building value in proferssional service frims

BUILDING VALUE IN PROFESSIONAL SERVICE FIRMS

Moderated by:Brian Kennel

Performance Management Consulting, LLC

Building Value in Professional Service Firms

What do you want be a part of?

A few possibilities: Something that is consistently profitable Something that is financially rewarding personally Something that has long term value Something that is professionally rewarding


Some environmental reality Most professional services firms have no equity

(reserves) Most have been forced to compete in a pay me now

economy (this may be changing of late) Actual value is determined more by what the market will

pay rather than by the value of what is being produced Tax Considerations for LLC’s

Debt is often a necessary evil as earnings are taxed whether distributed to the members or not


Reality of ownership More difficult now than ever

Requires a level of commitment to excellence in everything you do

In most instances, owners actually work harder than non-owners A question of priorities


Ownership: What is it? Ability to participate in the profit of the non

owners – if you are a solo it is all about you Ability to participate in the long term value of the

firm (assuming you create the value) Level of status and prestige reserved for owners

An opportunity for you to be a part of something larger than yourself


Ownership: What is it not? An automatic pass to financial freedom

The firm is worth what you are An easier life Status and prestige in and of itself

Lots of people own stock in broke companies Simple

Requires a level of thinking and execution that is better than a non-owners


Some important points about what you earn? Compensation is a measure of value Value is a measure of success If the underlying success does not

create/support the value being paid, the firm will under perform (or go broke)

Compensation must be based on success


What your pay should be based on Billable work (firm and solo) Training (if applicable - firm) Recruiting (if applicable-firm) Leveraging – profit creation (firm and solo) Marketing ( necessary for any firm) Administrative contributions (firm concept)


Beyond the obvious, why is billable work so important? Capitalize on your high value

Remain relevant Lack of billable work will diminish skill sets Lack of billable work will diminish your

understanding of the marketplace


Beyond the obvious, why is training so important? Compensation requirements force the need for

profitability Profitability is created by billing junior professionals

in amounts that exceed what they are paid Training is the number one way to increase leverage

(profit on juniors)


Beyond the obvious, why is recruiting so important? Hours are all we have to sell No people no hours No hours to sell and clients go to people that

have hours to sell Recruiting renews the firm, stabilizes the

workforce and adds long term value to the firm


What exactly is leverage?Wikipedia defines as:

“ leverage (or gearing) is using given resources in such a way that the potential positive or negative outcome is magnified”


What exactly is leverage? Two kinds of leverage

Positive Training is an action that produces a positive result over and

over Coordinating client work and available staff maximizes efficiency

Negative Poor client service that reduces that value of the service Making someone wait for instructions or information needed to

produce a positive result Wasting someone’s time


Results of positive leverage? Increasing profits with less work Layered leverage

I teach you to do something profitably and you in turn teach someone else etc.

The more positive leverage the quicker profits grow Review specific leveraging examples


Leveraging Example: 4 man team - 1 partner and 3 professionals Solo Models

Team Partner Non

Partner Non

Partner Non

Partner Team Total

Partner

Hours billed 1,600 1,900 1,900 1,600 7,000 1,800

Billing rate $225 $185 $165 $95 $168 $225

Time value $360,000 $351,500 $313,500 $152,000 $1,177,000 $360,000

Collected amount $342,000 $333,925 $297,825 $144,400 $1,118,150 $342,000

Salary $90,000 $80,000 $50,000 $220,000 Bonus $32,678 $29,348 $5,820 $67,845 Benefits $24,536 $21,870 $11,164 $57,569

Loaded payroll $147,213 $131,217 $66,984 $345,414 Allocated overhead $82,667 $62,000 $62,000 $41,333 $324,264 $82,667

Net income $259,333 $124,712 $104,608 $36,083 $448,473 $259,333 Profit generated per owner hour worked (assume 600 non billable/400 non billable in the solo model) $204 $144

Notes:

Any number of team combinations could be applied. Results will vary with differing rate and hour assumptions.

Time value refers to billable hours multiplied by billing rate.

Collected amount assumes a 95% realization factor to account for the reality that all time worked is not normally collected

Salary is a variable depending upon firm type and industry segment

Bonus is a simple formula of 25 % of collected amount minus 2.5 times salary.

Fringe benefits are assumed to be 20% of salary and bonus

Allocated overhead is based on an assumed 40% profit margin (to include owners collections)

Net income is collected amount minus loaded payroll and overhead

Profit per owner hour worked is calculated by dividing gross collections by owner hours (billable and non billable) worked. It is assumed that a solo practice owner would work more billable hours to meet demand.


Limitations of a lone wolf(solo) practice style Income is limited to what you produce Rate is everything Limited long term value is created Not as profitable as a properly managed

leveraged model See profit comparisons-previous slide

Creates very little opportunity for anyone else


What are the ways to overcome billing rate limitations? Lower cost structure More billable hours Expanded leverage Lower compensation to the owner (s) – never popular Seek higher profit work – may be difficult in today’s

economy


Beyond the obvious, why is marketing so important? Account relationships deteriorate

Hedge against losing existing business Helps secure better billing rates

Rates are affected by confidence Increases confidence when bidding new work Increases self determination in customer relationships

New business allows the you to focus on win/win relationships without fear of losing business


What are the roles we play? Originators, Managers and Resources (also referred to as

Finders, Minders and Grinders in less complementary terms)

Originators get business Managers create leverage and improve the product Resources have the talent and training to create the product Many have to play all 3 roles

Which is more valuable? Each has its place

What is a superstar?


A note about Superstars Able to attract new business consistently Able to develop stable, mature and profitable

customer/client relationships Well respected by clients and peers Good internal relationships

Places high value on the contributions of others Understand their limitations

Avoid bad deals Surround themselves with others that are strong where they

are weak Share the credit and glory


Notes about Originators

Driven by the excitement of being attractive to someone new Driven by competition Will promise almost anything to secure new business Believe securing new business makes them indispensable Oftentimes refuse to accept their limitations

Become superstars after they recognize and account for the other essential parts of the organization in the sales process


Notes about Managers

Managers need quality resources Managers should see Originators as internal clients Should focus on making the Originator comfortable with

the manager being part of the client relationship Managers seek to build client relationships along

operational lines Must be careful not to become competitive with the Originator

Good Originator/Manager relationships will make you more competitive


Notes about Resources

Resources are most interested in doing the work Not as concerned with Originator/Manager relationships Resources comprise the leverage Quality Resources focus on becoming good at the “what”

in what they do Sometimes resources work directly with Originators


Basic business needs 4 basic and undeniable needs

Capital needs Growth needs Income needs Profitability needs


What are capital needs? Also known as working capital, equity or debt

Many firms use debt as its primary source of capital Used to support WIP, AR and Equipment

It generally takes and average of 3.5 months to turn a billable hour worked today into cash

Working capital provides consistency of cash flow


What are growth needs? Growth is needed to meet income needs No growth/less leverage

Not much long term value Growth is necessary to meet client demand

Short staffing creates a negative cycle Pace of growth dictates a certain capital need

WIP and AR absorb capital the could be used for growth


What are income needs? A want is not a need

Basic economic theory dictates that we have unlimited wants and limited resources

Wants and needs cause people to demand the highest salary they can command for their work

If the firm cannot meet these salary demands good people will leave

Choices must be balanced Income, lifestyle and workload If the firm/you cannot operate at a high level income will

suffer If the firm/you operates at a high level, a competitive

advantage is gained


What are profitability needs? Profitable businesses

Longer term focus Decisions can be made with proper input Opportunities can be maximized

Unprofitable businesses Driven by short term priorities Impeded competitiveness Impacts everything negatively

Profitability is a measure of success Profitable business are more desirable

Banks, Suppliers, Peers and Clients Profitability breeds confidence


What is stopping you from reaching your potential? Experience Training Desire Clients Working capital issues Lack of desire and/or time to train Resistance to change Other

building value in proferssional service frims

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measure of value value

time value

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long term value

professional services

value level of status

late actual value