Too often the “feel good” factors and recency of wins overtake facts when it comes to measuring the success of business development initiatives and financial health of many professional services firms.
Properly dimensioning real individual contribution to financial success of any professional services firm requires assessment of more than simply personal fee production.
(Measuring personal billings still matters: firms shouldn’t lose sight of accountability for direct, current contribution to the financial health of the firm).
However, to get a true handle on your current and future financial health JMA recommends professional services firms measure go beyond the immediate and individual.
Unintended consequences of traditional professional services firms measures
While most professional services firms current measures reward equally, by according highest status to those with high personal fee contribution, this approach has undesirable (and unintended) downsides.
Unintended consequences of professional services firms measures may include:
- breeding cynicism (“the firm says it wants us to go and spend time getting business, and to spread it round the firm, and to leverage our relationships for the firm as a whole, but the only thing it measures and the highest medal of honour goes to the highest personal fee earner, and it doesn’t treat the unselfish business developer as the hero s/he is”)
- encourages focus only on making one’s own fee target and rewards client-hugging or hogging
- inadvertently [mildly] disincentivises fee-sharing and leveraging relationships for wide benefit
- encourages short-termism (and yes you do still need a healthy emphasis on “now” – we have to pay this year’s bills and be profitable now to be attractive, strategically healthy, and realise our future potential)
- discourages medium- and long-term investment
- presents to non-partner lawyers a model which appears to reward only personal fee production, rather than the espoused values of the firm
- may not value the business development efforts and success of non-partner lawyers as they aspire to career progression.
Getting assessment of broader financial contribution to the firm is extraordinarily difficult, often, in our quest for objectivity, we measure only that about which we can be absolutely accurate and precise. But a true assessment of the strategic health of any professional services firm must take account of factors beyond individual contribution to the current period.
Professional services firms measures – must haves
Here are some contributions which JMA thinks are worth measuring.
Some of these ideas may go too far for your firm, but these are all worth considering, and getting across all of these gives a really comprehensive picture of all contributions to the firm’s fees.
Current year personal fees
- Actual personal fees – which most firms accurately measure now
- Personal fees trend line (i.e. are professionals consistently going in the right direction, or is this an impressive performance coming off a low base?)
- Number of chargeable hours to produce fees or effective realisation rate (i.e. are you going up the value curve, or not?)
- Number of annual working hours to produce fees (i.e. true effective realisation rate what is your business development, relationship management, practice admin (what does it cost to really produce the fees?) and what is supervision, management participation costing the firm in terms of opportunity cost?
Current year work group fees (aka teams/cells/op centres/profit centres)
- Actual work group fees i. e. the total fees for the group of professionals on your team or whose work you have supervised
- Work group fees trend line
- Work group realisation rate (the value curve again).
Current year practice group fees (aka departments, teams, divisions, business units, and disciplines)
- Actual practice group fees
- Practice group fees trend line
- Practice group realisation rate – subdivided by professional classification (i.e. early career, mid-career, senior, partner/principal (non-equity), partner/principal (equity)
Approximation for real gross profit
Before partner returns, but after considering all other production costs) for fees, measured for:
- Individual professional (lawyer/accountant/engineer)
- Work group (team/cell/profit centre)
- Practice group (departments/teams/divisions/disciplines)
Client relationship management
- fees under direct management
- fees under management, exclusive of personal billings (i.e. contribution to client retention and development beyond personal fee benefit)
- fees under management, outside personal billings and own work group (i.e. contribution to management of relationship outside direct workgroup under supervision)
- fees under management, outside personal billings, own work group, and practice group (i.e. relationship management value relating to “rest of firm” – indicative of spread of fees).
Professional services firms measures that are harder to track, but also worth considering
From a forecasting or future financial health perspective, some additional indicators give much better sense of the real financial (still not non-financial) contributions of an individual.
Some of these are much harder to measure, and your firm probably doesn’t track this data, but a couple worth considering as professional services firm measures include:
Client development – new business
- new clients introduced/sourced – fee value this year, fee expectation next two years, fee potential next two years
- new work/types of matters/projects from established clients – fees relating to classes of business not previously sourced from this client – fee value this year, expectation next two years, fee potential next two years.
- work won back from key competitors – value of current year fees, expected next two years fees sourced from named competitors.
New services selling
- current year fees and expected next two years fees from new services availed by both established/new clients – g. new environmental engineering services, other target services.
Activity emphasis achievement
- tracking of current year fees and expected next two years fees deriving from specific “emphasis” services – g. if M&A, or private equity, is one of/the agreed service emphasis for next year, fees relating to that activity, or achieving fees and signs of fee growth in the forestry sector, for instance.
Estimated fees for stock of current matters in hand over next 12 months:
- personally held i.e. fees earned as a fee earner rather than a matter or client manager
- under direct management – e. fees supervised
- relationship i. e. fees for matters in-hand expected to be realised over next twelve months for clients for whom an individual manages the relationship.
By developing meaningful measures suitable for your professional services firm’s individuals, work groups, and practice groups, you will have a valuable decision support tool for forecasting the future financial and strategic health of your professional services firm.
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