This article is an extract from the book 'Everything you need to know about Xero Practice Manager'
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Here is an example of some of the mistakes an accounting practice might make when trying to improve the overall performance of their practice. It highlights the challenges that arise when trying to make changes to one area of the practice while ignoring others. This example will highlight a typical two to three year journey for an accounting practice and should help fast track your learning so you do not make the same mistakes.
Aaron Aardvark from Aardvark & Aardvark CA wants to improve his practice’s overall performance. He understands the average hourly rate is the best metric to focus on as it is a function of billable rates, write-offs and productivity. If he gets this mix right, his average hourly rate will rise, and so will the overall profitability of his practice. He’s got a plan.
Knowing that practice average hourly rate is simply a function of total practice revenue to total time, Aaron decides the easiest way to increase his practice revenue is to acquire more clients by pricing his services more competitively. To do this he lowers his billable rates for hourly work, and lowers the pricing on his new fixed-price agreements.
It works! He has new customers knocking down his door. His revenue increases in his practice and his team are turning out more jobs than ever. In fact, they can’t keep up. His team has to work longer hours to meet fixed deadlines, until they can’t work any longer. Deadlines start slipping. Aaron checks his practice average hourly rate and is confused by finding that it hasn’t changed at all. Although his revenues have increased, his total time has also increased because his team has had to work longer hours to deliver the work. But don’t worry, Aaron has another plan.
Satisfied with his success and growth, Aaron decides to advertise for a new team member to solve his capacity problem. Some of his team have been working long hours and doing a high volume of billable work. One in particular, Sally, deserves a promotion. He’s going to advertise for a qualified junior team member and promote Sally next week. Growth feels good. But he still hasn’t increased his practice average hourly rate. Aaron has another plan.
Noticing that his team is spending a lot of time on non-customer work, Aaron decides to also hire an administrator. This should take some of the non-customer tasks like on-boarding, communications and documentation away from his billable team so they can focus on their customer work. Non-customer work will be centralised with Joe, his new administrator. It works! His billable team love Joe. Joe lets them focus on customer work so they no longer need to work such long hours to meet existing deadlines. Aaron’s billable team is more productive than ever. efficiency feels good. But he still hasn’t increased his practice average hourly rate. In fact, it’s worsened! Joe has increased his total practice time. Aaron has another plan.
Aaron’s plan is to lift his team’s productivity even further so his practice can achieve the same output of jobs, meet all their deadlines and achieve the same revenue, but with the existing team. Newly promoted Sally can take on some of the job scheduling, management and capacity planning work the team were doing individually. It works! Sally’s management of the team has allowed them to meet their existing deadlines and get through the same volume of work without hiring new team members. Sally, however, is not bringing in the same value of revenue she used to due to her new responsibilities. Aaron’s practice average hourly rate worsens. Perplexed, Aaron ponders his next plan.
Aaron looks around the office and sees a hive of activity. They are a well-oiled machine. His billable team are always on-task working on client jobs. Sally keeps them humming and Joe keeps the admin away. But something’s not right. His revenue has not changed and he has two extra team members. His practice average hourly rate is worse than what it was before he brought on all those new clients by lowering his pricing. How is all this effort and increased productivity not transferring into higher revenue?
Aaron runs some numbers. He notices that while all of his billable team are busy and productive, they are actually not effective. Even at the new lower billable rate, jobs take longer to do than the budgeted time. His team are meeting their deadlines, the clients are happy, they are paying their bills on time, but almost every job is going over budget. The average hourly rate on some of these jobs is dire. While this doesn’t affect his revenue, it certainly affects his capacity and the total amount of revenue he can generate with the team he has. Aaron can’t take on any new clients until this is resolved. Fortunately, Aaron has another plan.
Aaron decides to increase his fixed-price agreement and hourly pricing again, starting with new clients, but eventually all clients after their next engagement renewal date. With his team humming at capacity, supply is scarce and demand for his practice’s services is high. He can’t continue with his current pricing structure. It works. Aardvark & Aardvark CA take on fewer customers as the year progresses due to higher pricing. The clients they do take on are of higher value and quality. The few clients that have not renewed their engagement due to the price increase weren’t profitable anyway.
His team is now completing fewer jobs but at a higher value. The pressure has come off and there is an audible sigh of relief in the office. Revenues have increased, the team has stayed the same. Doing less work at higher value feels good. Aaron checks his practice average hourly rate. It has increased! But Aaron is still uneasy. It seems a false victory. Why? Despite increasing the price of his services for new and existing customers, improving his revenue and regaining some breathing room in his office capacity, many jobs are still going over budget. Aaron’s practice is no longer in a constant state of panic and overtime, but he still doesn’t have capacity to take on any more higher-value customers. Aaron runs some numbers.
His team are efficiently delivering higher-value work but they are still not effective with their time. For their hourly rate work, Aaron finds that he is frequently unable to invoice all of a team member's time due to rework, errors or tasks taking longer than expected. While Aaron’s fixed-price agreement jobs meet all their deadlines and clients are now paying fairly for the services they receive, if these were on an hourly-rate basis there would be even more written off! Aaron calculates that on average his team typically exceeds a job’s budget by 25%. This does not impact a job’s invoiced value, but it does impact his practice’s available capacity. Aaron calculates that if he could reduce that to 0%, he could take on 25% more work in his practice. Aaron could also increase his revenue by 25% with the same team! That would really improve his practice average hourly rate. Aaron has another plan.
Aaron has Sally organise a training and mentoring program for the team to identify and fill the gaps in their training that are leading to some of the budget overruns on jobs. Sally pairs people up with complimentary skills so they can learn from each other instead of operating individually as they had been in the past. Aaron’s billable team are excited for the new techniques they are learning from each other as well as externally. Job budget overruns slowly decrease. What used to take eight hours is now taking six. Capacity has increased and Aaron and Sally announce that each team member can now take alternating Friday afternoons off each month. Aaron is now running an efficient and effective team, delivering higher-value work. With this new-found capacity, Aaron can now take on those new higher-value clients he was having to turn away. Aaron checks his practice average hourly rate. It’s gone through the roof!
This lift in practice average hourly rate means Aaron is making more money for every hour worked. A lift in practice average hourly rate means revenue has increased without a change to the direct cost structure of the practice, making the practice more profitable.
As we have seen in the example above, your practice average hourly rate can be improved only through a combination of several factors working together. Increasing the average hourly rate of your practice will increase the amount of revenue your practice earns in relation to the amount of effort required to earn that revenue. Measuring your practice's average hourly rate is relatively easy, but in order to willfully improve it you need to understand all of the components and their interrelationships very well.
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