Having established basic parameters for normal time based charging in previous posts, we can now look at some of the variables likely to affect outcomes and the way they should be handled for planning purposes.
The first variable is treatment of write-offs/write-ups.
A write-off arises when time spent cannot be recovered, whereas write-ups involve billings beyond the direct time involved. The first reduces average fees, the second increases average fees.
Both write-offs and write-ups are of particular importance in fixed price jobs.The higher the proportion of work derived from fixed price contracts, the greater the attention that must be paid to unders and overs.
Sensible business development therefore requires a conscious approach to the measurement and management of both write-offs and write-ups.
The second variable is the size and management of workload fluctuations.
Calculation of time and charge targets is based on time available in a period. Fluctuating workloads can play havoc with such calculations in creating alternative periods of under and over capacity. To the degree that extra resources have to be bought in during peak periods or jobs foregone, then either costs are increased or revenue reduced.
The degree of problem will vary from business to business. In all cases, a conscious management policy should be adopted to minimise the impact of workload fluctuations.
The options here include:
- expanding working hours to cope. This approach is more feasible where planning has been based on eight hour days and reasonable billings targets, since this creates short term overflow capacity.
- reducing revenue and profit targets to match internal resources more closely to peak workloads. This approach can make a lot of sense if combined with a policy of concentrating on higher yield work, deliberately weeding out lower yield work.
- carefully scheduling both charge and non-charge activities to maximise the value of available time: developmental activities can be defined in advance to be carried out in low charge periods; work on jobs can be started in advance of formal start dates; alternatively, work on specific assignments can be slowed down.
- deliberately outsourcing work, using rises and falls in use of external resources to protect internal resources from the impact of workload fluctuations. Under this approach, targets are set in such a way as to fully utilise core resources, with work beyond this point outsourced.
- The critical question here is the likely scale of workload fluctuations. To illustrate by example, the full utilisation of internal resources at all times may be associated with workload peaks of up to 160 per cent of capacity, with an average of 30 per cent. In this case, marketing targets would be set at 130 per cent of internal capacity, while resource planning and costing would include allowance for maximum use of external resources of 60 per cent of internal capacity for defined periods.
- deliberately managing marketing activities to try to generate a more even work flow. One of the features of workload fluctuations is the way they can be entrenched by the production/marketing cycle. In high work load periods marketing declines, leading to a fall in new work. As work falls, marketing increases, leading to a subsequent new work peak, again marked by low marketing. Thus workload fluctuations lead to marketing fluctuations which in turn lead to workload fluctuations.
The third variable is the composition of work.
All jobs contain a mixture of activities. Because market rates vary with type of work, so the real return from the job will vary with the mix of activities contained within it.
Large consulting practices mix and match varying levels of charge staff to take this mix into account. Among other things, this allows partners and other high level staff to achieve high personal charge rates since they can concentrate their time on high billable activities.
The independent does not normally have this luxury, personally completing all the different mix of activities relating to the job. This factor alone is sufficient to explain the normal difference in personal billings between independents and equivalent capability partners in major firms.
As the composition of work changes, so returns will vary. It is therefore very important to be aware of both the activity composition of particular jobs and changing types of activity over time.
Most independents handle this problem on one of three ways.
- they ignore it entirely, simply quoting whatever price they consider necessary to get the job regardless of daily or hourly charge rates. In this context, many independents do not have in fact have standard charge rates. This approach nearly always leads to below average returns
- they apply a standard charge rate to the time involved in all jobs regardless of activity mix. This approach gives better results in that the return on specific jobs is more certain. However, it is likely to lead to over and under bidding. The first means loss of work, the second loss of profits
- they concentrate on relatively uniform work types related to their capabilities, thus effectively minimising the problem.
In practice, the best way of managing the problem depends upon the particular business but is likely to involve:
- analysis of the changing patterns of work to determine the mix involved. Without this, the practice is flying blind.
- a measure of concentration on particular types of work.
- a deliberate policy of subcontracting work, concentrating internal resources on higher level activities.
Most independents feel that they are too close to the line to follow the third option, subcontracting. This may be true, but comes at a price. Using another consultant, a casual or a shared resource allows the independent to concentrate not just on higher level production, but also on business development and marketing, thus growing the business. It also builds longer term capabilities. The alternative approach can lock the independent into a vicious, low yield, cycle.
The composition of work also affects the ability to vary charge rates.
Calculation of charge rates allows for down, business development and marketing time. Because larger long term jobs reduce the need for marketing time, rates can be reduced without affecting the bottom line.
To illustrate by example, postulate a $1000 daily charge rate with a 60 per cent charge target. This combination means an average daily yield across the whole year of $600 per day. The same consultant working full time on an assignment for an extended period can charge out at around $600 per day instead of $1000 and still generate the same fees.
Note on copyright
This material is copyright Jim Belshaw. It may be reproduced or quoted with due acknowledgement.