with an employee, or more typically, with a group of employees, by grade or default role. In complex PSOs that work across international boundaries, and which may contain more than one business stream, you will probably associate standard fees with combinations of grade, business stream and company (or country), especially if markets are substantially different in each of these. But you may choose any other meaningful combination of criteria against which to hold your standard fee rates, as long as comparison with actual rates remains possible. As with all systems, however, it is sensible to keep complexity at bay if possible. This is no exact science. Think always in terms of what you will do with the information that you hope to obtain.

 

As long as you can achieve actual fee rates that are close to your standard fees then your PSO should meet its planned profits (as long as all other measures are as planned).

 

If your rates are higher or lower than planned then a variance will emerge between the value of your fees if they were calculated at standard fee rates, and your actual fees.

 

For example, our plan for Genesys assumes a specific number of days at standard rates:

 

	Days	Fee Rate	Fees
Managing Director	22	1400	30,800
Secretary
Salesman/Account Manager
Senior Scientific Officer	110	1100	121,000
Research Scientists	1,760	950	1,672,000
Total	1,892		1,823,800

 

Let’s suppose that actual fee rates are 10% lower than planned:

 

	Days	Fee Rate	Fees
Managing Director	22	1260	27,720
Secretary
Salesman/Account Manager
Senior Scientific Officer	110	990	108,900
Research Scientists	1,760	855	1,504,800
Total	1,892		1,641,420

 

In this case a standard fee variance emerges as follows:

 

	Scenario 1
Standard Fees	1,823,800
Standard Fee Variance	-182,380
Actual Fees	1,641,420

 

Standard Fee Variance can be defined as follows:

 

Standard Fee Variance measures the difference between actual fees charged to clients and the standard fees that would be charged for the same work, these also being the rates on which revenue forecasts have been built. They may usefully be analysed by Grade, Role, Business Stream, Department, Company and any other useful segmentation.

 

Actual Rates on fixed price projects.

 

This definition of standard fee variance depends on the concept of actual fee rates. So let’s look in a little more detail at this concept. Actual rate is a simple enough concept in the case of time and materials projects, when every second of professional work is potentially chargeable. But how do we handle fixed price projects when there is typically a lump sum for a project or subdivision of a project?

 

You might think that it is meaningless to associate standard rates with fixed price projects. After all, revenue doesn’t depend in any way on how much time you spend on the project. Nor does it depend on who executes the work.

 

But this is a fallacy. If you are not imagining notional rates associated with the staff you plan to deploy on the project then you’re entertaining a very risky proposition, because you have arrived at a price without any calculation at all. True, you could claim on the other hand that you are fully aware of costs. And in this case, that’s fine, since you’re relating potential revenue to potential costs, and effectively defining rates as marked up costs. This is a slightly different method, but the result is the same.

 

You can think of it in two different ways:

 

You can determine a discounted or uplifted rate proportional to standard fee rates and apply this to estimated days. In this example, the project has a fixed price of 50,000:

 

Total Fixed Revenue	Days	Standard Fee Rate	Total Fees at Standard Rate	Notional Fee Rate	Total Fees at Notional Rate
Total Fixed Revenue					50,000
Principal	4	1250	5,000	1,042	4,167
Senior	10	1000	10,000	833	8,333
Junior	60	750	45,000	625	37,500
			60,000		50,000

 

(The ‘actual’ fee rates for this project are calculated as five sixths of standard fee rates, since revenue is fixed at 50,000 instead of the 60,000 it would be at standard rates.)

 

Alternatively, you can uplift costs in proportion:

 

Total Fixed Revenue	Days	Cost	Notional Fee Rate	Total Fees at Notional Rate
Total Fixed Revenue				50,000
Principal	4	700	1,224	4,894
Senior	10	480	839	8,388
Junior	60	350	612	36,718
				50,000

 

It doesn’t much matter which method you choose. Both deliver a notional fee rate that can be compared with standard fee rates to determine standard fee variance.

 

And once you can monitor standard fee variance you can act on it. Because, all other things remaining constant, if your actual fees are lower than standard fees then your profits are under threat. If they are higher, then you’re doing well.

 

Standard Fee Variance is a useful leading indicator of how well you’ve judged the market. If you have overestimated your rates then you must use all the tools at your disposal to claw back profitability:

 

·      By increasing utilisation

 

·      By increasing realisation

 

·      By reducing staff cost

 

·      By reducing overhead costs

 

·      By negotiating fees more aggressively and cleverly

 

 

This is an excerpt from "Eight Measures For Successful Professional Services Management by Adam Bager Chairman of systems@work.

Thirteen Obstacles To Good Utilisation - Part 3

Patience and perseverance have a magical effect before which difficulties disappear and obstacles vanish.

John Quincy Adams (1767-1848)   

In the final part of this article we will focus on the final 5 of the 13 issues you should be considering when faced with low utilisation.

1. Overstaffing and Insufficient use of External Staff
2. Inconvenient Project Dependencies
3. Distant Deadlines
4. Inaccurate Estimates
5. Unimaginative Approaches to Last Minute Deals

Overstaffing and Insufficient Use of External Staff

 

Clearly, the most obvious cause of low utilisation is too many staff. If you can’t find enough work to occupy your staff then your utilisation must fall.

 

But how can you judge whether you have too many staff?

 

The answer is that you have too many staff if you never have too few. If you can always satisfy immediate demand then you probably have too many staff too much of the time. This is because demand for services never comes evenly. There are peaks and troughs. If you can satisfy all the peaks then you have too many staff during the troughs.

 

The following graph shows demand for consulting days over a number of weeks. To ensure full satisfaction at this level of demand requires capacity of 48 days per week.

 

 

 

Plan A

 

Ensuring sufficient capacity to accommodate the peak of demand means accepting considerable slack at non-peak times:

 

 

In this example, 49 hours are slack, around 10% of available time.

 

Plan B

 

If we set maximum capacity at 44 days per week then it’s clear that there are some weeks where demand exceeds capacity and somewhere there is still idle time.

 

Assuming that demand cannot be shifted to occupy idle time, the percentage of slack time has been reduced to approximately 3.5%. In addition, it is reasonable to assume that the seven hours of demand that cannot be met might be rescheduled.

 

 

 

In the first case, you must bear the cost of 49 hours idle time.

 

In the second case, you must bear the cost of 16 hours idle time, and forego revenue for seven hours.

 

	Idle Time @ 500	Lost Revenue @ 1000	Total
Plan A	49 = -24,500		-24,500
Plan B	16 = -8,000	7 = -7,000	-15,000

 

Plan B saves 9,500, but if we can assume that clients will accept some rescheduling of work, then Plan B becomes even more attractive. Effectively we are saving money because we are employing fewer staff to execute the same work.

 

Of course, satisfying demand means satisfying clients, an important goal regardless of utilisation, and if you can’t satisfy the peaks of demand, you risk an unsatisfied customer.

 

The skill lies in finding a balance between these two competing demands - one that calls for high levels of customer satisfaction and another that calls for commercial pragmatism – a balance that is reasonable both for your clients and your PSO. This balance is best achieved through careful management of your clients’ expectations. If your client unrealistically believes that you can provide resources at short notice of whatever type he requires then he will be disappointed if you can’t. You need to:

 

·      Publish your service levels in respect of ad-hoc consulting, substantial project work, emergency on-site work, etc.

 

·      Make ‘penalties’ and ‘incentives’ in respect of timing (and, as discussed above, ‘cancellations’) clear

 

·      Explain the reasoning behind these understandings

 

The important point to remember is that service levels are not absolute, but are measured against expectations.

 

Another approach to meeting expectations is to ‘farm out’ work during the peaks of demand. This is a useful approach when the skills that you sell are standard enough and common enough to exist in a pool of freelancers in the market. Especially if you have competitors (and who doesn’t?) these freelancers are very likely to exist, helping both you and your competitors to meet peaks of demand.

 

But bear the following in mind:

 

·      If your own staff’s skills can easily be supplemented by ‘standard enough and common enough’ skills readily available in the market, then you may wonder whether you have any ‘unique selling points’ that differentiate you in the market and make you competitive

 

·      But if, on the other hand, you do have unique approaches that differentiate you, you risk passing these on to your competitors, especially if they have recourse to exactly the same pool of freelancers

 

·      Gross margins on freelance suppliers of skills will be lower (which fairly reflects that fact that you have no risk of covering cost without revenue)

 

·      Freelancers rarely have the same loyalty and attachment to your standards and approaches

 

·      Freelancers are tempted (and especially if encouraged by your clients) to sell their services directly to your clients

 

·      Clients like consistency in the professional staff who service them. They like familiar faces. But you cannot guarantee or easily supply consulting/service continuity to your clients if you employ freelancers.

 

Inconvenient Project Dependencies

 

Not all PSOs are project-oriented or team-oriented. Many provide services that are sequential, and therefore dependent on one another, where the completion of one task must precede another. Large IT, or engineering or architectural projects involve the deployment of large multi-disciplinary teams over long periods, executing highly structured projects, where each task has a logical dependency on preceding ones. When this is the case, and when an individual employee may work on several projects in several teams, scheduling issues can arise due to interdependency, not only within projects, but also across projects.

 

Suppose that employee A is needed for a particular task X in project A, and for a similar task Y in project B.

 

Suppose task Z in project B cannot begin until task Y is complete.

 

Suppose also that task Z employs large numbers of staff.

 

Then suppose task X begins and ends late.

 

 

Your original plan might show Project A Task X finishing just in time for the start of Project B Task Y. Your projected utilisation shows employees busy on Project A Task Z from 23^rd February and on Project B Task Z from 9^th March.

 

But supposing Project A Task X overruns by a week. Everything is then shifted and utilisation suffers across the company.

 

 

This is merely to show how dependencies affect utilisation. But how can you avoid these issues?

 

·      First, by understanding these dependencies and assessing risks of slippage in advance (MS Project Central is a good tool for this)

 

·      Second, by substitution - by trying to avoid dependency on a single employee in this way

 

·      Third, by creative project management – by structuring your projects to avoid dependencies

 

Distant Deadlines

 

Procrastination is pleasant. Doing tomorrow what you don’t need to do today gives you moments (sometimes eons) of time in which you can relax and play a round of golf.

 

But procrastination increases risk and can ultimately damage the financial health of your organisation.

 

Much better to live by the grim Protestant work ethic that says ‘Never do tomorrow what you can easily do today.’

 

The reasons are obvious.

 

By filling the future with work that can be finished today, you are potentially incurring an opportunity cost by reducing your availability for new opportunities that you don’t (yet) see.

 

And by putting off work that you can do today, you reduce the revenue that you can recognise, even if it takes the form of Work in Progress value rather than invoiced value.

 

Doing today what you think you can do tomorrow applies equally to both chargeable projects that you invoice to your clients, and internal projects. If you have a good grasp of availability then don’t encourage your clients to give you distant deadlines. Encourage them to give you deadlines that you can meet on the soonest possible date. This means more revenue and quicker cash. Equally, just because a project is internal (writing a research paper, choosing a software system, writing your own procedure manuals, building sales cases, etc.) don’t allow yourself to think that deadlines don’t matter. Take the same view. The quicker something is done, the sooner your staff are available for new opportunities, and the sooner ‘value’ is built, whether in the form of revenue or intangible asset value.

 

Remember too, that it’s just as important to control the duration of internal projects, as it is to control the duration of client projects. Failing to do so can impact disastrously on chargeable utilisation even if not on utilisation. An uncontrolled internal project is likely to extend to fill the time available, fulfilling Murphy’s merciless law, and at a huge cost to chargeable utilisation if your staff even once find it more convenient to give their time to this rather than chargeable work.

 

Inaccurate Estimates

 

Estimating how long it will take to do something is phenomenally difficult. How often do you correctly estimate how long it will take you to cook a three-course dinner for ten of your friends (well, in my case I usually get this wrong)?

 

The problem with estimating is that things are never quite the same from one day to another, and from one project to another. If they were, we wouldn’t be working in professional services. We would be working on a production line.

 

However, estimating is essential in professional services, and not only when clients are asking to know when your work will be completed, or demanding a fixed price for the work they want you to do. Estimating is important for utilisation too, since it is the duration of a task for an employee that determines his next availability. If a culture of inaccurate estimation prevails then a PSO will have to leave generous gaps between assignments to ensure reasonable levels of service. Some of these gaps will be filled, but some won’t, and you will never be able to optimise the placement of staff on projects, and meet your clients’ deadlines.

 

When I worked in Central and Eastern Europe, just before the Iron Curtain came down in 1989, I tried to bring the disciplines of project management that I’d learned in London to the work I had to do in Budapest.

 

‘How long will it take you to translate this manual into Hungarian?’ I asked one of my team.

 

The question was met with puzzlement.

 

‘How can I possibly know that until I’ve finished it?’

 

This attitude prevailed across the entire region. Is it any wonder that the Five Year Plans of Communist Eastern Europe never succeeded except on paper?

 

Estimation is an art that professional staff learn as they go along, but it’s also a science, in that learning from experience need not be an entirely intuitive process. If your staff have told you the truth about the time they’ve spent on similar tasks and projects then your timesheet system should contain a wealth of useful information to help you estimate more accurately in the future. And you will have reports on previous performance against estimates.

 

Nevertheless, however much you might believe you have learned, I would still hold to the general principle, and especially if you’re dealing with programmers, that it is wise to increase every number that you’re given.

 

Unimaginative Approach to Last Minute Deals

 

Markets of all kinds have become more like auction houses. Through the internet, we can all attend ‘sales’ and bid for the goods and services we buy. We all know that prices we see reflect both the scarcity of what remains for sale (causing prices to rise) and the risk of holding unsold stock (causing prices to fall). Buyers are afraid that stock will all sell, and suppliers are afraid it won’t. Prices reflect the risk of one or the other eventuality, in proportion to its likelihood.

 

Let’s look at hotels and air travel. Most of us are very familiar with the methods of hotels and airlines, and the ‘revenue management’ systems they employ. Some of these are extraordinarily sophisticated, predicting patterns of purchase for particular flights or particular nights based on season, weather, day of the week, special events, and so on.

 

The basic rule is that the earlier you buy, when unsold stock is high, the cheaper the price. As stock diminishes, prices rise, until, just a few days before a flight or night, the price can be as high as on any old-fashioned airline or in any old-fashioned hotel, both selling at fixed prices per category without sophisticated revenue management systems. This is fine, because, as availability diminishes, and choices close in on the buyer, he or she must balance the risk of not getting a flight or room at all, with the higher cost.

 

At the last minute, if there’s almost nothing left, you’ll pay a premium to secure a flight home or a good night’s sleep.

 

But what if there isn’t almost nothing left?

 

If the hotel or the airline is holding too much unsold stock as the deadline for its expiration approaches, then you might expect them to price their stock at almost any price as long as it exceeds cost (and the marginal cost can be extremely low). Almost any price is better than an empty seat or an empty room. We all know they do this sometimes, and even for whole seasons. Hotel prices can be remarkably low when, for one reason or another, a resort has suddenly become unpopular.

 

However, in general, airline and hotels don’t sell in this way.

 

If you pack your bags, and wait until the very last minute to buy an airline seat, when you know that a particular flight isn’t full, you’ll be surprised to see that prices don’t fall dramatically at the last minute.

 

Why not? Is it a lack of sophistication in the systems that hotels and airlines use?

 

No, the general reason is that this isn’t a game they want to play with their customers. And yes, buying and selling is a game. It’s a game governed by rules that are set by the airlines and hotels, but which customers come to understand. The rules of the game are that as time runs out prices rise.

 

If the rules were different, and prices didn’t go on rising at the last minute, but fell again as unsold stock begins to look ‘unsalable’ we would quickly learn these rules and our behaviour would become more complicated. We would begin to book our rooms or flights either very early or very late. Exactly what effect this would have is somewhat unpredictable, but our sense of risk versus price would fail, hotel companies and airlines would cease to be able to predict demand accurately, and the ‘system’ or ‘game’ would become an unruly ‘rout’.

 

What does this have to do with PSOs and utilisation?

 

The available time of our staff is our unsold stock, our equivalent of a row of empty seats, or a corridor of unoccupied hotel rooms. If it remains available as the time for its passing approaches, we must sell it. Perhaps the techniques of revenue management have a place in the pricing of consulting time. Book early to get the best prices.

 

But I’ve yet to see this happen, other than through the application of a short-notice premium price. PSOs don’t generally use the revenue management methods of the airline and hotel businesses. It would be an interesting game to try, though I suspect that whilst clients would take advantage of low prices booked early, they would rarely be tempted to pay a very high premium for last minute bookings, unless the advice they needed was urgent. It is rarely that urgent. The overall effect of this game would probably be lower achieved consulting rates. In practice, our clients would buy early at lower prices, and only rarely buy later at higher prices, except when an emergency demands it.

 

However, a PSO cannot totally ignore the rules of the market, rules that relate price to availability. And generally we don’t. Through differentiation, we seek to make our particular skills appear rare, and we price accordingly. We apply discounts to bulk purchases and long-term commitments. We charge a premium for short-notice demands. We offer discounts during periods of low utilisation (often in the summer months), and we package our services into ‘training courses’, ‘system audits’, ‘best practice reviews’, etc., when times are lean. We cannot afford to be too proud.

 

The point to remember is that if your time is unsold, it is lost forever. Because of this, you must be imaginative about how you sell your unsold stock. Whilst doing so you must also be aware that buying and selling remains a game between you and your clients. Just as the airline and hotel industries cannot afford to confuse the public as to the basic rules of the game, you, too, must never allow your customers to think that if they wait long enough before placing an order for your time, they’ll get a better price. That way, disaster lies, since optimising the deployment of your staff, and estimating the resources you will need, becomes impossible in such circumstances. Hold fast to the general rule, that customers will get a better deal the earlier and the greater their commitment.

 

But be imaginative too. Sell your unsold stock in imaginative ways, by ‘packaging’ it to differentiate it from the services you usually sell. And if you can predict your leaner times well in advance, so much the better.

This is an excerpt from "Eight Measures For Successful Professional Services Management by Adam Bager Chairman of systems@work.

Thirteen Obstacles To Good Utilisation - Part 2

Patience and perseverance have a magical effect before which difficulties disappear and obstacles vanish.

John Quincy Adams (1767-1848)   

In Part 1 of this article we focused on 4 of the 13 issues you should be considering when faced with low utilisation.

1. Cancellations and Postponements
2. Poor Planning
3. Poor Time Management
4. Failure to Share

In this article we will consider the next 4 of these....

1. Short Days (over-ready acceptance of a client’s timetable)
2. Unsophisticated Contracts
3. Multiple Short Assignments
4. Inaccurate Time Recording

Short Days

 

How often do you see your staff record 6.5 hours of project work, when you expect to see a whole day? Or 2 hours when you expect to see a whole morning?

 

When you query this, you’ll hear stories like this: ‘The client said to come at 10, and he sent me away at 4.30 because he had so many other things to do’.

 

There’s nothing wrong with this, if this is what the client wants, and if the client understands that, he must nevertheless pay for a whole day or a whole half-day. What is disastrous for the PSO is the assumption that the client will pay only for the exact hours that your professional staff work in his workplace, whilst a whole day or half day has been agreed.

 

Accepting this practice amounts to an assumption of lower than maximal utilisation and it should be avoided. Consider the following technique:

 

Clearly state that you deal in days and half days, at least when your staff work at your client’s workplace. Anything less than 3.5 hours will be treated as a half day in terms of fee calculation, and anything less than 8 hours and more than 4 will be treated as a whole day.  

 

You should also negotiate higher rates for half days (pro rata) than for full days since it is highly unlikely that you will always fill the second half of the day with fee-earning client work.

 

Rules like these, enshrined in contracts, will ensure that your clients work full days or half days with your professional staff, or accept the commercial consequences of not doing so.

 

Note, however, that you should not encourage your staff to enter incorrect (rounded) hours because of this. It’s important that you have a complete and accurate record of actual hours. If you are going to round your hours to half days and whole days, let your system do this for you. However, make sure that you can report both actual hours, as entered, as well as rounded hours.

 

You may, instead (or in other circumstances), round all assignments of fewer than X hours to X hours. Even if you are not rounding to half days or whole days, this can be effective (and when the time is spent at a client’s site, it is also entirely justifiable).

 

I recently analysed the effect, in terms of fee value, of rounding durations that are shorter than two hours up to two hours. Over the course of a year, in a company employing around 140 chargeable staff, the numbers were these:

 

Reported Hours	Rounded Hours	Difference	Notional Fees @ 60 EUR per Hour
76,743	77,428	685	41,100

 

The benefits in this case would clearly exceed the cost of implementing the systems and contracts that enable the process.

 

Unsophisticated Contracts

 

It would be useful if your clients could understand the commercial basics of a PSO, that utilisation is the key to a PSO’s profitability. Make sure that your contracts are very clear about how hours are calculated and fees charged (as above in the case of short days or half days, and rounded hours), about how travel time is to be counted and charged, about how research time, or time spent on other supporting activities, is to be counted and charged. Making these rules clear at the outset will avoid difficulties later.

 

Note that all client-related activities, including research, travel to and from the client’s workplace, entertainment, and account management, as well as the core activities of consulting, must be recorded. Even if these hours are not all charged, they will help you to understand your costs.

Multiple Short Assignments

 

Especially when your professional work involves activities at the client’s workplace, there is a danger that your professional staff will execute multiple short assignments during the working day, spending additional time on travel to and from one client or another.

 

Have you ever calculated the average client assignment time per day?

 

If this is much less than a day then your utilisation will fall for no other reason than that your staff are spending time travelling or engaged in some other unproductive activities.

 

If this erosion of utilisation is a necessary aspect of the work of some or all of your staff then you must compensate with higher fees or charge premium rate fees for short periods. Especially using the latter technique you can encourage your clients to gather a number of issues into a single group of issues before engaging with you. This will also tend to lead to more careful planning.

 

I recently analysed the 2008 timesheet data of a company I advise. This company employs around 140 consultants, at a number of different grades, in several countries within a number of different business streams. In other words, it’s quite complex. I calculated the average length of time reported on each unique day/project combination by professional consulting staff, on client oriented projects (in other words, excluding internal projects), analysed by grade, business stream, and country.

 

The company has an agreement with its clients that it never charges less than two hours (unless by special agreement) so we can compare time reported and time charged, expecting the latter to be higher.

 

Taking twenty employees randomly the data look like this (note that all these staff work in countries where 8 hours per day are standard):

 

	Average Assignment Hours	Average Rounded Assignment Hours	Average Daily Charged Hours	Average Rounded Daily Charged Hours
Employee 1	8.00	8.00	8.00	8.00
Employee 2	7.88	7.88	7.88	7.88
Employee 3	7.63	7.63	7.63	7.63
Employee 4	7.35	7.35	7.35	7.35
Employee 5	7.32	7.35	7.32	7.35
Employee 6	7.10	7.15	7.10	7.15
Employee 7	7.03	7.14	7.49	7.61
Employee 8	6.62	6.64	6.65	6.68
Employee 9	6.59	7.39	6.59	7.39
Employee 10	6.52	6.52	6.65	6.65
Employee 11	6.29	6.29	6.29	6.29
Employee 12	6.09	6.40	6.09	6.40
Employee 13	6.08	6.24	6.67	6.84
Employee 14	5.98	6.04	5.98	6.04
Employee 15	5.63	5.66	5.63	5.66
Employee 16	5.43	5.47	5.64	5.68
Employee 17	5.42	5.50	5.52	5.60
Employee 18	5.08	5.20	5.55	5.67
Employee 19	5.08	5.10	5.08	5.10
Employee 20	5.00	5.00	5.00	5.00

 

The second and third columns show average hours per assignment, regardless of whether an employee works on two assignments on the same day. The second shows hours recorded, and the third shows hours charged. The difference between the two is a result of rounding.

 

The fourth and fifth columns show average hours recorded per day (regardless of how many different clients’ projects are worked on). The fourth shows recorded hours, and the fifth shows charged (rounded) hours.

 

Clearly, the second pair of averages can never be lower than the first pair. If an employee switches frequently between projects in the course of a single day (as lawyers might) then we would expect the second pair to be substantially higher. In the data we see in this table, however, this is rarely the case, by which we can conclude that it is rare for any of these employees to work on two assignments in the same day.

 

In this case, it is reasonable to assume that utilisation will decline with average assignment time.

 

	Average Assignment Hours	Average Rounded Assignment Hours	Chargeable Utilisation
Employee 1	8.00	8.00	43.75
Employee 2	7.88	7.88	74.05
Employee 3	7.60	7.60	102.47
Employee 4	6.59	7.39	81.80
Employee 5	7.35	7.35	52.78
Employee 6	7.32	7.35	63.17
Employee 7	7.03	7.14	88.28
Employee 8	6.09	6.40	85.19
Employee 9	6.08	6.24	87.47
Employee 10	5.63	5.66	54.39
Employee 11	5.43	5.47	39.45
Employee 12	4.93	5.10	43.10
Employee 13	5.00	5.00	1.04
Employee 14	5.00	5.00	82.31
Employee 15	4.86	4.86	63.27
Employee 16	4.01	4.13	41.56
Employee 17	4.01	4.01	58.57
Employee 18	3.76	3.76	66.96
Employee 19	3.38	3.75	32.72
Employee 20	3.35	3.48	54.82

 

The average chargeable utilisation for the first ten employees, for whom average rounded assignment time is longer, is 57.48% and for the second ten it is 34.6%.

 

This, in itself, is insufficient evidence to establish a causal link between short assignment hours and lower chargeable utilisation, but the data do not refute the theory either.

 

And on their own these data don’t tell us much. This measurement, in isolation, doesn’t help us to decide a) whether there’s a problem that needs to be solved, or b) whether there’s a way of solving it. After all, we can’t tell from this whether the employee really ought to achieve a longer assignment time average. Clearly, on the basis of these data, we can’t yet go to Employee 20 and ask him or her about time management, though we can, of course, congratulate Employee 1.

 

We need to know more. We need to look more deeply into the data.

 

	Average Hours	Average Rounded Hours
Country 1	7.31	7.40
Country 2	6.07	6.08
Country 3	6.02	6.07
Country 4	5.95	6.01
Country 5	5.75	5.90
Country 6	4.96	5.09
Country 7	4.96	5.22
Country 8	4.15	5.23
Country 9	4.00	4.00
Country 10	1.00	1.00

 

These data, for example, show averages for each country, and begin to help us understand the overall issue at a more detailed, but manageable level. It begins to be possible to ask questions. Why, for example, are average assignment times so short in Country 8, Country 9 and Country 10, and so high in Country 1?

 

	Average Hours	Average Rounded Hours
Stream A	7.99	7.99
Stream B	6.03	6.08
Stream C	5.80	5.91
Stream D	3.95	4.14
Stream E	5.94	6.07
Stream F	5.02	5.24
Stream G	5.80	5.82

 

Or we can analyse the problem by business stream to determine whether this difference arise from the nature of the work in each stream.

 

	Average Hours	Average Rounded Hours
Consultant	6.13	6.19
Snr Consultant	6.06	6.19
Snr Programmer	6.05	6.08
Programmer	5.93	5.96
Team Leader	5.45	5.54
Project Manager	5.40	5.56
Services Mngr	3.97	4.08
Manager	3.65	4.16

 

Or again, by grade. And here it’s easy to see what we might expect, that the more senior the employee, the shorter the average assignment time.

 

And, most usefully, we can look at all these data together, and look more deeply into the time management habits of particular employees, whose averages are higher or lower than we might expect.

 

				Average Hours	Average Rounded Hours
Employee 1	Consultant	Country 3	Stream 1	4.93	5.10
Employee 2	Consultant	Country 8	Stream 2	6.09	6.40
Employee 3	Senior Consultant	Country 3	Stream 1	6.08	6.24
Employee 4	Programmer	Country 6	Stream 3	4.01	4.13
Employee 5	Consultant	Country 6	Stream 3	3.38	3.75
Employee 6	Consultant	Country 2	Stream 2	7.88	7.88
Employee 7	Consultant	Country 2	Stream 2	4.01	4.01
Employee 8	Consultant	Country 5	Stream 2	5.00	5.00
Employee 9	Consultant	Country 3	Stream 2	5.63	5.66
Employee 10	Senior Consultant	Country 2	Stream 2	7.63	7.63
Employee 11	Senior Consultant	Country 2	Stream 2	3.76	3.76
Employee 12	Senior Consultant	Country 5	Stream 1	6.59	7.39
Employee 13	Services Manager	Country 6	Stream 2	3.54	3.68
Employee 14	Consultant	Country 2	Stream 1	4.86	4.86
Employee 15	Consultant	Country 3	Stream 4	7.32	7.35

 

It’s also interesting to note, since the data are available (but not shown here), that average assignment duration doesn’t vary significantly from month to month, scotching any intuition that professional staff might be more keen to hurry home in one season or another.

 

Having analysed the data in these ways, we can now ask questions such as these:

 

·      Why do employees with Consultant grade in the same business streams have markedly different averages in different countries?

 

·      Why do Employees at the same grade in the same business stream in the same country have markedly different averages?

 

·      Why does one business stream have markedly different averages from another?

 

The questions can go on and on. In addition, if you ask the right questions you might eventually discover some answers.

 

Inaccurate Time Recording

 

Utilisation can sometimes seem lower than it actually is simply because your staff fail to record accurately the time they spend working for clients. This is the natural tendency of staff in PSOs, who sometimes fear their clients more than their managers. Or, more seriously, of staff who love their clients so thoroughly that they do not want to embarrass them by charging them for their work.

 

You might try any number of techniques to motivate your staff to record their time accurately, but these will not always work. In such situations, there is no substitute for a line manager’s close understanding of what his or her staff are doing, and when and where they’re doing it.

 

But allowing your staff to work extra hours, whilst recording only standard hours, can seriously damage your utilisation figures, not only because you might thus forego the recording of greater than 100% utilisation on certain days, but because if an assignment is finished earlier than planned, you might have empty days on your hands that you cannot sell.

 

Bear in mind that you should make your time recording sufficiently ‘granular’ to enable fairly accurate measurement of time spent on an assignment. If you set your minimum unit as 30 minutes, then you may well find that your consultants record their time to the nearest lower measure. Instead of recording one hour and fifty minutes, they might tend to record one hour and a half. Setting this ‘granularity’ to a lower unit might increase both the accuracy of time recording and the utilisation measure you calculate. As a consequence, it might also increase the fees you charge.

In Part 3 we we will focus on the remaining 5 obstacles....

1. Overstaffing and Insufficient use of External Staff
2. Inconvenient Project Dependencies
3. Distant Deadlines
4. Inaccurate Estimates
5. Unimaginative Approaches to Last Minute Deals

This is an excerpt from "Eight Measures For Successful Professional Services Management by Adam Bager Chairman of systems@work.

Thirteen Obstacles To Good Utilisation - Part 1

Patience and perseverance have a magical effect before which difficulties disappear and obstacles vanish.

John Quincy Adams (1767-1848)   

It’s one thing to measure utilisation. It’s quite another to understand what it means and change it.

These are some of the issues you might consider when you’re faced with low utilisation:

1. Cancellations and Postponements
2. Poor Planning
3. Poor Time Management
4. Failure to Share
5. Short Days (over-ready acceptance of a client’s timetable)
6. Unsophisticated Contracts
7. Multiple Short Assignments
8. Inaccurate Time Recording
9. Overstaffing and Insufficient use of External Staff
10. Inconvenient Project Dependencies
11. Distant Deadlines
12. Inaccurate Estimates
13. Unimaginative Approaches to Last Minute Deals

In this article we will consider the first 4 of these.

Cancellations and Postponements

It is perfectly acceptable that our clients don’t understand the basic principles of a PSO, that PSOs sell time, and that time passes irretrievably. True, most PSOs are in the business of understanding their clients businesses intimately, but that’s the nature of PSOs, and if it were otherwise, the money would flow the other way.

Clients, of course, don’t sufficiently feel the inconvenience a PSO faces when an assignment or meeting is cancelled or postponed at short notice. And sometimes our professional staff don’t feel this either. But for the PSO as a whole this is tantamount to throwing money away, since very often costs will be incurred (unutilised time) without revenue to match them.

There are a number of ways you might try to avoid this situation.

Penalties, or the threat of penalties, are effective solutions. Your contract should explain that at short notice it is difficult to reassign your staff and that you will therefore charge X% of fees for cancellation or postponement with N days notice, and Y% of fees for cancellation or postponement with M days notice. You may have to make special allowances for your most important clients, but in all cases, you should track each occurrence of cancellation or postponement. It’s very likely that if you can educate your clients to understand the commercial damage that cancellation does you might find it happens less frequently.

Also, bear in mind that postponement, whilst a good deal less unpleasant than cancellation, is still damaging. Even if your staff’s diaries show sufficient empty space for the future, you reduce, by postponement, your readiness to provide services elsewhere, and you defer revenue. There is potentially an opportunity cost in the future, and a revenue timing issue now.

Poor Planning

In a complex PSO employing a wide range of staff with different skills and experience, and when the PSO executes a mixture of short term and long term assignments, each with its own requirements for skills and experience, it is no wonder that managing the future is difficult.

But mismanaging the future leads inexorably to poor utilisation, with potentially useful staff standing idle whilst assignments that need them are delayed due to ignorance of their availability.

The skills, cost, experience, (and even preferences of your staff) should be visible to all involved in assigning staff to projects. Maintaining an accurate, up-to-date skills database is essential. And, ideally, even feedback on an employee’s contribution to the projects he or she has worked on is useful information when appropriate allocation is required. Above all, availability must be visible and up to date. Where there are uncertainties (perhaps a staff member has been booked to a project only tentatively) this must also be visible. It is the task of the services manager to try to bring forward, postpone, rearrange or otherwise juggle staff and time to maximise utilisation.

This might even involve commercial agility too. Persuading a client to bring forward or postpone a project or assignment may involve discounting or the provision of other benefits. But the overall increase in utilisation may justify all of this.

Poor Time Management

But planning isn’t only about managers planning the disposition of their staff. It’s also a personal thing. Some of us have a natural tendency to think ahead, decide on a goal and calculate the steps to get there. We have an instinct for the most efficient management of time, a sense of where the critical path lies and what depends on what. Others don’t. Some adopt an empirical approach to getting things done, doing one thing until they discover they must begin another, and only then calculating what they need to have in place to get that done. They think serially, rather than in parallel.

Planning personal time well can make an enormous difference to the productivity (and utilisation) of professional staff, especially when they must switch frequently from one task to another, from working for one client to working for another.

Good personal planning can be as simple as ordering a taxi in advance rather than at the time when one needs it, or taking materials home so that an unnecessary trip to the office in the morning isn’t needed. Getting these things wrong can mean hours of unutilised time.

This may seem to be a personal rather than a company issue, but good time planning is something one can learn and it makes perfect sense to provide education and training in this area. When planning ahead, encourage your staff to think carefully, days in advance, about:

• What needs to be done by colleagues or clients before they can begin their work, so that they can ensure that it will be done, or that they have a contingency plan if it’s not
  
• How they can get from A to B or from A to C to B efficiently
  
• What materials they need and where they need them to be, so that no time is wasted in collating or collecting materials inconveniently
  
  
  
• How long tasks will take so that schedules aren’t distorted

Don’t ever assume that a consulting genius is good at managing time.

Failure to Share

Sharing is essential in the more complicated PSO. This means the sharing of staff across teams, business units, companies and countries, when skills, languages, travel costs and availability permit it.

Failure to share results in skills lying idle when they might be put to gainful employment. This is an adjunct of poor planning, but it is important to emphasise the fact that managers must be encouraged, motivated, and incentivised to sell their idle resources to their peers, and to buy from their peers instead of from the external market.

Above all, good visibility of availability and aptitudes across teams, business units, even legal entities, is essential. Systems that can’t manage your resources as a single pool risk losing you opportunities for greater efficiency and improved utilisation.

In Part 2 we we will focus on the next 4 obstacles....

1. Short Days (over-ready acceptance of a client’s timetable)
2. Unsophisticated Contracts
3. Multiple Short Assignments
4. Inaccurate Time Recording

This is an excerpt from "Eight Measures For Successful Professional Services Management by Adam Bager Chairman of systems@work.

Successful Professional Services Management - Utilisation

It’s not enough to be busy, so are the ants. The question is, what are we busy about?

Henry David Thoreau (1817-1862)

What’s the most obvious sign of a successful PSO?

Well, one of the most tempting signs is an air of industry, of busyness approaching panic, with staff rushing from job to job, from one client to another, busy on their mobile phones as they hurry from fast cars into the prestigious offices of their clients.

Granted, this may be the sign of a happy PSO, since hyperactivity is often the lifeblood of consulting, but is it the sign of a successful one?

The answer, of course, is ‘It depends’.

It depends….

• On what your staff are actually doing
• On how much of their time is billable
• On whether your level of activity is as planned
• On the rates at which they’re billed
• On how much of the time has been billed
• On whether the client will pay
• On whether your fees really cover your consultants’ costs
• On whether you’re squandering your profits on unnecessary overheads

Each of these measurements, in isolation, is insufficient and more or less meaningless. Together, they are the key performance indicators of a PSO.

But let’s start with utilisation, a common measure of how busy a PSO is.

It’s my experience that PSO managers are often wary of discussing utilisation. Ask a professional services manager what level of utilisation he or she has achieved and you’ll get an evasive answer, or a very precise answer accompanied by an evasive demeanour. I’ve never been quite sure why this is. Is it because they have an imprecise idea of what utilisation means? Is it because they’re incapable of measuring it? Or is because they are ashamed of the value they’ve calculated? It can often be all three.

In any case, some may say 65%, some 80%, and some 90%. But what do they really mean? Do they ever ask each other?

To explore the concept of utilisation let’s consider a made-up company called Genesys, who carry out research projects in genetic engineering. The company employs the following staff:

• A Founder/Managing Director, whose brilliance as a geneticist directs the research methods of the company, and who still contributes about 10% of his time to the company’s project work.
• A Secretary
• A Salesman/Account Manager responsible for procuring project work from clients.
• A Senior Scientific Officer, responsible for every one of the company’s projects. He spends around 50% of his time on project work and the rest of his time managing a team of Research Scientists and doing administration, including billing.
• Ten Research Scientists, at various different levels, employed to carry out project work.

 

The company carries out a mix of billable project work for clients, and, when time permits, develops methods, tools and techniques that it may later put to good use on client-oriented billable projects.

Being busy is generally a good sign, and the Managing Director asks the Senior Scientific Officer on almost a daily basis how busy the company is. Invariably the answer is ‘very’, but what does this mean?

Utilisation, the term customarily used as a standard measure of busyness, can be defined in many ways, but best practice suggests something like this:

Utilisation, usually expressed in percentage terms, is the proportion of available time spent (and/or billed) by professional service staff on projects, which add value to the organisation.

But this is already troublesome, and begs at least the following questions:

• What exactly is available time?
• Who exactly are the professional service staff?
• Which projects add value to the company and in what kinds of ways?

Available Time

Available time is usually defined as the maximum amount of standard time (in other words normal daily office hours) that can be spent on projects. It will usually exclude holiday time, planned training time, and any other time (such as company meetings) that professional staff are required to spend on non-project work. Available time is the limit on the standard time that can be turned into value.

Let’s look at a typical weekly timesheet for one of our ten Research Scientists and consider the available time that it implies. In this example, we’ll assume that standard daily hours are eight per day.

On Wednesday and Friday, our Research Scientist has worked more than standard hours. However, our definition of available time limits it only to standard hours. This is therefore the maximum number of hours ‘available’ on each working day (here 8 hours), however many additional hours are worked. And the fact that our Scientist has worked on Saturday does not alter the fact that there are zero hours ‘available’ on Saturday.

Holiday and Training constitute unavailable time (even though Training ‘adds value’.)

Most other time in this timesheet is recorded as occurring during available time.

(Not everyone in every organisation agrees on which activities constitute available time, but the important thing is not to be dogmatic about this but to be consistent once you have formed your definition. Above all, it is important that you can explain your rules when asked what you mean by utilisation.)

The following table divides timesheet time into available and unavailable time; leaving extra worked hours are unmarked.

In this timesheet, our Research Scientist has recorded 44 hours, and excluding Holiday, has recorded 36 working hours. 28 of these are ‘available’ for fee-paid or other value-adding work.

Note that it is the exclusion of unavailable time from your utilisation calculation that makes it immune to seasonal variations. Although it is very likely that your consulting earnings will dip during the summer months, it is less likely that your utilisation will fall, except as affected by your clients’ unavailability for project work or decision-making.

Professional Service Staff

In measuring both available time and utilisation, we should be careful to exclude staff who are not part of the professional team. It is the professional team who are involved in earning revenue and whose utilisation we are eager to measure. Administrators’ and secretaries’ costs contribute to overheads.

Clearly, the company’s Senior Scientific Officer and ten Research Scientists belong to the professional team and the company’s Secretary does not.

But what about the Managing Director, and the Salesman/Account Manager? Both of these work, in some sense, for Genesys’s clients. The Managing Director spends 10% of his time on projects, and the Salesman/Account Manager spends most of his time with potential clients and existing ones. Should they, then, be treated as members of the professional team?

In fact, there is no hard and fast rule about this, and consistency in measurement, and the usefulness of measures, is more important than any concept of absolute correctness. What matters is that trends should be observable and that expectations and standards for these measures can be set in budgetary planning.

But most companies separate costs of selling from the provision of services in their profit and loss statements, using the concept of cost centre to capture these differences, and for this reason it makes sense to separate Salesmen and Account Managers from utilisation measures, though we will see how it may be important to measure the time that Salesmen and Account Managers spend on particular opportunities and clients (see Profit & Loss).

Management and Administration are also often separated into separate cost centres, so that the Profit and Loss statement for Genesys can be given this structure:

Consulting Sales Revenue
Consulting Sales Cost

Gross Margin

Cost of Sales and Account Management

Cost of Administration

Cost of Management

Other Overheads

Operating Costs

Net Margin

But where to place the costs and revenues of the company’s Managing Director? He may manage the company, but he also spends time on consulting. How do we measure his contribution to available time and utilisation? After all, if he earns revenue for the firm, then, on the principle that revenues and related costs must be matched, we should attribute some of his costs to the Professional Services department too.

The most practical answer is to estimate the time that he might expect to spend on consulting and any other value-adding projects (in this case 10%), treat 10% of his time as potentially available and assign 10% of his costs to Consulting Sales Cost. Only 90% of this cost will therefore belong to Cost of Management.

In terms of available time, we might treat the Senior Scientific Office in a similar way in respect of available time, since half of his time is spent in managing the consulting team and half on projects. However, all of his costs will belong to Consulting Sales Cost.

We can use the term ‘target utilisation’ to capture the idea of the maximum planned utilisation that can be achieved by each member of the team.

We will see how these target utilisation values affect the calculation of utilisation in due course. We should now go on to consider which projects count as contributing towards utilisation.

Projects and Utilisation

Let’s go back the definition I gave earlier:

Utilisation, usually expressed in percentage terms, is the proportion of available time spent (and/or billed) by professional service staff on projects, which add value to the organisation.

This is carefully phrased. Time is considered ‘utilised’ if it adds value to the organisation. There are two ways projects can add value:

• By generating revenue from specific clients for specifically contracted work.
  
  In these cases, it doesn’t matter whether the revenue is directly related to time by a declared fee rate per hour or day, or in some more complex way, such as in fixed price projects, or milestone-based projects, or success-fee projects.
• By increasing the capability of the company to earn revenue at a later stage.
  
  This might include product development work, other forms of research, or even sales support work.

Let’s look at the timesheet we were considering earlier, and separate available time into Unutilised, Utilised Available time, and Utilised time outside Available time (such as when a Research Scientist has worked more than standard hours in a day).

By our earlier definition utilisation can be calculated here as:

((Total Utilised Hours/Available Hours) * 100) = ((29/28) * 100) = 104 %

This Research Scientist has worked more hours than he has available. There is nothing counter-intuitive about this, since it is clear that he has worked overtime.

At least one thing, however, might complicate this calculation. We have assumed, for the sake of simplicity that the overtime hours that the Research Scientist has worked will not be compensated for by time off in lieu. In most PSOs, this is a fair assumption, reflecting both the eagerness of professional staff and the harsh assumptions of managers.

If, however, there is an assumption that time off in lieu is earned by overtime then overtime hours must also be considered as available. Sometimes overtime hours worked at weekends earn double time off in lieu, and this complicates matters even more, since available hours must then be doubled for each hour worked.

Making this assumption, that overtime on weekdays earns one-for-one time off in lieu and overtime at weekends earns double, our timesheet looks like this:

((Total Utilised Hours/Available Hours) * 100) = ((29/34) * 100) = 85 %

These measures can become more and more sophisticated, but there’s a point at which (and only you can be the judge of this) further sophistication in calculation is pointless. This is at least partly because of the essential inaccuracy of your professional staff (see Telling the Truth about Time). It would be folly to assume that your records are completely accurate, and thus folly to assume your utilisation calculations can be.

Furthermore, you should bear in mind that the usefulness of utilisation calculations lies in what they make you do. Statistics are only useful inasmuch as they alter behaviour. It’s unlikely to be an absolute number that affects your decisions as a services manager, but your observation of trends. Increases and decreases in utilisation are more important to you than absolute numbers.

We have seen how utilisation can be calculated from available time, taking account of factors such as target utilisation and issues surrounding time off in lieu, and counting value-adding projects as contributing to utilisation. This calculation now looks like this:

Utilisation %     =    (Utilised Hours/(Available Hours * Factor)) * 100

But there’s still something slightly misleading about this calculation, and taken on its own this is a highly dangerous formula.

Consider the following two timesheets:

Timesheet A

Timesheet B

Utilisation percentage, as defined above, shows them to be the same.

But there is one crucial difference:

Timesheet A shows 23 hours on Client Projects and 6 hours on Internal Projects.

Timesheet B shows 13 hours on Client Projects and 16 hours on Internal Projects.

In terms of adding value, it is conceivable that these are equivalent in the long run, but it is also very likely that Timesheet A will generate cash for the company far more rapidly than Timesheet B. And rare is the company to whom this doesn’t matter.

This raises the issue of another kind of utilisation – Chargeable Utilisation.

The problem is that if utilisation becomes your guiding principle you will lose sight of the commercially more important measure of chargeable utilisation. If you’re not careful, and especially if you are measuring and motivating your staff by the simpler measure of utilisation, you will find that utilisation stays relatively high even as fee-earning client-oriented work declines. This is because your staff will deliberately or unconsciously fill their time with work on internal projects, albeit important value-adding ones. Internal projects have a tendency to take up the slack when client project time declines.

While we’re on this subject, it’s worth emphasising that this is one reason why it is vitally important that you control your internal projects as well as your client projects. Many PSOs have a laissez-faire attitude towards non-fee-earning projects, believing that it doesn’t matter how long they take, precisely because they ‘take up the slack’. This is dangerous.

If you don’t control your internal projects carefully:

• You may be misled into thinking that your staff are productively busier than they are, and that you are not overstaffed.
• You may find that your staff are reporting time against internal projects in preference to client-oriented work, simply because they prefer this work.

You might begin to wonder why it’s worth bothering with utilisation at all. Chargeable utilisation, you might think, is the only important measure. But this is not so. We measure overall utilisation for good reasons. Some of these have to do with motivating and comparing staff. There really is valuable non-client-oriented work that we must encourage our staff to do, without penalty, such as sales work, research and development. Your staff are not always in a position to choose what they work on and it would therefore be unfair to judge them solely by chargeable utilisation.

These then are the golden rules:

• Measure overall utilisation, but
• Keep a close eye on chargeable utilisation, and
• Control your internal projects as carefully as your external ones.

For the record, Chargeable Utilisation can be defined in this way:

Chargeable Utilisation, usually expressed in percentage terms, is the proportion of available time spent (and/or billed) by professional service staff on projects which are charged to clients (irrespective of contractual conditions).

Project Classifications

To summarise, utilisation measures depend on classifying your projects in these kinds of ways:

Utilisation divides Y by X (shaded cells).

Chargeable utilisation divides Z by X (shaded cells).

This is an excerpt from "Eight Measures For Successful Professional Services Management by Adam Bager Chairman of systems@work.

Successful Professional Services Management - Telling The Truth About Time

I've been on a calendar but I’ve never been on time.

                        Marilyn Monroe (1926-1962)

If PSOs are in the business of selling time, you’d think that recording time would be uncontroversial. Timesheets must be an accurate record of how your professional staff spend their time. If they’re not, then how can you do anything more complex, such as billing, let alone all the measurement and analysis we’ll be looking at in this book?

But often timesheets aren’t accurate. In fact, I’d say that inaccuracy is the rule rather than the exception.

I don’t mean the inaccuracy that comes from the fact that PSOs don’t record time to the nearest second or minute. Very few PSOs need accuracy to that level (even law firms record time only to the nearest six minutes, whilst IT consulting organisation often record to the nearest hour). Nor do I mean the inaccuracy that comes from mistakes such as recording time against the wrong project or activity. What I mean is that professional staff deliberately misrepresent the time they’ve spent on one activity or another.

Why can’t PSOs take as much care about recording time as shops do in recording their inventory?

Professional staff simply won’t tell the truth about time.

Why?

The reasons are many, but I’ve come across these:

• ‘I always put eight hours. It’s the easiest thing to do.’
• ‘I didn’t feel I could charge the client. I don’t think the work I did was really worth what he’d have to pay.’
• ‘I don’t want my boss to see that it took me so long.”
• ‘I never charge more than a whole day, even if I work extra hours.’
• ‘It’s a fixed price project and there aren’t any hours left.’
• ‘I don’t like to charge for time I spend on research. The client expects me to know what I’m talking about.’
• ‘It was only a few minutes work. Not worth recording, surely.’
• ‘It’s an internal project. No one minds how many hours I record against it.’
• ‘I made a little mistake on the project. It really didn’t take me long to put it right.’
• 
  ‘I wanted to make it really perfect, so I spent some of my own time on it.’
• ‘I know we need more work of this kind, and we won’t get it if we’re completely honest about how long it takes.’
• ‘I won’t get my bonus if I don’t hit 35 chargeable hours a week.’
• ‘This client doesn’t care how much we charge. The other one does. So I put all my time on the first one.’
• ‘The work was useful for two of my clients, so why not record it twice. We can charge them both.’
• ‘I can’t record time correctly because the law doesn’t allow me to work overtime.’

This is by no means an exhaustive list. You will have come across your own variations on these themes. None might display as cavalier an attitude to time keeping (and recording) as Marilyn Monroe’s observation, but some come close.

Of course these sentiments are sometimes noble, sometimes selfish, and sometimes even fraudulent. Where they are noble, we’re glad that our professional staff care greatly about their clients. But invisible generosity is often the beginning of commercial suicide. And fraud is fraud, and doesn’t need discussion.

In fact as PSO managers, we never want guilt, or laziness, or greed, or carelessness, or pride, or malice, to play any part in time recording. We want timesheets to be emotionally neutral, objective accounts of what professional staff have done.

As I shall explain later in Motivation and Measurement, it’s actually hard to get your staff to tell the truth about time, even when it’s in their own self-interest. For every employee who will falsify the record to further his own interests, there are perhaps two who will falsify the record to further their clients’ interests. This may say something rather splendid about human nature, but I’m not sure it’s something we want to encourage. Disinterested honesty is the ideal.

If extensive (if not excessive) generosity to clients is the ethos of your PSO, perhaps the best you can do is to explain what you do with the information your staff give you. In particular, for those who are too ashamed to charge for their time, you need to explain that recorded time and charged time are two separate concepts. In fact, all we ever want our professional staff to do is to record their time accurately, leaving commercial decisions about chargeability and value to managers. You may allow them to advise about what they feel is chargeable, but about time, they must be honest. Even so, persuading our staff of this decoupling of time recording and invoicing is astonishingly difficult.

But accurate time recording isn’t only about duration. It’s also about the detail of what’s been done. In some project-based organisations, and where projects are complex, and especially when based on fixed-price quotations, it may be useful to record time at the level of activity, or task within project. When it comes to determining the causes of project overruns this kind of information is essential.

Why is accuracy so important? These are the advantages:

Commercial

• More recorded time might mean higher revenue (and this doesn’t mean extortion)
• Accurate time means more useful reports on profitability, which in turn means better management decisions
• Accurate time means early warning when projects overrun
• Accurate time means you know how much all your projects, including your internal ones, are costing you
• Accurate time means you’re not defrauding your clients

Sales and Marketing

• Accurate time means more accurate estimates for similar work

HR

• Accurate time means you know when your staff are overworking (and you might be surprised at how much they might resent the overtime, even if they’re not telling you about it)
• Accurate time means you know when your staff are struggling to cope with work that they may be finding too difficult

The beginning of wisdom for a PSO is the proper recording of time.


What can you do to increase the accuracy of time recording?

• Motivation works for some. If employees are rewarded for chargeable hours, utilised hours, or worked hours, then the more likely they are to record what they’ve really done. (But don’t overdo it. You don’t want dishonesty by exaggeration.)
• Include line managers in the timesheet authorisation workflow. This is useful if they really know and see the hours their staff are working. They’ll probably know if their staff are working excessive hours and not recording them.
• Collect timesheets frequently. There is no greater (and more innocent) enemy of accuracy than a poor memory. If staff don’t have to report their time every week, or every day, then they won’t get it right. Like the student revising for exams at the very last minute, your staff will fill in their timesheet as the deadline approaches, and will find it more difficult than they thought. How easily can you remember what you were doing all day after a month has passed

This is an excerpt from "Eight Measures For Successful Professional Services Management by Adam Bager Chairman of systems@work.

Successful Professional Services Management - Time

But at my back I always hear
Time's winged chariot hurrying near;
And yonder all before us lie
Deserts of vast eternity.

Andrew Marvell (1621-1678)

To His Coy Mistress

Professional Services Organisations (hereafter PSOs) sell (or, in the not-for-profit world, simply determine the cost of) time. They may not know it, but this is what they do.

It’s not always obvious. Indeed some professional services organisations don’t like the sound of the idea, and would prefer to think of themselves as above the grubby world of turning time into money. They have ideas, they sell the intellectual emanations of their minds, and these are beyond the reach of measurement.

But in the end, at the deepest level, however proud they might justifiably be, time is what they sell, or spend, whether they are the genius creating a business revolution, or the humblest junior auditor adding up numbers. If they are not even subliminally aware of this, it is a miracle that they make a living.

Selling time isn’t like selling tangible goods. This is because of the nature of time:

• Time passes.
• Time costs money.
• Time is limited.

In the words of Andrew Marvell, writing in the seventeenth century, long before the advent of the PSO, but understanding their predicament perfectly, time’s ‘winged chariot’ is always at our back, laying waste to the time we have failed to use profitably. Before us lie ‘vast deserts of eternity’, the time that we must fill or sell profitably to avoid going out of business.

Time is like a product that expires when the day is done. Imagine a shop that must dispose of whatever it hasn’t sold as the clock strikes midnight. Imagine a hotel that hasn’t sold its rooms. An empty hour and an empty room are opportunities that are lost forever. And imagine the warehouse filling with new goods to sell as each day begins. PSOs have exactly these problems. If they haven’t put their time to good use by the time the day has ended, it has become unsaleable and irretrievable. Costs may have been incurred but without the revenue to cover them.

And unless you have unique skills that are so much in demand that you can live well on only a few hours work (and spend every afternoon on the golf course without your mobile phone), you will know very well that there is never enough time to do the things that your clients and your colleagues want from you.

Or so it should be, because if you’ve too much time and nothing to do, and you’ve got respectable, agile and busy competitors, then you’re probably not going to bill enough to cover your costs. 

Your time and your colleagues’ time are precious. You must spend it wisely on the activities that bring you the most benefit. You must avoid wasting it by planning so badly that you find there are days or hours when there’s nothing for you to do. 

If time is what you sell, then you must sell it efficiently. Only the genius (assuming, at least that he’s good at marketing himself) is exempt from this stricture. For the majority of us, working in competitive fields, efficiency is essential.

Efficiency means getting the maximum return on available time. Usually this means obtaining the highest possible revenue from the time you spend on something. But often, and especially in the case of PSOs where relationships with clients are close and subtle, it means obtaining the highest possible revenue, in the long term, from the time you spend on something. In both cases, the concept of measurement is essential.

Many PSOs don’t charge by the year, the month, the week, the hour or the minute, with carefully calculated rates for each unit, for each client, for each grade. They often come up with ingenious (and sometimes highly risky) ways of selling time too. By the project, or the task, or based on the success of whatever they do. But in the end, it comes down to the same thing. Experts in one profession or another spend time thinking about their clients’ problems, or in carrying out a bewildering range of activities for their clients. These might include adding up debits and credits, programming a new computer system, devising a legal argument, disbursing charitable funds, and so on. They use the skills and knowledge they’ve gained through education and experience to provide value for their clients. In all cases, they spend time and obtain revenue. 

The vast majority of PSOs, therefore, if they are to be efficient, need measurement.

What should they measure?

If profitability is the goal (or in the case of the not-for-profit sector, the reduction of cost), then what’s important is to measure and manage everything that threatens it: What threatens profitability?

• Idleness
  
  If your professional staff aren’t busy enough then you’re likely to be incurring cost without gaining revenue.
  
  Utilisation is a measure of idleness, or rather of its opposite – busyness.

• Discounted prices
  
  Even if your professional staff are busy and all their time is billed at the rates you’ve contracted with your clients, you’ll still be in trouble if your rates are too low.
  
  Standard Fee Variance compares the actual fees you charge with the fees that your target or budgeted rates would earn you, these being the rates on which your projected profitability is based.

• Activity shortfall
  
  If utilisation and fee rates are in line with your plans, your overall rate of activity may still fall below the levels predicted in your forecast (of course this necessarily implies a smaller team of professional staff), leading to lower gross margins, a smaller contribution to overhead costs and a risk of losses.
  
  Activity Variance measures your shortfall against (or excess over) forecast. It is made up of all values affected by fewer or greater numbers of staff.

• Unrewarded effort
  
  If your professional staff are busy but their time isn’t billed then your service margins are likely to be squeezed.
  
  Realisation is a measure of the efficiency with which you turn time into revenue.

• Underestimated costs
  
  The cost of your staff is the equivalent of variable cost in manufacturing. It should vary in proportion to ‘production’ (revenue); staff costs should rise with revenue and headcount, and fall conversely.
  
  Standard costs are often calculated for available hours, based on expected utilisation, and including direct costs that increase or decrease with headcount (i.e. salary, taxes, social payments, car costs, mobile phone, etc.). Notional profitability for an hour’s work is calculated by comparing fees with costs.
  
  When costs are underestimated, profitability will therefore fall below expected levels. Keeping an eye on the accuracy of your standard costs is essential.
  
  Standard Cost Variance is this measure.

• Unbilled Work in Progress
  
  A PSO can seem to be very successful, can even appear, for a short time at least, and until the auditors turn up their noses, to be very profitable, without even billing a single cent.
  
  This is because PSOs can often recognise revenue that they haven’t billed, in the form of Work in Progress. This is work that is potentially billable at a known value (less provisions). Work in Progress is a common feature in PSOs that perform work that is billable by completion of phases, or on success, or at project completion.
  
  But a company that has too much Work in Progress is a company that has too little cash.
  
  WIP Days, a measure of the number of days of revenue that is tied up in WIP is a measure of this risk.
  
  [Note that the value at which Work in Progress is stated will depend on a PSOs accounting policy (and also, but often, separately, on statutory regulations). Here, I assume that for management purposes Work in Progress will be stated at revenue value rather than cost value. If an alternative policy is adopted then the relationship between revenue and delivery of services will no longer be linear, but will be distorted by timing differences between delivery and billing. See Revenue Recognition, WIP and Provisions.]

• Underestimated overheads
  
  There will be little in these notes about overheads, since the management of overheads in PSOs is not significantly different from the management of overheads in the non-service sector. However, remember that your overall profitability is predicated on your professional staff delivering sufficient gross profit, or ‘contribution’ easily to cover your fixed overheads.
  
  Overhead Variance measures the difference between planned and actual overheads.

• Debtor Days
  
  Managing debts, ensuring they are paid and making the appropriate provisions when there is a risk that they will not be, is part and parcel of the management of any company. It is no more or less important in PSOs, and improper management can as easily destroy a PSO as any other, limiting cash available for growth, or the financing of WIP. Debtor Days, when properly analysed, can also be an indication of deeper discontent amongst your clients.
  
  Debtor Days, a measure of the number of days of revenue that is tied up in Debt, is a measure of this risk.

These are probably the eight most important financial Key Performance Indicators (KPIs) for a PSO. If you can make these measurements then you can answer some important questions.

If profits are lower than forecast, is it because:

• You’re selling less work than you planned?
• You’re selling at lower prices than you should?
• Your staff aren’t as busy as they should be?
• You can’t charge all the work you’re doing?
• Your fixed price projects are running out of control?
• Your staff costs are higher than you’d planned?
• Your overheads are greater than you’d planned?

Is it because of several, rather than any single one, of these issues? Which problem should you tackle first?

And if your measurements are fine enough you can ask these questions not only of your PSO as a whole, but also of specific departments, teams, business units, locations, grades, roles, and however else you analyse your business.

It is the aim of the following chapters to explain and show how each of these measures can be defined. And along the way, from time to time, there are some suggestions on their resolution.

Assumptions

Many PSOs sell products as well as time, but these notes pay little attention to this. My basic assumption is that in terms of measurement you are able to separate the activities of your professional staff from your other activities, even if they are related. This may be naïve, of course, because in many companies there are cross subsidies between these different activities. But even if so, the measurements I recommend and the advice I suggest will still be of relevance to an important part of your business.

Terminology

I use the acronym PSO for Professional Services Organisation throughout. PSOs may be legal firms, engineers, non-governmental organisations, consultants, accountants, public relations professionals and so on. Most of them are professional. All provide some kind of service. Most are even organised.

As for what they do, one PSOs ‘project’ is another’s ‘engagement’, or ‘case’, or ‘task’. One PSO’s ‘employee’ is another’s ‘resource’, or ‘consultant’, or ‘officer’, or ‘lawyer’. One PSO’s ‘client’ is another’s ‘customer’, and so on. My own experience has been in the world of ‘projects’, ‘clients’, and ‘employees’ and I shall use that terminology throughout. In that world ‘employees’ work on ‘projects’ for ‘clients’. I leave it to you to make your own mental substitutions.

This is an excerpt from "Eight Measures For Successful Professional Services Management by Adam Bager Chairman of systems@work.

Successful Professional Services Management - An Introduction

You can measure many things that you cannot manage. You can measure the temperature on a sunny day; you can calculate the average temperature over a season. If you live in London, you can count the days of continuous rain, and, in the Sahara, the days of drought. However, sadly, these phenomena remain beyond our powers of management.

But there aren’t many things you can manage that you cannot measure, whether measurement is formal, analogue, digital, quantitative, qualitative, or subjective. You can’t manage the temperature of a room if you can’t measure it, even if the measurement you make is an informal one, such as how you feel about the heat, rather than the precise measure of an automatic air conditioning system. And you can’t manage a business unless you can measure it – its profitability, its efficiency, its cash, and the trends of each of these. Without measurement, decision-making is intuitive and irrational.

Measurement and management go hand in hand. This is commonplace in most industries and a vast assortment of business systems reflects this. You can’t run a distribution company without knowing how much stock you’re holding, how fast it moves, how long it takes to procure it, and how its cost relates to its sales value. And there isn’t a single company in the world that can be managed well without a financial system (even if based on the abacus). Measurement is central to management everywhere and in all branches of business.

But in the professional services industry measurement is usually partial. Professional services companies succeed through the profitable deployment of their skills, and yet, these products being human, professional staff, whether lawyers, engineers, programmers, accountants, tax consultants, teachers or others, are often averse to measuring what they do. How many professionals do you know who obtain pleasure from filling in a timesheet?

But this attitude, that human beings are beyond measurement, is the beginning of chaos and in some cases the cause of financial collapse. At the very least the serious mismanagement of professional services organisations. Without measurement a professional services company is like a ship at sea without a GPS device (or whatever passes for a compass nowadays). If it doesn’t know how busy it is, how busy it’s going to be, where its profits lie, what skills it’s short of, it’s permanently at risk.

This Blog (based on a book I have written by the same name) are about the key measurements that I believe a professional services company must be aware of, and about how measurement, management, and even motivation, can be made to work well together. It is only secondarily about how these measurements can be made. For a small company sometimes even Excel or Access may be sufficient, whereas for others, specialist software, such as time@work, is the answer.
Underlying all the observations in these notes are the following assumptions, which I hold to be truisms in business:

• Only things that are measurable are manageable
• Information is only useful and worth preparing if it affects the decisions you make
• No process will work if it isn’t to the advantage of those who should observe it
• Motivational measurements work only if they fall largely within the control of those whom they are designed to motivate

This is why measurement, management and motivation are so closely linked. It is all very well to set up sophisticated mechanisms of management and reporting, but unless these work with what motivates professional staff and management, you might as well not bother.

This is an excerpt from "Eight Measures For Successful Professional Services Management by Adam Bager Chairman of systems@work.