July 2003

Productivity in the Small Services Firm: Using Software to Decode the Bottom Line

By Brian Saunders

According to the Small Business Administration, small services firms are flourishing after having weathered big layoffs and cutbacks, trimmed expenses, and spent much of the past 18 months shifting their focus from the top of the P&L to the bottom.

After years of talking about quarter-over-quarter growth rates, the focus is on productivity. While that sounds like a return to common sense, the path to improved productivity is anything but clear.

What Is “Productivity”?

One way to look at productivity is to measure man-hours. Consider a hypothetical 10-person accounting firm. With 160 hours in the average man-month, the firm has 1,600 hours for sale. The more time billed to clients, the better the bottom line.

A 1% boost in billing means 16 extra hours of pure profit every month, translating into $15,000–$40,000 a year, a nice year-end bonus. An increase of 3%–5% can make a real difference, but is a 3%–5% boost in productivity realistic?

Studies like the one conducted by the Texas Society of CPAs in 1994 found that professional personnel in accounting firms of various sizes bill approximately 74% of their total work time (only 57% of all employees are included).

Large firms have focused on this kind of math for years, developing sophisticated tools to help them enhance their productivity numbers. Service process optimization (SPO) tools are increasingly popular, with many firms starting to sing their praises. While 10%–20% gains aren’t unheard of, 5%–10% is more common.

Although those numbers look good from a distance, upon close inspection they get fuzzy. Also, installing and maintaining SPO tools is expensive, and smaller firms barely have enough time and resources to put a simple timesheet program in place, let alone decipher all the data they collect. In general, oversized solutions can create a productivity sinkhole that few small firms can afford to navigate.

Boosting productivity is not necessarily a large-scale, expensive proposition. A business can achieve real, measurable results simply by understanding and tracking the metrics on which SPO software systems are based.

Shifting Focus

Productivity improvements start with a shift in focus. Most small services firms see time-tracking as an extension of the invoicing process. As such, when thinking about the work done or the hours tracked, firms think in terms of tasks and projects. SPO software helps sharpen the focus on employees and teams.

This shift in focus is the key productivity-related benefit that SPO software brings to a service firm. From that vantage point, the link between staff and profits becomes clearer. These systems help identify profitable groups, divisions, and teams in addition to profitable projects. That makes SPO solutions valuable, even for firms with a fixed-fee or retainer-based environment.

A staff-centric management focus revolves around three key metrics: utilization, realization, and profitability.

Zeroing in on the Numbers

To start, creating standard time periods that transcend the project work (e.g., weeks/months rather than tasks/projects) will provide a clearer picture of billable capacity per employee. Managers can then link capacity back to the time each person actually spends on client work. A picture of employee performance per period, not just per project, starts to emerge.

Because most time-tracking is done by the hour, employee costs should be expressed in terms of $/hour. This calculation is different from allocating payroll costs, and it helps firms spot problems that a simple cost allocation misses. With a uniform cost/hour number, firms will be able to zero in on which stage of their planning process needs mending.

Finally, revenue should be linked back to the hours required to produce it. That final step shows a clear link, at the employee level, between an hour of capacity, an input hour, and a billed hour.

These numeric building blocks help to decipher the numbers that time-entry and accounting systems provide by revealing how much time a team devotes to billable work, and clarify each team’s contribution to the bottom line.

Managing Productivity Instead of Measuring It

Zeroing in on the aforementioned numeric building blocks lets managers focus on improving productivity by reallocating resources.

Budgeting will become more important, and managers will get a clearer understanding of how project interactions affect the bottom line. Of course, any action plan needs to find its way back into a firm’s systems. This way, managers can continue to hone their approach and see its effect—real time—on the company’s staff-centric numbers.

Keeping It Simple

A system that delivers a quick report listing capacity, utilization, realization, and profitability by employee, then by team, helps managers focus on productivity. Systems that force managers to extract information from project plans and invoices hinder that effort. A system that allows managers to drill down from summary to detail is helpful; one that requires two or more paper reports to accomplish the same goal is not.

Because time entry is a service firm’s primary data collection point, the process should be extremely easy. More than 65% of the businesses that use time-tracking software list “incomplete/missing data” within their top three complaints. The temptation to blame employees for these oversights notwithstanding, system complexities (the software and the process) are usually at fault.

Even with incomplete data, a system should still be able to function, tracking detailed budgets on one project and summary budgets on another, tracking “work by activity type” where the company needs it and just “work” where it doesn’t. The system’s screens and reports should recognize missing data and show only what is necessary.

Brian Saunders is a founding partner at Edison’s Attic (www.edisonsattic.com), a firm specializing in software for small professional services firms.

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