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Jamie Lawrence

Wagestream

Insights Director

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The Engine of Profit: getting the best ROI from your staff

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This article was written by Alan Pannett, co-author of Key Skills for Professionals.

If you are intent on obtaining stronger ROI from your people, by fine tuning the ‘engine of profit’ in your business, you will need to interpret wisely the five factors identified by David Maister, when he was researching and teaching at Harvard Business School. Maister’s observations are particularly important to professional services businesses charging for the time spent by their professional advisers (e.g. hourly fee rates for legal advice).  

Five factors affecting staff ROI

  • 1. Utilisation: the number of hours of chargeable time recorded by each team member, measured against the number of hours budgeted, expressed as a percentage. Ideally, every team member should record all their budgeted hours each month and throughout the year (i.e. 100 percent utilisation). Realistically, utilisation levels are lower, often between 80 percent and 95 percent.
  • 2. Leverage: the ratio of team members earning fees for the business to partners or co-owners of the business. Typically this may be between 1:3 and 1:5. This is both an important structural issue for the business as a whole and within each team working for clients.
  • 3. Realisation: the number of hours recovered as fees (i.e. billed, collected and banked) expressed as a percentage of the total number of hours recorded. Again, this should ideally be 100 percent but it often varies between 80 percent and 90 percent.
  • 4. Rate: the hourly billing rate of an individual team member (or the ‘composite’ rate of the team). This rate should be equal to, or above the budgeted rate for that individual (or the budgeted ‘composite’ rate of the team).
  • 5. Margin: the business’s net income, stated as a percentage. This will vary significantly according to the way the business is structured, the overheads which are incurred by the business including office space, salaries and business infrastructure costs.

What can you do to boost ROI from your people?

Solve the Under Delegation Problem

The ‘Under Delegation Problem’ (i.e. experienced team members not delegating tasks to those who can more profitably do those tasks) plagues many firms and has been prevalent during the current economic downturn. 

Solving the Under Delegation Problem will enable the business to:

  • Enhance profitability – under delegation means that the cost of delivering the service to clients is higher than is needs to be
  • Build the skills of less experienced team members
  • Motivate team members to develop their skills to tackle more complex tasks
  • Where tasks are done at the appropriate level, more experienced team members can use the time which has been freed up to win more work from existing and new clients

To get the strongest ROI from less experienced team members, ensure they work as part of a well-structured team so that appropriate tasks can be effectively delegated to them.

Ensure that tasks are delegated to the lowest competent level (i.e. to someone who is capable of doing the task under appropriate supervision). Work must not be ‘hogged’ by more experienced members of the team as a means of meeting hours and fees budgets.

Ensure that every member of the team is kept busy

Utilisation is essentially a measure of actual business activity set against budgeted business activity. It is an indication of how busy people are compared with how busy you expected them to be.

Keeping each team member busy, helps ensure they are fully utilised at all times. Do not underestimate the significance of this basic point to ‘the bottom line’ of your business.

Example: M is budgeted at six hours of chargeable client work on each working day, (approximately 1400 hours a year). If M achieves 100 percent of budget at a charge rate of £100 per hour, M will generate £140,000 in fees. Assuming M is paid an annual salary of £30,000 and that the additional costs of employing M (e.g. employer’s National Insurance contribution, pension costs etc.) amount to 20 percent of M’s annual salary (i.e. £6,000), the total cost of employing M is £36,000. M’s budgeted contribution is £104,000 (a multiple 2.88 times the cost of employing M). The ROI for M is a multiple of nearly three times the cost of employing M.

If M actually records 1,120 hours of chargeable time (i.e. 80 percent of budget) the value of the time recorded is £112,000. When M’s salary and other direct costs are deducted this leaves £76,000, which is only 2.1 times the cost of employing M.

Make sure that all your people are fully utilised in order to gain the strongest ROI. Focus on keeping each person busy, by using appropriate delegation techniques, effective supervision and ensuring that each person records their chargeable time fully and accurately.

Bill promptly for work done

Ensure that all your people convert work in progress into bills delivered as quickly as they can; then seek to collect payment from clients promptly; by doing so you will keep realisation as high as possible.

Example: M has recorded 1,120 hours of chargeable time (i.e. 80 percent of budget) and generated a potential value of £112,000. If M then realises only 80 percent of that time, the fees actually collected, which are attributable to M are £89,600. After deducting the full cost of employing M, M’s actual contribution is £53,600, which is only 1.48 times the full cost of employing M.

Make sure that as much chargeable time as possible is converted to bills and realised by each person in your team.

This can best be achieved through:

  • accurate time recording, supported by clear and meaningful ‘narrative’,
  • regular billing (converting work in progress to debtors)
  • prompt collection (converting debtors to cash).

Where this process is managed effectively, the profitability of individual team members and the profitability of the team will increase.  

Appropriate supervision and risk management

Appropriate and effective supervision is essential to managing the inherent risks of employing and training new team members. Be sure to limit risk by providing appropriate levels of training and supervision for all client work. You will convert a potential risk into a learning experience for the person being supervised and enable them to undertake more complex work. 

The lowdown…

Provided that an individual is working within a well structured team and is 

a) given clear instructions (i.e. using effective delegation techniques);
b) fully utilised (i.e. kept busy doing appropriate client tasks);
c) effectively supervised by an experienced team member;
d) told to bill clients promptly for the work they have done, and
e) trained to take on more complex work;

then you should achieve the optimum ROI on the cost of employing that individual.

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Jamie Lawrence

Insights Director

Read more from Jamie Lawrence
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