Now that your entire team knows the difference between Fixed Fees, Hourly Fees and Upset Fees (Part 1), we can move on to the two most important variables you need to monitor to run a profitable consulting firm. Let’s set aside revenue and cost (revenue – cost = profit), since they are the ‘outcomes’ of dozens of operational decisions in your company. Instead, let’s focus on two more granular variables that every consulting firm needs to monitor weekly (or at least monthly) with their teams.
- The Project Progress (% project completion) is a ratio of the fees that have been used on a fixed fee project, and,
- the Utilization Rate (% billable) is a ratio of the billable to non-billable hours of each staff member is in your firm.
These two variables have the most impact on the profitability of your firm, and the good new is…if everyone understands them, individuals can have a big impact on the company’s bottom line.
Consulting is the business of selling time, and you need to make sure that everyone’s time is maximized on billable time every month. In consulting, time is money… but only if it’s billable.
In consulting, time is money… but only if it’s billable.
1. Percent Project Completion
For ‘hourly fee’ projects, every hour worked is usually fully reimbursable by a client; so there is technically no “% complete” on a project. But, most projects in consulting are ‘fixed fee’, so they have a set price, no matter how many hours are worked.
That means for every hour worked, your team is consuming the project budget. Some staff are being billed at a lower rate, so they consume the budget slower than senior staff who have a higher billable rate and consume the budget faster (but bring the efficiency of their experience). Once the budget is consumed (100% complete), your team is, in essence, working for free or working at a reduced rate.
Every staff member has a theoretical billable rate (say $100/hr) and an actual billable rate which may more or less their theoretical rate depending on the status of the job when it concludes. For example, if a project runs 200% or 2 times over-budget, the billable rate of a $100/hr staffer is only $50/hr on that job. Conversely, if the project was completed at 50%, their billable rate for that job would be $200/hr. The actual billable rate is called Realization.
Tracking the progress (% Complete) on a project used to be onerous requiring many linked spreadsheets and usually a full-time, dedicated person assigned to monitor, input and track everyone’s time on projects. But with smart, networked timesheets, all that work is done automatically and is available to the project team in realtime as they work. Teams become accountable for their time when they can see the % Complete in realtime with every hour they add to the project in their timesheets. This is the power of collective intelligence, when people can see and monitor their goal (i.e. to bring a project in at or below 100%), they will take proactive steps as a group to manage their time efficiently as individuals. They will also be much more in-tune with what the anticipated deliverables are for a project, rather than working blindly, accumulating hours on a project with no sense of the true costs.
On large projects, GroupThinq allows you to break down the project into phases; each phase has its own budget. This allows your team to understand the % Complete for each phase of the project, ensuring that over-runs can be caught early.
When your entire team understands the real cost of a project over-run (when the 100% complete is exceeded), they will be much more accountable with how their time is spent. Project teams will coordinate together much more closely to meet the budget goals of the project and most importantly, there is less need for top-down oversight from managers and owners on projects. Teams can work together with collective intelligence to unlock their true time potential.
Being accountable for the project budget has massive implications on the profitability of the consulting firm.
2. The Utilization Rate
The ‘Utilization Rate’ or Percent Billable is a ratio of each person’s billable time to non-billable time. For instance, an 80% billable rate means that 80% of a person’s time will be billable, and 20% of their time will be non-billable. Owners and Senior staff usually have a lower utilization rate (sometimes below 50%) and a much higher billable rate. This is because they have to spend time managing and growing the company, writing proposals (which are not billable) or undertaking marketing or strategic plans for the company. Junior and intermediate staff usually work purely on projects and so their percent billable is typically much higher in the 80-95% range.
Most companies set billable targets for staff so there is a general understanding about how much time is assumed to be billable when they are hired. Often, this is part of each staff member’s job offer letter, and it is updated as a person becomes more senior. Some staff (controllers, accountants, internal marketing people, or a proposal writers) have a 0% utilization rate. While these staff are extremely important to a company, but they do not directly generate income via billable projects.
If your staff’s utilization rate drops below their intended target, it’s usually an indication that work is either slowing down (and you need to accelerate ‘feeding the funnel’) or people are busy feeding the funnel by writing proposals or doing marketing work. If owners and managers are not monitoring staff’s Utilization Rates, or if staff don’t know what their billable targets are, people will spend time on activities that generate little revenue for the company. This can be catastrophic for a firms profitability.
It’s important that everyone knows, and is accountable for, their billable target. It’s also important that owners and managers regularly review the Utilization Reports to ensure targets are being met.
Pulling it Together
Taken together, the % project completion and % billable are two of the most important variables that should be monitored regularly in a consulting firm. All staff in the firm should understand these definitions and should be working actively to meet their targets (project budget and % billable). Projects that are running over-budget should be identified and resolved as early as possible… involving the entire project team (see the Active Project report in GroupThinq below).
Similarly, every individual in the firm should know about and try to meet their billable targets. There are times when this is impossible during busy proposal season, or if a new company marketing campaign has been launched. But, over the period of a year, staff should generally be in their target range. Managers and owners should be reviewing utilization rates weekly or at least monthly (see GroupThinq’s Staff Utilization Rate report below).
The other benefit of monitoring both variables, is that people will not be inclined to fill their timesheets with non-billable time to reduce the impacts on an over-budget project. These 2 variables create the much needed time accountability for everyone in the consulting firm.
Remember, only billable time is money in consulting.