Professional services
A professional services firm sells time and judgement, and most firms know far less about the economics of either than they think. Hours are worked and not billed, billed and not collected, or billed at a rate that stopped covering cost years ago. We bring firm-level finance to law, engineering, design, consulting, architecture and other professional firms across British Columbia, working alongside their CPA.
How the money works
- Utilisation and realisation decide profit, and most firms track hours without tracking what those hours were billed and collected at
- Work in progress and receivables together can hold months of revenue that has been earned and not yet turned into cash
- Partner and senior compensation is the largest cost and the most political, so pricing and profit sharing are tangled together
- Fixed fees and value pricing raise margin when scoped well and destroy it when scope creeps
The moves we make
- Utilisation, realisation and collection reporting by person, by client and by service line
- Pricing by matter or project type from actual cost and realised rates, with scope rules for fixed fees
- A billing and collections routine that bills monthly, takes retainers and starts collections before the due date
- A partner compensation model tied to firm profit, origination and realisation rather than hours alone
Where cash and margin leak
Margin leaks through write-downs at billing, when a partner decides the client will not pay for the hours worked. It leaks through fixed fees that were scoped optimistically and through rates that have not kept up with salary increases. It leaks through junior staff who are under-utilised and senior staff who do work a junior should.
Cash leaks through the gap between work done and invoice sent, which in many firms is a month or more, and the gap between invoice and payment, which is another one or two. A firm that bills quarterly is lending its clients money.
The numbers to watch every week
Utilisation by person against target. Realisation, which is billed value against standard value, by person and by client. Collection rate. Work in progress in days. Receivables in days. Pipeline of new matters or projects and their expected fees. Revenue per professional and profit per partner, monthly.
The firms that read these weekly price better, bill faster and have fewer surprises at year end. The firms that read them annually have the same partners' meeting every year.
How pricing works in professional services
Hourly rates are set from the cost of a professional's time, including salary, benefits, overhead and non-billable time, plus a margin. Most firms set them from what competitors charge and then wonder why profit is thin. Rebuilding rates from cost is the first move.
Fixed fees and value pricing work when the scope is written, the assumptions are stated and changes are priced. We build pricing models by matter or project type from the firm's own history of hours and realised fees, so a fixed fee is a calculated bet rather than a guess, and a scope change is a billing event rather than a write-off.
Questions from professional services owners
How do we reduce write-downs at billing?
Price from a model built on actual hours by matter type, agree scope and assumptions in writing, review work in progress weekly rather than at billing, and bill monthly so the client sees the work while it is fresh. Write-downs fall when the surprise is removed.
Should we move from hourly billing to fixed fees?
For repeatable work with a known scope, usually yes, because the firm keeps the benefit of becoming efficient. For open-ended or litigation-style work, hourly or a hybrid with a retainer is safer. The decision is made matter type by matter type from your own data.
Can you help design partner compensation?
Yes. We model the firm's profit and the contribution of each partner across origination, realisation, utilisation and management, and build a plan that the partners can see is fair and that the firm can afford. The partnership agreement itself is for your lawyer.
Start with a finance review.
Ninety minutes with Ali on your cash, margin and pricing. You leave with the four numbers to watch and the two or three moves that change them, whether or not we work together.