Does this revenue model sound familiar?
Number of Fee Earners x Available Hours per Fee Earner x Productivity Percentage x Charge Rate x Recovery Rate = Revenue – Direct Labour = Gross Profit
If this is your model, you’re not alone.
The majority of professional service firms focus their revenue model around how many hours the firm has available to charge to clients in any given year.
While it’s the norm, it’s a problematic model. It caps the revenue you can generate and causes your teams daily behaviour to focus on production rather than revenue growth. It stops the leaders of the business getting out there and seriously growing the revenue of the firm.
Squeeze the Orange.
I refer to this hours based revenue model as “Squeezing the Orange”, where a firm tries to improve profitability on efficiency gains and by attempting ad hoc sales and marketing activity.
The problem with this is you can only “Squeeze the Orange” until it runs out of juice.
You can only minimise costs and increase margin to a point, and ad hoc marketing activities will get you nowhere.
Sure, systems improvements produce efficiency gains; however, the greatest gains are only made when the systems improvements are initially implemented.
Any further efficiency gains are minimal after this and any strategies are focused more on maintaining the improved margins.
When Partners and Associates in firms constantly focus their efforts on achieving hours based budgets, they lose sight of the key activities that drive revenue in firms.
But the only way to increase your revenue is by having more hours to sell, right?
Wrong! It means that your factory employs more people and to maintain margin you need to drive more revenue.
So why do anything different?
My challenge for professional service firms is to adopt “business best practice”, which means understanding that an hourly rate revenue model inhibits revenue business growth. The revenue activities that drive revenue growth come from product, marketing, sales and client relationship management activities, not the “factory”.
If you look at any successful business, it has separated the key revenue activities so that it can minimise the impact of variables on its daily/weekly/monthly/quarterly and annual revenue targets. For a business to truly be successful it must adopt the following 5 Dimensional Revenue Strategy:
Product = What you sell
Marketing = How you generate leads
Sales = How you convert leads to sales ($revenue)
Production and Delivery = How you build the product
Client Relationship Management = How you manage your clients’ experience so they buy and buy again
Each activity requires different skills and hinges on each other for revenue to grow. But each activity requires a different strategy so that the action plans are clear.
For a professional service firm to truly be successful the Partners of the business need to ensure that their mind set moves away from the hours based revenue model to one of a product focused and client relationship based model. A product focus doesn’t mean that you commoditise what you do. It merely means that you are clear on the list of services you provide, the value they give to the client and you have a program to improve and grow your service offerings over time. The opportunities that exist within a professional service firm are endless with the right action plans in the right areas focusing on the right activities.
Yes, you still need to have a focus on systems and efficiency and charging hours to clients to generate your revenue, but these strategies and action plans fall under the activity of “Production and Delivery”. The P&D activities can only drive margin, they can’t drive revenue growth. Revenue growth will only come from your Product, Marketing, Sales and Client Relationship Management activities.
To build your revenue model using the 5 Dimensional Revenue Strategy, you need to understand and apply the Revenue Growth Formula which is:
Target Revenue = (current clients+ new clients^) x transaction frequency^ x average sale^ x margin^
Growing revenue is simply a matter of maths. ‘^’ means ‘make it exponential’. Every strategy you implement must work to leverage the activity so that it produces consistent growth.
Any strategies you develop to grow revenue must fall within one of the formula components. If you analyse this further, each of the components relate back to the five revenue strategy activities as follows:
With a “Squeezing the Orange” revenue strategy, if you focus on margin only, you can only squeeze the orange until it runs out of juice. But with a 5 dimensional Revenue Growth Strategy, the growth in revenue can be exponential.
The focus is to develop strategies in each of the growth formula components and then drive the activities to produce the revenue results. In implementing any revenue strategy you must first pick the “low hanging fruit”. Start with your current clients. They already know you, they already trust you. In nearly every instance they will have unmet needs.
You must prioritise your actions that will have the greatest probability of revenue growth so that you do these first. Any strategy must be assessed and categorised according to the following order of priority:
Priority #1: Providing existing products/services to existing clients.
This is the first priority because you already know the product/service and the client already knows you. Make sure you are providing all of your products/services to all of your clients.
Priority #2: Providing new products/services to existing clients.
You already have a relationship with these clients, so their resistance to purchasing new products from you will be less.
Priority #3: Providing new and existing products/services to new clients.
We all agree that it is easier to sell to an existing client than a new client. New clients usually take time to acquire, time to understand their needs and time build trust with you.
The Top 5 Profit Improvement Strategies for professional service firms to drive revenue growth are:
1. Revenue Growth Formula
Decide to shift your mindset from “Squeezing the Orange” to proactively driving the key revenue components that result in revenue growth. Start with your existing clients. Build structure around your products/service offerings, educate your clients on what they need you to do for them, meet with them and identify their needs, sign them up, do their work and manage your relationship with them. Instead of just focusing solely on the number of hours your fee earners recover, focus on your existing clients and develop strategies to increase the number of times they do business with you each time.
2. Define Top 3-5 Product/Service Offerings
Define the top 3-5 products/services provided by your firm, or capable of being provided, to your clients. You will find that there are endless opportunities to provide these products to existing clients that have no bought them from your firm. Don’t tell yourself that the clients don’t want them. You don’t know until you ask them. You need to recognise that your clients are clients of your firm, and for certain products may be better provided by others in the firm, not you. Price these products using a value-based approach, so that clients can see the benefit of employing you to provide them, rather than seeing an hourly rate charged for the service.
3. Marketing and Sales
Develop a marketing strategy to drive an increase in transaction frequency so that your clients are aware of all of your top 3-5 products. The marketing strategy must be designed to educate your clients about all of the services you provide and to drive opportunities from clients for these services.
Separate sales activities from marketing and implement a structured sales process so that opportunities generated are converted to revenue. Usually your Partners and Associates would be responsible for sales.
4. Upsell and Cross Sell
Whenever you are working with your clients, identify opportunities for you to do work with them, or for other departments in your firm. Introduce your clients to other Specialists in your firm. Design a client review checklist around all of your products and services and run through it with your clients. You will be amazed by the opportunities that present themselves.
5. Value what you do
Don’t be cheap! Your skills, knowledge, experience and personal intellectual capital demand that you charge an appropriate price for your work and the solutions you provide to your clients. Be proud and charge appropriately, you are worth it.
If you implement these 5 key strategies by focusing on providing your existing products and services to existing clients, and ensuring that your revenue strategy is built using the Revenue Growth Formula, your revenue will grow in a structured and sustainable way.
top 5 cash flow improvement strategies for professional service firms
Partners focused on doing ‘the work’ often take their eye off the lifeblood of their business; cash flow.
Without cash flow, the firm struggle to pay debts and pay you, the owner. Managing cash flow and driving cash flow improvement is just as vital to a law firm as a clear revenue strategy. You cannot afford to ignore cash flow management.
The Cash Gap
There is a difference between profit and cash. Take a look at the following diagram.
In this example, the time between the client agreeing to the engagement and receiving the cash is 105 days. However, the final profit is recorded 60 days after the engagement. You have 60 days of expenses which the majority are not on credit.
The fundamental focus of any profit and cash flow plan is to ensure that the time between receiving the cash and signing the costs agreement is kept to a minimum. You might think this is impossible but there are plenty of businesses that do it.
Think about the following. If you build a house, does the builder require a deposit when you sign the contract? When you buy a new pair of shoes do you have to pay for them before you leave the shop? If you go on a holiday, do you have to purchase your plane tickets before you get on the plane? Most successful businesses bring this gap between sale and cash receipt back to the bare minimum, and doing so means improved cash flow. This is called the cash gap (the time between signing the costs agreement and cash receipt).
The cash flow improvement formula for a healthy business should:
- Drive WIP down;
- Drive debtors down; and
- Maintain creditors at terms.
So that surplus cash exists to:
- Make asset purchases;
- Pay debts; and
- Pay dividends and drawings to Partners.
Managing cash flow by focusing your strategies on these areas will give you confidence in the business decisions you make.
The Top 5 Cash flow Strategies for your professional services firm to drive cash flow growth are:
1. Plain English Cover Letter
You need to make sure your clients fully and completely understand the terms of doing business with you. Your cost agreement is a legal document that is required under the Legal Practitioners Act. To drive cash flow improvement, you must make sure that your clients are clear on the following:
1. An estimate of what you will fee them;
2. The timing of billing; and
3. The payment terms and methods.
By signing off on this, your client effectively gives you permission to follow it in terms of your cash flow procedure. The more they understand, the greater your cash flow will improve. This is the first step to reducing the cash gap.
2. Initial Fee at Signing
You should bill your clients at least one third to 50% of your estimate at the time of signing the agreement. This doesn’t mean that they have to pay you before you start, or put the money in the trust account, it just means your terms of engagement are that you will bill an amount at the start. It will be payable by the client on the normal payment terms as stipulated in your costs agreement. This is the 2nd step in reducing the cash gap.
3. Deposit Cash into Trust Account
You will only be entitled to bank cash received into your general account if you have done the work. So when you receive your client money, deposit it into your trust account and move to step 4.
4. Minimum Weekly Trust Account Withdrawal
Now that you have the cash in the trust account, review the WIP balances at least weekly to determine the extent of your cash withdrawals to your general account.
5. Minimum Weekly Debtor Follow Up
Be ruthless about following up your outstanding debtors. The client has agreed to your terms in the cost agreement so hold them accountable to follow your payment rules.
By using the example above, if you bill your clients 50% at the commencement and the balance on completion and assuming they pay on 30 days the cash gap would reduce from 105 days to:
– the first 50% to 30 days
– the last 50% to 90 days
Think about the cash flow improvement in total dollars for your firm.
To review your current profit and cash flow strategies and determine what is possible in terms of growth from your firm, call Matt Schlyder on 07 3833 3999.