Building Value In Proferssional Service Frims
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The document discusses building value in professional service firms. It addresses several key points: 1. Ownership requires a high level of commitment to excellence and hard work. Owners work harder than non-owners and must prioritize long-term value creation. 2. Leverage, through training and recruiting professionals, is important for profitability. It allows firms to bill junior staff at rates higher than their salaries, increasing profits. 3. Marketing is essential to hedge against losing existing business, secure better rates, and increase self-determination with clients. Without new business, firms risk losing existing accounts.
Building Value In Proferssional Service Frims
- 1. BUILDING VALUE IN PROFESSIONAL SERVICE FIRMS Moderated by: Brian Kennel Performance Management Consulting, LLC
- 2. 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
- 3. Building Value in Professional Service Firms 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
- 4. Building Value in Professional Service Firms 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
- 5. Building Value in Professional Service Firms 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
- 6. Building Value in Professional Service Firms 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
- 7. Building Value in Professional Service Firms 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
- 8. Building Value in Professional Service Firms 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)
- 9. Building Value in Professional Service Firms 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
- 10. Building Value in Professional Service Firms 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)
- 11. Building Value in Professional Service Firms 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
- 12. Building Value in Professional Service Firms 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”
- 13. Building Value in Professional Service Firms 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
- 14. Building Value in Professional Service Firms 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
- 15. Building Value in Professional Service Firms 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. 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
- 16. Building Value in Professional Service Firms 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
- 17. Building Value in Professional Service Firms 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
- 18. Building Value in Professional Service Firms 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
- 19. Building Value in Professional Service Firms 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?
- 20. Building Value in Professional Service Firms 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
- 21. Building Value in Professional Service Firms 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
- 22. Building Value in Professional Service Firms 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
- 23. Building Value in Professional Service Firms 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
- 24. Building Value in Professional Service Firms Basic business needs 4 basic and undeniable needs Capital needs Growth needs Income needs Profitability needs
- 25. Building Value in Professional Service Firms 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
- 26. Building Value in Professional Service Firms 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
- 27. Building Value in Professional Service Firms 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
- 28. Building Value in Professional Service Firms 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
- 29. Building Value in Professional Service Firms 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
Editor's Notes
- #30: Stop