Secrets of High Performing Firms Revealed
The firm highlighted below is a great example of a high-performing firm in action. They are a three partner suburban firm, serving small businesses and individual salary earners. They have been implementing our strategies for three years now, and this last 12 months has been their most successful yet. We monitor their performance every month through our Internet-based monitoring system.
Achieving Revolutionary Result – Where to Focus
We have a lot of content and strategies that have been tried and tested on hundreds of firms around the world. We categorize everything into four key quadrants.
The content and strategies follow our three-step process for success: 1) Get better with what you have got 2) Get capacity 3) Grow your revenue.
The internal projects are workflow and people, and the external projects are, of course, clients and revenue. Depending on how much you can implement will determine how fast you achieve greater revenue, profit and cash flow.
Many firms think they need to get workflow right before focusing on clients or revenue, or they drive revenue without fixing the workflow. The challenge is that once you just focus on one, the others slip.
If you want to maximize revenue, profit and cash flow, you must focus on all 4 categories at the same time!
12 Key Performance Indicators (KPIs) to Focus On
Other than focusing on keeping overheads low (which most Accountants are pretty good at!), there are 12 KPIs that every firm needs to focus on to revolutionize their revenue, profit and cash flow.
All of these KPIs can be altered with good strategy, leadership and management. With proper execution of strategy, these KPIs will result in high revenue, high profits and high cash flow.
Make sure you have a suitable KPI scorecard (such as our Internet-based one on page six) that can plan, monitor and benchmark you against other firms of your size.
KPI #1 – Productivity, or Utilization, of Professionals
The relationship between profitably and ‘productivity’ (or ‘utilization’) in the old revenue model has always been about ‘billable hours.’ How many can be charged to the client/project?
As mentioned previously, driving billable hours is a ludicrous business model. Many partners of firms want to drive billable hours, and they are quite proud of the fact that a team, a team member or themselves has more than someone else.
WARNING! Excessive focus on this metric promotes the wrong behavior. Team members ‘hog’ work, ‘pad out’ time sheets and are generally inefficient.
If you want to be as efficient as possible, then price the project upfront, have an hours budget on the project and then drive the time down – thus, running out of work and creating capacity.
The measure is simple – charged time into available time.
So, if there were 40 hours in a (working) week available to charge, and your team member ‘charged’ 30 of them, then that would equate to 75 percentage.
If there is plenty of work to do, and you have sufficient team members, then a healthy mix of ‘productive time’ is expected – around 75 percent of a normal working week.
KPI # 2 – Productivity, or Utilization, Rate of Partners
It’s very easy to increase profits in an accounting firm. Simply, have the most senior people (partners) charge more time.
The partners generally have the highest charge rates, and theoretically, the most experience. Yes, you will increase profits, but only for the short term.
David Maister, author of many outstanding professional services firm books, said it best:
"What you do with your billable time will determine your income."
"What you do with your non-billable time will determine your future”
Assuming that the partners of the firm are partners for the right reasons (not a glorified/expensive senior accountant with the title of partner), then the partners should only be doing 3 things:
- High-end advisory work for a small percentage of time … <35 percent of time.
- Nurturing existing clients, making sure each client has every service they need to satisfy their goals in life.
- Acting in a leadership position – driving performance, winning new clients and innovating.
If partners can spend two hours in a client meeting and bring back a $10,000 project with a 75 percent margin, then I would consider that a good use of partner time!
KPI # 3 – Average Hourly Rate, or Net Worth Firm Billing Rate
If you are like most firms, you will have a range of charge rates in your firm. Normally, charge rates range from $100-$350 per person, depending on salary and experience level.
If this is the case, then your Average Hourly Rate (AHR), or net firm billing rate, for client hours will be around $150-$200.
It’s pretty pathetic to think that is all you believe you are worth! This is such a silly system for pricing. I think you are worth much more, but you have to believe it and you have to change the way you price projects.
There are two measures of Average Hourly Rate:
- AHR – client hours. Take your revenue (let’s say $2M) and divide by client hours billed (let’s say 10,000). In this case, it is $200.
- AHR – hours worked entire team. Take your entire team (including partners, admin and professionals) and multiply by the working hours in a year to get total hours worked (say 12 people X 1750 hours each = 21,000 worked hours). Now, divide revenue ($2M) by total hours worked (21,000). In this case, it is $95.
It’s important to look at both of them. You can have a fantastic AHR for client hours (>$400), yet very poor AHR on all hours worked (<$150) because of the productivity, people mix & and administration process.
The ultimate measure is to be focused on AHR – hours worked for the entire team. It’s this one that will ultimately drive your profit before partner salaries.
If you are pricing projects up front then there are only four ways you can dramatically increase your AHR.
- Charge more for the same project – straight price rise.
- Be more efficient and have less time on each project.
- Sell higher value projects based on value created.
- Change your administration mix and get more out what you have got.
Your AHR should be improving every single month. If it is, then that is a reflection on your pricing/sales prowess, and your efficiency of throughput.
If it’s not improving (or going backwards), make sure you mention this to our coaching team when they do your Business Performance Review.
KPI #4 – Write Ups/Downs: Realization Rate
What a waste it is to discount before billing, which is often called write offs or write downs. It’s measured by the value of the time charged to work in progress (WIP), minus a discount applied before billing.
So, if $2.3M was charged to WIP in the year, yet only $2M was billed, then the write down was 13 percent.
In some countries, they record it in a more positive light by using a bigger number – “We had an 87 percent realization rate.” What a complete joke. Trying to put a positive spin on a negative number.
Face up to it – you discounted 13 percent, or $300,000, in work last year! That’s an apartment or a house in some locations. You destroyed a small house. You would have had more fun if you burned the house to the ground and watched it burn, while having a cold beverage.
Most firms have them and most firms justify them with blame and excuses, such as “We couldn’t charge the amount on the WIP,” or “The client would never pay that much.”
My question is, how do you know?
Writing down work is at the heart of the self-esteem issue with partners of accounting firms. Why do it? You made a decision to write down – so make a decision to stop it.
If you price in arrears, then your business model says that you should charge whatever is on the clock – not a minute more. Writing up after pricing in arrears goes completely against your business model, and is considered fraudulent behavior. It’s ‘ripping people off.’
If you price up front, you have agreement from the client on project price and scope, then you do the project in the most efficient means possible, and you’ll have an abundance of write ups. Much more of a positive result!
You should be aiming for a positive result with write ups – no negative numbers, or numbers less than 100 percent.
KPI #5 – Work in Progress Days
Work in Progress (WIP) is your inventory. Like any good cash management program, you would advise your clients to ‘turn their inventory over’ more frequently to improve cash flow.
There is no difference with an accounting firm. Your inventory should be invoiced every single month. If you are pricing upfront (and I hope you are), then why not ask for some payment upfront as well? That’ll help your WIP balance!
If you have done the work, then send a bill. If the client is being difficult, or the project is taking a long time, then send an interim bill.
Your WIP balance at the end of each month should be less than three percent of your annual revenue – or 10 days of revenue.
KPI #6 – Accounts Receivable, or Debtor Days
Why is it that a firm will engage a client, start working on the project, wait for the client to send in missing information, finally finish the project 60 days later and then, at the end of the month, send an invoice and be paid 30-60 days after that? A 120+ day process! It just doesn’t make sense.
You have to pay the labor, the insurances, the rent and everything else in that time, yet due to your management processes, your client treats you like an interest free bank!
Remember this … “Thee who makes the rules – wins the game”
Why do you operate under this model? Just because you always have is not a good enough reason.
If you ask for some money upfront (and make new rules), many of your clients will pay. If you ask for 100 percent upfront before starting, many of your clients will pay. If you give your clients some choices (and not the pay in arrears choice), many of your clients will pay.
Your monthly receivables balance should be less than 6 percent of annual fees – or 20 days of annual revenue. Stop being an interest free bank. Today!
KPI #7 – Lead Generation
Every business needs new enquiries for new clients. You can get new enquiries either:
- Reactively, or
Most firms follow option 1 and wait for enquiries to come through, by the way of referrals from existing clients. Other than being a very slow path to growth, there is nothing wrong with it.
If you are proactive about it, then you will adopt marketing techniques that encourage your target market to make an enquiry with you. Most Accountants I know do not want start-up businesses (due to the majority of them having the inability to pay), so that means that the client you want is already serviced by another accounting firm.
A client will leave their current firm (or join another) because of two reasons only:
- Service – Not being proactive, sloppy customer service or limited communication/relationship.
- Services – Perceived value for money, looking for more but not offered.
For you to encourage new enquiries, you have to offer multiple ‘experiences’ with you. Can the prospective client hear you speak at a conference, meet with you or read an article, for example?
Some firms need more clients than others. As a rule of thumb, you might be losing 10 percent annually (attrition or letting some go), so you should at least aim for a net 10 percent increase, which means a 20 percent growth rate in new clients to cover the loss.
If you need 20 percent new clients and your conversion rate is 50 percent (not following our system), then you need approximately 3 percent of your current client count in quality enquiries – each month!
KPI #8 – Conversion Rate
We teach a 12-step (sales) meeting process for accountants. If followed to the letter, then a conversion rate (enquiry to sale ratio) will be around 80 percent – in a short time period (say less than 60 days).
Before we teach this tried and tested method, we hear things like:
“I had a great meeting – they will definitely be a client.”
“I met this potential client and I get the feeling they want to be a client of ours.”
“I met the general manager of this business and they want to switch to us.”
“I am so pumped – this prospective client is worth at least $50K per year to the firm.”
“I met this person at a networking function and they moaned about their current accountant – they are ready to join us.”
It’s all rubbish. Unless you have a proper ‘pipeline management’ system and structured meeting system, you are simply going on gut feel. Not good enough for forecasting new revenue!
If you have all the buyers in the meeting, you purposely develop a relationship, you understand the background of the situation, you find out their clear objectives, you attach measurement milestones to achieve them and you understand the value you bring to the table, then you might just have a chance of winning the business and accurately projecting your conversion rate.
First, you need to monitor what it is now. Based on an enquiry received (by whatever means), what percentage do you close in a reasonable time frame?
If you have a high conversion rate now, based on limited sales skills or process, then you are probably not charging enough. If you charge appropriately based on value, and you follow our meeting process, then you should be at 75 percent or more.
KPI #9 – Retention Rate: With Referrals Per Client
Most firms have high retention rate per client. That means their clients stay clients of the firm for a long period of time. Somehow, the accounting profession has got most of their clients bluffed that it is hard to change accountants. It’s actually not.
Partners will argue that clients remain with the firm because of the great relationship they have with their clients. I beg to differ. How can you have a great relationship with someone when you see them once or twice per year?
Imagine what your relationship would be like at home if you only saw your life partner once or twice per year? For some of you reading this, it would be better!
I do not think retention rate is high because of great service, relationships, value for money or services offered.
I think retention rate is high because the accountant knows about the clients’ financial affairs.
Most people do not speak openly about their financial affairs – it’s a very private matter. And, if they only speak to a couple of people about a very private matter, a lot of trust is built up. Not a relationship – trust. Your clients trust you to not tell others. So, they don’t leave.
However, the real measure is how happy they are to be a client of your firm. I think that metric is based on the number of referrals you receive each year per client. If you divided the number of referrals (enquiries) you get annually into your total client base, this will give you a startling reality of how happy your clients actually are.
Now, the flip side to that is they want you all for themselves and they do not want to refer! Possibly.
Focusing on building relationships (retention rate strategies) is not about increasing the retention rate number (it’s already high); it’s about making memorable experiences with existing clients so that they buy more from you and refer more to you.
You should be aiming for a retention rate of 95 percent, and at least one referral per client per year.
KPI #10 – Average Project Value
- A project is not the annual fee with a client.
- Annual accounting is a project.
- A business plan is a project.
- A finance proposal is a project.
- A tax return is a project.
- What is your average project value?
- It’s simple to work out.
All you need to do is divide the number of invoices sent into your revenue for the year. If you have multiple invoices for one project, then that should be classed as one invoice.
Your average project value, multiplied by the number of projects per client per year, will equal your revenue per client.
It’s a great way to look at your client base. If you have a very small average project value (but lots of clients), you will have a large administration function just for invoicing.
The objective should be to increase the average project value, while also increasing the number of projects that each client buys from you each year.
If your business clients are not spending at least $20,000 with you annually, and buying at least four projects from you (therefore, average project value is around $5,000), then I think you are under-servicing your client base.
KPI # 11 – Number of Projects Per Client Per Year
The more projects a client buys from you, the better they are served and the more you ‘put a fence’ around the client. It makes it harder for them to leave your firm if they are buying (on average) four or more services from you.
This KPI, however, should not be about retaining clients (although, that will happen); it should be about servicing them properly.
If you are doing your job currently by building close relationships with your clients and meeting them frequently at no cost, you will get to know them and you will find many projects and opportunities.
To work out the number of projects per client, take the number of your invoices sent and divide the number of clients into it. Typically, it will be around two projects per client per year.
Here’s a simple test: In a table, list all your services across the top and all your clients on the left hand side. Apply a ‘tick,’ or a ‘cross,’ to each client and each service and see how many ticks you come up with. This is a measure of your ‘services penetration.’ It’s called a client service matrix.
My guess is that less than 15 percent of your clients buy every service you have to offer! Yet, many clients need your additional services – they just don’t know they exist because you have never offered them!
If you have a focus on ‘all clients you want to keep,’ then you will make sure they are buying what they need to succeed.
By the time you have worked out KPI 10 and 11, your table might look something like the table below:
KPI # 12 – People to Partnet Ratio: Leverage
To increase profits per partner, you have four key strategies only:
- Reduce costs, while maintaining revenue.
- Increase revenue, while maintaining low costs.
- Reduce the partner headcount, while maintaining revenue and low costs.
- Maintain partner headcount, while growing revenue and lowering costs.
Many “high profit percentage firms” have low leverage of people per partner. That means they have too many partners for the headcount and the revenue. As a result of this, they may have high profit in percentage terms, but in absolute terms, they will have relatively low profit per partner.
Think very carefully about the next person you want to bring on as a partner. Do you have too many partners now? Can a better management structure suffice? Are you looking to bring on the next partner to retain them as a team member, or are you doing it for good business reasons?
If you like the current partners you have, and they are working well together and bringing in lots of new business, then don’t get rid of them. Grow the headcount and the revenue into the partner base.
For great profits per partner (more than $1M per partner), you need to be thinking of leverage of more than 13:1. That’s at least 13 full-time equivalent people per partner.
Your KPI Scorecard
The KPI Scorecard for your firm is highlighted in detail at my Firm of NOW roadshow this November and December, across the U.S. Join us, and use discount code Intuit®, to save $50 per registration. Learn more at www.firmofnow.com.