Delivering valuable services to clients is the lifeblood of your firm’s revenue stream. Managing the flow of those services and ensuring the firm’s revenue growth is critical. But in the pursuit of revenue growth, too many make the mistake of overemphasizing the billing measures of chargeability and utilization, an approach that can cost you in ways that aren’t always immediately evident.
Before we explore those costs, let’s start by addressing a foundational billing philosophy. In my perfect world, firms would embrace not-to-exceed, value, and other non-hours-based pricing methods. I believe that disconnecting our pricing, packaging, and revenue production from the hours worked should be a strategic imperative for all firms. But that’s not yet happening consistently in firms today.
In the real world, most firms still tie their revenues to hours. They budget chargeable hours and utilization (billed hours divided by total hours worked) by person, by level, and/or by service line. Chargeable hour goals are then usually set by level and by individual. Smart firms ensure their budgets are in line with industry norms that can be derived using benchmark studies such as the AICPA Private Companies Practice Section (PCPS) Management of an Accounting Practice (MAP) Survey.
For those firms still focused on these metrics, I implore you to be wary of overemphasizing them in your performance measures and reward systems. When you focus too much on chargeability and utilization, the following negative consequences will almost surely occur:
- You’ll give people an incentive to slow down their work or to enter “un-valuable” hours into your time and billing system. By focusing on chargeable hours or utilization percentage without also focusing on an individual’s realization, you encourage your people to complete their client work in more time than it might actually take to finish, instead of motivating them to be as efficient as possible. This can inflate your chargeable hours, but the “extra” hours have no real value to your clients, so they cannot be billed or recovered.
- To counter this, your firm must always combine any chargeable goal with a realization goal. Realization can be calculated by taking the net hours billed divided by gross billable hours accrued or, more typically, the net fees billed divided by gross fees accrued for an individual. Tying your people’s chargeability to their ability to realize value from that time is critical. Also, consider setting up a nonbillable “training” code for each client engagement so time can be entered and tracked for learning that happens on the job, including rework, without penalizing the individual or the overall engagement profitability.
- You’ll encourage your people to hoard chargeable hours and inhibit teamwork. As individuals increase their responsibility within a firm, their chargeable hour goal should decrease, because they should be focused more on managing work and less on delivering work. When a firm overemphasizes chargeable hours or utilization goals, we typically see higher level people hoarding work to ensure they hit their billable hour goal. This results in work not being delegated, a decision that can slow the learning and development of lower level staff people. In addition, the firm may experience a lack of teamwork evidenced by people keeping and delivering work that they are not well suited for, instead of sharing it with those who are better suited for it, all in an effort to meet the hours objectives put before them.
- Centralized work scheduling within each of your service lines and clear budgets of hours by level for each engagement can help you reduce the risk of work hoarding or working at the wrong level, but many firms do not have these structures in place.
- You’ll discourage practice-building activities and behavior. This repercussion concerns me greatly. As individuals progress in their careers, they begin to manage client relationships, engagements, and team members, and they participate in valuable practice-building activities such as recruiting, staff development, and business development. When you over-reward chargeability, these critical practice-building activities become a burden to your team members. They look for ways not to volunteer for important firm initiatives because the firm rewards chargeability or utilization, not nonchargeable hours spent enhancing the firm. Without these practice-building activities, you risk not building future capacity for your firm’s growth.
- Developing budgets for nonchargeable hours that include time for meeting with clients outside of an engagement, business development, people development, community service, and more can help you with this, but not if your chargeable goals and other nonbillable administrative responsibilities are too time-consuming or onerous.
- You’ll erode the respect of up-and-coming team members. This potential risk keeps me up at night, because I hear this from young people in our profession. Your up-and-comers know that it is not good business to pad timesheets, hoard hours, slow down work, or take time away from important practice development and growth initiatives. And yet they see firm leaders actively encouraging these behaviors by overemphasizing and/or over-rewarding utilization and chargeability. This frustrates and discourages team members who worry that their leaders “don’t get it” because the leaders are accidentally encouraging the wrong behaviors and are also focusing discussions on time and hours, which up-and-comers feel are “old school” notions.
- To address this concern, shift your emphasis from an hours focus to a production and results focus.
To illustrate, consider these four alternative ways of measuring and rewarding your people:
- Develop individual goals around realized revenue, which is a factor of an individual’s chargeable hours, their rate per hour, and their realization percentage.
- As individuals move up in the firm, focus them on revenue managed, which would include their own realizable production, and also the realized revenue for the engagements, people, service lines, and industry niches they manage.
- As your people develop business, measure and reward their revenue sourced or sold, so that they have an incentive to bring in profitable new business and funnel it to the team or individual in your firm most qualified to deliver the services.
- For those people who are more people-development or internal initiative focused, develop specific, results-based performance measures, such as “Act as the career adviser for Susan, Jim, and Robert, guiding them each to their next promotion by [date one year from now].”
Stop overfocusing on utilization and chargeability. Avoid the inefficiency, selfishness, and disengagement it can cause. Instead, focus your people on revenue-producing behaviors and desired results. When you do, you’ll experience the firm growth and team respect you most desire.