What Is Your Economic Value For Your Firm?
Professional services firms – such as law, consulting, and financial advisory firms -- seek to hire and retain people who can add value to the organization in a variety of ways. For example, these organizations look for professionals who can provide expertise in a valued area of client demand for services, draw recognition and accolades that enhance the firm’s reputation, and contribute to and help build the firm’s culture.
But the most important variable that professional services firms look at is the economic picture that a professional presents, and how that picture fits within the firm’s broader financial goals and benchmarks. Professional services firms are based on a model where a professional is assessed - and retained or let go - largely depending on whether the revenue the firm receives and books from that professional exceeds substantially the costs incurred by and attributable to that professional. To know how you are being assessed under this model, it’s critical that you understand the financial measures that your firm uses.
Understand what your firm expects of you financially
If you aren’t sure about what the metrics are that your firm uses to evaluate what financial benefit you are contributing, you need to get familiar with them. Many junior professionals do not have an understanding of these financial issues, and assume that more senior personnel – partners, managing directors and principals – are responsible for addressing and managing them for more junior colleagues. Often the firm has never even outlined to junior fee earners what the economics of the organization require of them individually. For those seeking to be elevated or promoted within their firm, it can come as a surprise when, despite all the good work they are doing, the firm is concerned about the financial proposition that the professional presents. And even some senior personnel, including those looked to for their potential to bring in business and originate the bulk of the firm’s revenue, don’t understand or seek to understand the financial economics of their professional services firms.
Those financial expectations are connected directly to how you are evaluated
A lack of understanding of economic targets can be fatal when firms evaluate whether it is time to exit a professional based on the level of their financial contributions. Firms make constant calibrations throughout the year to evaluate what the organization’s financial picture looks like. Thus, the emails and phone calls professionals receive to inquire as to when clients will make payments on receivables, to point out how the professional’s billable hours are tracking, to solicit information about major pitches and wins, and to ask what the professional’s expected client revenue is for the next quarter are not just friendly inquiries. The firm is looking for information about what the person is bringing to the table in terms of both revenue and cost, and will be using that information to analyze where they stand. Failure to be aware of these measurements, respond to them, and work to meet the firm’s financial expectations can result in a professional being told of a disappointing, and potentially surprising, decision about their future with the firm.
Seek out resources that can help you better understand what you should be focused on financially
To begin analyzing where you fit into your firm’s financial expectations, start conversations with your firm’s management, practice leaders, finance officers, and office managing partners to find out what the firm’s economic targets for you look like. These are people who receive regular reports giving them updates on the firm’s financial picture, as well as breakdowns showing the financial situation for each individual fee earner. Most of them can and want to help you determine what you should know so you can try to address any shortfalls in your financial performance. It’s expensive to onboard and hire people at any level in professional services, and it’s in the firm’s interest, therefore, to help them succeed from a financial perspective.
Develop questions that you should be asking yourself and others about your performance
These are some questions that you might use to start assessing how you are valuable economically to your firm:
Year over year, do you maintain annual billable hours that meet your firm’s minimum goals?
Is the quality and efficiency of your work such that clients want to work with you and are willing to pay you and the firm well for that time?
Are you someone that clients will pay to work for them without having substantial amounts of your billables discounted or written off?
Are you doing work for clients that the firm wants to secure or retain? Is the quality and visibility of your work helping to expand and grow the firm’s relationship with those clients beyond the firm’s existing work?
Is your work being billed and paid such that you are achieving the rate of realization that your firm targets? Is this the case both for work where you are billing by the hour and where you are billing under alternative fee arrangements?
Is there enough work to keep you in demand on a full-time basis and how long will that work flow continue? Are there events which might alter the demand for your services?
If you are fairly senior but not a partner, managing director or principal of the firm, how do you compete favorably for work against those more senior people, especially if your billing rate is almost as high as theirs? Similarly, how does the value of your work compare favorably against that of someone more junior who can bill at a lower rate?
Do you bring expertise that is needed by clients, and is that demand reflected in the size of the revenue you generate for the firm? For example, you may be a subject matter expert in a certain discrete area, and clients may be looking for someone with that knowledge, but the economics of most firms require that demand and billing rates for your work be substantial even if your practice area is specialized.
In addition, if you are a partner, managing director or principal of the firm, you should be clear on a few more points:
Do you originate business for your firm, and do you do so at the level that the firm expects and needs in order to be able to meet its own revenue and budgetary goals?
Are you consistently generating enough work to engage more junior people in the firm on a sustained basis, and is that work being done at the rate of realization required?
Are you managing junior personnel effectively and efficiently, such that their time and billable rate are justified both to the firm and to the client?
Do you generate revenue attributable to you that is sufficient not just to cover your compensation but also a portion of the firm’s costs (including but not limited to the salaries of more junior professionals, real estate, utilities, taxes, marketing, business development, recruiting and training, malpractice insurance, debt service, IT and research support, and travel)?
Are you able to adapt your practice and your team to new market realities, such as the requirement for outsourcing of some work to contract personnel, billing rate pressures, and changes in client demand due to economic downturns?
Do your clients view you as one of the primary reasons that they engage your firm? Would your departure from the firm result in a loss of those clients’ business?
These questions are a just starting point. Every firm is different, and the expectations within practices and teams can vary as well. There may be other areas for inquiry, and specific measures unique to your firm, as well as online, internal firm tools that you can use to track your financial metrics on a daily or weekly basis. Leveraging those can be significant in helping you analyze what your firm is looking at financially and how you meet the benchmarks against which you are measured. It will also better prepare you for conversations about what your economic value is worth to your firm.