Promoting a Profitable Climate by
Michele Fellows
As published in the
November 2011 CIPA journal page 687.
All
businesses, no matter how well run, benefit from periodic review of
their
performance.
It is the business that
stops seeking to improve that ultimately begins to fail. Similarly, it’s not a
case of change for its
own sake… a bit of balance is required to ensure any and all changes are
followed through with and embedded within the organisation before
embarking on
the next great adventure.
Fail to do
that and soon employees lose interest or simply become confused by what
they
should and shouldn’t be focussing on.
Ask
anyone “why are you in business?” and you’ll most likely find the answer
is “to
make money”.
Clearly an IP firm is not a
charity, even if some are started with a greater purpose at heart, and
the
financial health and performance of the company is often the best place
to
start when conducting a business review.
Once a clear understanding of the financial state of the
business is
achieved it is far easier to take the correct decisions to rectify poor
performance
or build upon success.
There are a
number of areas to consider – liquidity, leverage and, of course,
profitability.
This article is focussed
on the latter.
Profitability
As
the income generated by a firm will have the most impact on
profitability, it
is imperative that a detailed understanding of the margins by
client/sector/service is achieved. Very few
businesses have this information to hand and yet, without this
knowledge, have limited
themselves.
In this situation knowing
where to price services, or even which services should continue to be
offered, is
almost impossible. A lack of insight
into the profit drivers often results in Partners becoming too focussed
on how
busy employees are rather than the more important benchmark of how
profitable
they are.
Taking
the time to complete (and maintain) a detailed analysis may indicate
that you
have certain profitable revenue streams that you should not only
continue to
offer but should actively pursue new clients for. Or, it may highlight
an area that is a loss
maker – where you are in effect paying the client to perform the
work. This
is where a firm may need to choose
between offering a bespoke “value added” service that clients pay a
premium for
or going down the volume route. Don’t
get me wrong, non-profitable business is not always a bad thing,
sometimes it
can work for you.
For example, you could
use it as a loss leader to draw in new clients and win new, more
profitable
business from them in addition to the loss making service. Or offer it as part
of a package deal – certain
services at a reduced cost if a particular threshold of work is
completed in
other areas.
The principle is for well
informed decisions to be taken, rather than a haphazard “hope we’ve
covered our
bases” approach.
Cultural
Change
The
biggest obstacle to overcome on this path to increased profitability is
likely
to be one of cultural change. As so few
businesses maintain accurate records of hours worked on each client, the
first
step is to introduce a culture of time keeping.
This is essential as man hours will be the single highest
cost in
determining the profit on work completed.
For some this will mean purchasing an appropriate software
programme and
for others it will simply mean actually using the software they
purchased some
time ago.
However, before any of this
can take place, the Partners first have to be convinced that the
gathering of
the data is an exercise worth investing time and money in. Whilst most
will
agree that the data would be useful they are often doubtful that
benefits
generated from the analysis of the data will outweigh the investment in
obtaining it.
In this case they will –
unequivocally. Secondly, once on board with the concept of data
collection it
now needs to be “sold” to the entire company so that all employees are
accurately
recording time spent on projects. For
many companies this sea change will be pivotal to their
success.
Boosting
the Bottom Line
There are
really only
two ways to improve one’s profitability:
Bring more
in:
·
Acquire new clients –
granted, not as easy as it sounds.
·
Increase
hours billed –
often a hard sell to employees who already feel overworked (although
analysis
will weed out those who have room to improve).
·
Increase
billing rates
– this can be done in small increments so isn’t that noticeable but you
still
need to ask if the market can bear this and does it fit with your
service
offering.
·
Collect more of the
monies invoiced – appoint someone to follow up on unpaid invoices, a
credit
controller, and/or ask for more money upfront (you’re probably more
intimidated
by the latter than the client will be, so go on – give it a try).
Or
Decrease
your costs:
·
Implement systems that improve efficiency – such as
using
software to track hours worked and costs incurred on a project that in
turn
allows for complete accurate and often automatic billing of the client,
thereby
reducing your costs and improving your margins.
·
Change suppliers or renegotiate
contracts at lower rates –
clients rarely have an issue asking you, their supplier, for a discount,
so why
not do the same of your suppliers? A
great place to earn a quick win is by reducing the costs of your Forex
transactions.
·
Review
usage and eliminate waste (including personnel, if
necessary) – a company’s needs change with time and so should the way
you use
your facilities and staff.
Yes
profits increase
when costs are reduced, but that well will soon run dry and without a
doubt
there are greater gains to be made by looking to increasing
revenues. In
addition to this, the implications of any
decisions designed to reduce costs must be considered. For example,
cutting
support staff may simply mean that fee earners ultimately bill less as
they are
left to cope with the additional workload.
Likewise, the apparent rewards reaped by focussing on small
issues like
cutting stationery usage may be more than outweighed by the time taken
to
monitor this as well as reduced staff morale.
Terri
Olson, the former Director of the Law Practice Management Program wrote
an
article entitled “A primer on Analyzing Law Firm Profitability”
(originally
published in the Georgia Bar Journal, October 1996, Vol. 2, No. 2, p.
54 but
which can be found online here).
She
provides a handy little formula and a few ideas on how to increase
profitability if you want to take a look.
Now I in no way believe that a Patent Firm is the same as a
Law Firm
(and by the same token that the European Market is the same as the US
Market)
so no knicker-twisting required,
however there are a
number of parallels that can be drawn and with a few tweaks of the
numbers (and
spelling) you could find yourself in a far better position of power.
In
summary
Ensure
you have a good understanding of your business finances and determine
your
commercial strategy by adopting some of the
following:
- Analyse
your
pricing structure – which revenue streams are more profitable,
should you
use fixed price contracts or hourly billing,
etc. - Assess
profitability/viability of new projects and/or establish pricing
points. - Ascertain
the
break-even point on personnel – helping to establish new areas of
training
required and more effective deployment of staff.
- Identify
potential
operational cost savings – Forex, Bad
debt. - Implement
effective accounting controls thereby improving cost management and
reducing the potential for fraud. - Review the
financial health of the business – profitability, return on
investment,
financing, gearing etc. and determine ways to improve these
indicators. - Establish
trigger
points for new hires, enabling seamless, cost effective expansion –
when
there is sufficient anticipated revenue to warrant the expense,
before the
workload is overwhelming. - Perform a complete
overview of the business to enable the identification of key
priorities,
such as commercial strategy and operational efficiency including
marketing,
brand image, staffing, morale and cost control.
Michele
Fellows is a qualified Chartered Management Accountant with over 15
years’
experience.
Currently she is a Director
at Fellows and Associates Ltd heading up the Consulting division.
Contact:
[email protected]