How Do Value-Based Firms Measure Success?
In the past few years, many innovative firms have moved away from hourly billing to fixed-fee or value pricing.
There are many benefits to making the switch from hourly to fixed or value pricing. Firms are rewarded for efficiency, clients feel more comfortable seeking proactive advice when they know the clock isn’t ticking and eliminating billable hour requirements tends to improve employee retention.
In a workshop or conference session, thought leaders tend to make value pricing sound like a no-brainer: talk to your clients, make the switch and everyone lives happily ever after. While we agree value pricing is the ideal, especially as firms move into more advisory roles with their clients, we also realize many firm leaders know it’s simply not that easy to make such a monumental shift.
After all, moving from hourly billing to value pricing isn’t just about changing an invoicing method. It impacts how you determine scheduling, manage talent and measure success. If you take away billable hours, how do you run your business?
The Problem With Billable Hours
Accountants are numbers people. As such, firms have long relied on metrics such as chargeable and non-chargeable hours, realization and utilization to evaluate their progress.
The problem with some of these metrics is that they’re used as a black-and-white measuring stick. If your team members meet arbitrary goals for billable hours, they’re performing well.
A project’s success is measured by the number of hours it took to complete and whether it hit a budget target (that was likely copied from last year’s budget). Your team members know this is what firm leaders use to determine bonuses, raises and promotions, so a tax return budgeted at ten hours will come in at exactly 10 hours, every time.
The problem is, these metrics don’t show the whole picture. If two staff members each have 1,700 charge hours, but one completed projects with net fees totaling $162,000 and the other had net fees of $90,000, are they really contributing equally to the success of the firm? Probably not. An excessive focus on billable hours promotes the wrong behavior: hoarding work, padding timesheets and inefficiency.
Metrics to Track in a Value-Pricing Firm
We have asked our members to come up with new metrics for the future firm and they delivered with a pretty extensive list. Here are some of our favorites:
- Revenue per full-time equivalent (FTE). The firm’s total net revenue earned divided by the number of its FTEs. This metric shows how much revenue each team member generates and provides information on the firm’s efficiency.
- Revenue by service line. Firms may offer a wide variety of professional and financial services, with advisory services adding to their more traditional services. This metric shows which services are the fastest growing as your firm extends its services beyond tax and assurance.
- Ratio of staff to equity partner. Calculated by dividing the number of a firm’s employees by the number of its equity partners. This metric shows how successful partners are at pushing work down.
- Average number of services per client. The closer your firm is entwined with a client, the more attuned to your needs you will be and the better able you are to address their needs. Improving this metric can increase retention rates exponentially.
- Lifetime value of a client. This is essentially the sum of all revenues generated from the firm’s service offerings over the lifetime of the client. It’s a good idea to track how this metric changes from year to year for your biggest clients, how long those clients have been with the firm, and whether new service offerings have been introduced to those clients.
- Net promoter score (NPS). This is a client satisfaction benchmark that measures how likely your clients are to recommend you to others. You determine your NPS by surveying your existing clients to ask, “On a scale of 0 to 10, how likely are you to recommend our firm to others?” and ask clients to give specific feedback about why they gave the score they did. Clients who answer the question with a 9-10 are Promotors. Clients who answer with a 7-8 are Passives, and clients who respond with 0-6 are Detractors. Calculate your NPS by subtracting the percentage of Detractors from the percentage of Promotors. Use the feedback your clients give to identify areas of improvement.
- Number of cross-selling opportunities vs. those won. A huge discrepancy between these two numbers indicates your team needs better training on servicing and cross-selling clients. This metric can also identify certain partners or team members who are really successful at marketing to existing clients.
- Income per equity partner (IPP). Calculated by dividing the firm’s net operating income by the number of equity partners. According to the most recent Rosenberg Survey, average IPP in 2017 was $441,000, up 2.6 percent from the previous year.
- Income generated by employee. Firms need to know how much revenue each person in the firm is generating to set salaries and assign work. This metric isn’t perfect, especially when staff members work in teams. However, if you can assign a certain percentage of revenue to each individual, it’s a good starting point for figuring out how to balance work in the firm.
- Work turnover. This measures how many days it takes to complete a job, from when all information is in until the client receives the deliverable. Clients value speed and efficiency, so it’s essential for the firm to know how quickly jobs are being completed to keep clients satisfied.
These are just a few of the metrics our members identified for measuring the performance of firms, partners and staff. There’s no exact method for applying these metrics in an accounting firm.
Each firm needs to evaluate what their culture values most, and watch out for unintended consequences of measuring those values. In any case, it’s important to collect feedback and continually look for ways to improve the information you collect and how it is used.
It’s tempting to continue to use billable hours as a metric because it’s easy to measure and ingrained in the profession. However, “that’s the way we’ve always done it” isn’t a valid excuse in a time when technological and demographic trends are disrupting the profession at a rapid pace.
The original article appeared on the Boomer Bulletin blog.