Increasing the profits of your professional service business seems terribly hard. There's this market-share myth that suggests the bigger you are, the more money that goes into partner's pockets. This is only true to a degree. And, sure, with fewer equity partners and more revenues that number will be slightly higher.
But unless you are doing something to completely different with your firm to break out of the pack, the dollars will never be significantly higher. A primary way to break out is to price better. Another way is to BE better. The best way is to be better AND price better.
US income metrics are pretty much the same across the ENTIRE industries of accounting and law.
Unless you are actually selling your firm and slicing up that pie, don't pay too much attention to profit-per-partner metrics because the divisors--the number of partners--are skewed by the equity/non-equity thing and the retired/semi-retired/should-be-retired thing.
Instead of profit-per-partner, let's consider revenue-per-employee. (You can use a full-time equivalent, FTE, number if you like.) In public accounting or law, when you divide gross by employee or net by employee, the numbers are pretty steady whether your firm has 3 employees or 3000.
Average reported sales in accounting firms are $113.8K per employee and average sales in law firms are $162.0K. Most firms fall within $20-30K/employee of these averages which tend to be more impacted by geography than by firm size.
About the only time income/employee is notably higher is in the massive firms who tend to invest better in processes and training and they are more focused on continually teaching their juniors to "do their job."
This holds true whether you look at gross or net revenues because, quite frankly, your costs are pretty much fixed. Just as income/employee averages are consistent from firm to firm, expense/employee averages are, too.
(By the way, what it means when your costs are fixed is that you don't need to bother TRACKING your time to "determine" your costs. You already know them.)
Fun With Numbers - a Digression
Want more operating insights? Divide revenues by number of clients to see the average earned per client. Try looking at this from one sector you serve to another. And then from one "product area" to another. Interesting.
Then divide expenses by number of clients. Look at this by sector and service (product), too. What does this tell you about where you are spending your energy? Is it clear that you should do a lot more of some things and much less of others? Drop a sector or service, perhaps? Or just increase your prices in a certain area or two?
So why do you spend all that money buying time and billing systems, and all that time remembering and entering all those .1 increments again? You already know what it costs, on average, to serve a client or perform a service.
Okay, now back to the program...
Training Investment Correlation with Results
Speaking of training investment, I'll share a startling statistic from the AICPA.
The average investment in continuing education in firms is about .8% of revenues...about the same amount spent on the firm's internet connection!! Something is seriously wrong with this.
While professional service firms invest in about 40-60 hours a year to "maintain" the high level skills needed to do the job of a lawyer or accountant, do you realize that The Container Store invests in 241 hours of training for a first year associate? And 160/year after that?
The average in retail, by the way, is 7 hours per year. The Container Store is breaking out of the pack. Better employees and happier ones = happier, more loyal, and "spendier" customers.
From The Container Store's website:
One of The Container Store's core business philosophies is that one great person equals three good people in terms of business productivity. So, why not hire only great people?
Customer service is The Container Store's core competency, so hiring people who are self-motivated and team-oriented with a passion for customer service is key.
We place so much importance on service that every first-year, full-time salesperson receives about 241 hours of training—in a retail industry where the average is about seven hours. And training continues throughout an employee's career.
Excellent customer service requires a strong dose of both attitude and skill. If skill is a little sub-par, attitude can make up for it. The inverse isn't so true...that's where the "right" person comes in.
Customer Service Pays (oh, and it's the right thing to do)
This post was inspired on reading Gerry Riskin's blog, Amazing Firms Amazing Practices.
In his post, Client Satisfaction May be EXTREMELY Profitable, Gerry picked up on a story about stock prices for strongly service-oriented companies outperforming the Dow Jones, S&P and NASDAQ:
...the authors of a study published in the Journal of Marketing found that companies at the top 20% of the the American Customer Satisfaction Index (ACSI) greatly outperformed the the stock market, generating a 40% return.
From 1996-2003, the portfolio outperformed the Dow Jones Industrial Average by 93%, the S&P 500 by 201%, and NASDAQ by 335%.
This concept and quote comes from an article on the Consumerist (neat site, by the way) called How To Beat The Stock Market: Buy Companies With High Customer Satisfaction Scores.
From the article, cumulative performance is shown here:
To tie all the elements in this post together--service, training and profitability--Gerry's advice is less talk and more action. He writes:
Don’t bother disseminating this information to your people in order to encourage them to focus on enhancing client satisfaction.
Their consequential improved knowledge on the subject will do little. It takes results (client satisfaction) to get results (improved profitability). SKILLS rather than knowledge with be essential to achieve the desired outcome.
It is possible to break out of the pack when it comes to increasing the value and performance of your practice. "Leveraging" people and time is "a" way but it has big limitations (number of people x hours in a day).
Between improved pricing approaches and delivering greater customer experiences, there are several firms busting out of those common profitability metrics. Some trailblazing firms' stories are listed on VeraSage's website and we (VeraSage) are learning about others almost daily.