It’s simple, be nimble- Part 4
Two equations developed in the previous article capture so much of information of the firm in just 4 numbers and makes control of the performance so much easier that
I call them – Efficiency Sutras or Efficiency maxims.
The sutras are reproduced below for sake of convenience
For monitoring individual performance:
Fees – direct cost = profit (or more accurately value addition or contribution at individual’s level)
For monitoring the firm’s performance:
Fees – direct cost – indirect cost = profit
With Efficiency Sutra, it becomes easier to quantify impact on profit due to any deviation from the assumptions and of course easy to take timely corrective actions to ensure that final profit remains closer to or higher than the sufficient profit goal set.
Possible deviations are listed below:
1. Non-billable time exceeds the estimate (in our example 10%)
2. Actual indirect expenses exceeds estimate
3. Under reporting of time data as compared to the estimated time per day and/ or estimated working days built into the equation .
4. Spending more time on any assignment without keeping in mind the expected fees from the assignment .
5. Giving ad hoc discount ,on the billing value which is arrived at by applying standard billing rates and actual time spent .
In short if these slippages are avoided then the objective of sufficient profit would be achieved.
Simple? Not really.
There are two more things that we need to keep in mind .The most important being “ availability of sufficient work to match the capacity of various people in the firm ,on day to day basis and the second “ intelligent data collection in time to ensure prompt corrective measures”.
Efficient marketing, timely execution and customer satisfaction would ensure sufficient work. Another important element involved in this is client’s willingness to appreciate the value of the service and make the payment of the bill for services rendered.
Now, willingness to pay the fees of professionals may translate into agreeing to the fees in advance. And that is where the firms need to adopt a discipline or a culture which I call “ Management by billing rates”. This in simple words would mean, time to be spent by people in the firm would be decided by the billing rates and not on the basis of expected costs. [In my view pricing decisions based on costs alone gives too much flexibility (read no control) as regards profit to be made and eventual fall in the overall profit.]
This discipline should be used even when the fees are not agreed in advance, to ensure efficiency in the operations of the firm. This will ensure that the firm’s shoddy execution, lack of productivity etc. are not passed on to the clients, by issue of inflated bills, based on excessive time spent, billed at standard rates.
Let’s take an example based on the data from the previous article –
Mr. A’s cost per hour is ₹ 225 and billing rate per hour is ₹ 680.
Let’s say he spends 10 hours on one assignment . The bill as per our
Efficiency Sutra, would be: 10 X 680 = ₹ 6800.
However, it is realized that the client had agreed to pay only ₹ 2000 for the assignment hence bill can be raised for ₹ 2000 and not for ₹ 6800.
Thus non recovery of value of extra time spent i.e. ₹ 4800 ( 6800- 2000) would result in reduction in the expected revenue as well as reduction in the expected profit. And this loss would be a permanent loss.
This loss of ₹ 4800 could have been prevented , had the firm asked Mr. A to work on the assignment for 3 hours only ( 2000/ 680 = 2.94).
(Other alternate possible solutions – pricing decisions are discussed later)
This simplistic example highlights the ability of billing rates to identify deviations, which have an impact not only on fees but also on your profit.
If this power of billing rates is used not after the extra time is spent, but much before and for effective monitoring during the course of rendering the service, the results would be phenomenal.
Absence of comprehensive policy of “Management by billing rates” leads to near death of profit goal by thousands of self-inflicted cuts like the one described above.