Forecasting Utility

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Time is money as the saying goes. This is particularly true in professional services firms, where the acquisition and distribution of knowledge is the name of the game. Understanding utility and how to maximise it, helps increase productivity and lends important context to many a wayward project.

So how do we calculate the forecast value?

How many working days in the year?

  • 365 days per year
  • 52 weekends, so 104 days lost
  • 25 days paid leave (variable for each firm and potentially each role)
  • 8 statutory days leave
  • 3 days off sick (assumed average across firm)
  • Leaves 225 days

Typical billable hours per day: –

  1. 14 for a very aggressive firm (x 225 = 3,150 hours pa)
  2. 8 for a commercial practice (x 225 = 1,800 hours pa)
  3. 4 for a realistic firm (x 225 = 900 hours pa)

It’s worth considering the amount of time any individual actually gets to focus on a given task in isolation. When one looks at the practical experience of many firms, useful insights are invariably gained from the ‘irrecoverable work in progress report’.

Typical chargeable rates: –

  1. c.£750 per hour for a senior role in a major firm (think big 4 in almost any discipline as most professional service markets are oligopolies)
  2. c.£350 per hour for a more junior role in a large firm or a senior individual in a mid-size firm
  3. c.£160 per hour for the owner of a small practice and many associates and paras in any firm
  4. c.£100 per hour or less for admin

Points to consider

  1. Why are you working this out? If it’s for revenue forecasting purposes, take care as there is a big difference between ‘headline’ rates and what you can actually end up charging.
  2. Where fixed costs shift – understanding utility really helps with capacity planning and when done correctly it will help you avoid the trap of projecting 10% more revenue and the same profit margin as last year (capacity constraints will lead you to hire at some point).
  3. Transactions vs Relationships – charging a full price for a transaction is generally deemed acceptable, however longer term relationship-based arrangements often call for reduced fees and a range of success measures.
  4. Other forms of income – this may not be the only way you earn revenue from a client and other forms of income may need to be considered when determining hourly rates.

One final thought – calculating ‘actual utility’ (so you can measure budget – actual – variance and then investigate the variance)  requires some degree of time measurement. This can be done by forcing all your people to record and account for every hour of the day, or it can be done through sample recording, which generally goes down better with the team 😉

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