Charge rates & Multiples
I’m often asked about how to set staff charge outs.
Here is common question:
“What percentage salary multiple should I use when calculating my staff charge rates?”
Now while charge out rates and multiples of charge rates are a good thing for benchmarking, I don’t believe they should be used for pricing services or measuring business efficiency.
Charge rates are a traditional tool used by compliance firms to determine an end price for a client. These served well in the past, but today’s clients are savvier, with greater expectations about services that are being delivered cheaper and faster. Just think about how Xero has re-educated the market about how long it takes to prepare BAS and financial statements. These advancing technologies lead clients to question why their fees for basic accounting functions are not dropping.
Further, from an accounting firm’s perspective, charge rates and multiples for pricing don’t help you to be more profitable or more accurately measure the efficiency of your people or your firm.
Pros of Charge Out Rates
Understand that I’m not saying don’t use them at all…
Firms should still apply a charge rate to create efficiencies and greater profitability by tracking average hourly rates recoverable.
e.g An estimate of 10 hours at $200 average should encourage Partners to do less on the job and look for ways for the team to do more.
Cons of Charge Out Rates
Charge out rates have a number of limitations for widespread application in today’s firms.
1. Charge Out Rates can mean redundant processes
Redundant process can quickly lead to inefficiencies. I’ll often hear Partners say, “if we are getting a good return per hour, why change?” Operational methodologies change consistently (which affects and over time if these systems aren’t reviewed slowly they become redundant.
2. Charge Out Rates don’t support the Premium Practice Structure
Partners must still free themselves up by delegating tasks. In the Premium Practice model Partners can rely on the system to automatically assign tasks to a specific job role. thus its all about systemising processes rather than delegating tasks. this means true freedom as the team take ownership of getting work out.
3. Charge Out Rates make good people (Partners & Managers) even busier
See the point above.
4. Charge Out Rates don’t encourage accuracy & quality ( let alone value delivered)
This is because the focus is on completion within the estimated time frame instead of delivering desirable results to the client.
5. Charge Out Rates focus on doing the job faster
This means focusing on completing the existing process faster, instead of perhaps exploring more holistic delivery solutions such as technology or new roles.
This Firm increased billings by $500k in 18 months
I worked on changing charge out rates with the very first firm I ever mentored. By focusing on a Premium Practice structure, they increased billings by half a million over the following 18 months.
This was a rural firm of four partners that were compliance dominate. They loved doing the work, dealing with clients and had created a good business that was growing, yet profits were falling.
Several factors contributed to falling profitability:
- automation and IT made it quick to do the work
- clients expected lower fees as they knew their job was based on hourly rates
- clients complained about the fees not coming down despite including several add-ons
By applying a Premium Practice Solution…
The Premium Practice Model is designed to deliver growing profitability by working smarter and leveraging existing resources.
Just some of the things we applied with our rural firm…
- Introduced a menu of services with fixed fees
- Charged add-on services as variations, (they were listed in menu with a transparent price)
- Billed at completion of every job, big or small
The Premium Practice Model increased profit & cashflow
- Increased in billings $1.2m to $1.7m in 18 months
- Halved debtor days within 12 months (Clients had greater appreciation for the service and paid quicker)
- Reduced WIP days (Bills issued immediately instead of quarterly or annually)
Add $500k to your Profit and Cashflow in the next 18 months
Growing your Firm and its profitability should not be a mystery.
I can apply the Premium Practice model to any firm willing to apply the methodology, and unlock the greater profits, by helping you build more effective teams and implement Value Add Services efficiently.
Use the links below to view my availability and book yourself a time to discuss your growth.