It’s Not The Hours You Put In, It’s What You Put In The Hours

Last issue I wrote about the fictitious accounting firm of Brown & Jones, and the effect that poor WIP management has on cash flow. We compared and contrasted the performance of the two partners, Phil and Ian.

Let’s revisit this firm and discuss how profits are divided up between the two partners, as I want to see if you think their present arrangement is equitable or not.

At present they simply divide profits equally.

Let’s look at some of their statistics pulled from their time and billing system.

Hours Worked, Billed & Recovered…

Phil - Chargeable hours logged, 1,600 - Admin hours for the firm, 300 - Other non-chargeable hours, 400
Total hours devoted to the firm, 2,300

Ian - Chargeable hours logged, 1,575 - Admin hours for the firm, 275 - Other non-chargeable hours, 100
Total hours devoted to the firm, 1,950

At first blush, it looks like Phil is working a little harder in the firm – 450 hours more, in fact, than Ian.

So, is it fair that Phil gets the same income as Ian, even though he puts 8.6 hours per week more into the running of the practice?
Well, we will need to dig a little further to find out, won’t we?

Phil - Chargeable hours logged, 1,600 - Hours Billed & Recovered, 1,263 - Billings Generated, $267,000 - Average Recovery Per Hour, $211.40

Ian - Chargeable hours logged, 1,575 - Hours Billed & Recovered, 1,424 - Billings Generated, $403,000 –
Average Recovery Per Hour, $283.00

Now we can see that Ian makes more per hour for the firm, and has more recoverable hours than his partner, Phil. But what if Phil’s non-chargeable activities are largely due to him managing the firm?

Maybe there needs to be some element of ‘chargeable, non-chargeable’ activities to give Phil credit for the management of the firm. But hey, wait a minute – they’re pretty equal in this regard – Phil spends 300 admin hours a year on practice matters and Ian spends 275.

So it looks like it simply boils down to efficiencies here. For sure, Ian is more productive, has a higher recovery rate, manages his WIP far more efficiently (as you’ll see from the last issue) and generates more cash for the firm.

And, indeed, when we look at the respective individual’s efficiencies, there’s a telling story here too!

Phil - 54.91% of all time recoverable
Ian - 73.02% of all time recoverable

Upon closer inspection and some blunt questioning, it turns out that Phil logs the time he spends at Rotary as ‘Other non-chargeable hours’, a total of 183 hours in the year in question, which just happened to be the year he was President of the local chapter.

Ah-ha! Three and a half hours per week, on average over the year, logged as ‘marketing’, which was his time spent on Rotary affairs. Now we’re getting somewhere.

It seemed a little odd to Ian that there would be such a gap in the total time dedicated to the firm between them, as they both tend to spend a similar amount of time in the office.

Of the remaining 217 hours of Phil’s non-chargeable time, 89 hours were dedicated to Board of Trade meetings he attended on behalf of the firm. These were, mostly, evening meetings and semi-social events and seminars, but in Phil’s mind, it’s all ‘marketing’.

Ian, on the other hand is treasurer of the Big Brother, Big Sister chapter in their city, but he doesn’t log the time he devotes to that cause in the firm’s time and billing system.

So, we have a discrepancy distorting the numbers as one partner applies one set of rules to recording his activities where the other has a different set of rules.

We clearly need some convergence here.

These are somewhat trivial issues tough, when you take in the big picture.

Ian works 161 more recovered hours a year than Phil, and achieves $71.60 per hour greater income than his partner.

The bottom line is that Ian collects $133,000 more in cash than Phil, or bills $136,000 more than Phil and he’d be right to raise these issues at a partner meeting.

Ian doesn’t even bother to enter the time he spends with team members, coaching them during the year and upgrading their individual and collective skill sets, which allows him to delegate more work down to them, helping him become even more efficient.

Phil, on the other hand, doesn’t do much of that, as he likes to finish off files himself, and so, there we are again, at the root of the problem at the beginning of last issue’s article.

Whatever will these two do to change Phil’s ways?

Next time out we’ll find out.