For timesheeting firms, the most common or standard KPIs are often known, but not fully understood or tracked with any consistency. Many firms know they “should” track the productivity and recoverability of their firm or staff, but don’t understand the role it plays in understanding the actual profitability of various jobs or clients. In this article, I’ll explain how we define some common KPIs in Xero Practice Manager (XPM), and how to make sure the figures are accurate and meaningful.
The KPIs I’ll cover in this article are defined as follows:
• Productivity is the percentage of a worker’s available time or capacity, which was spent on billable work (time posted as billable divided by actual capacity). Use the Productivity Dashboard on the All Reports page to monitor this KPI. Be wary of monitoring Productivity as the sole KPI for managing staff performance! Your staff will stack their timesheets with billable time that will probably not all be recoverable.
• Recoverability is the comparison of the invoiced value of billable time (“Invoiced Amount” field in XPM Reports), to the calculated WIP ledger value of billable time (“Billable Amount”); this can be shown as a dollar value of the difference, which is the write-on/off, or it can be shown as a percentage: invoiced amount divided by billable amount. (When we invoice the exact WIP value, recoverability is 100% and the write-on is $0.) Use the #Staff Write-Ons by Job report on the Samples tab of the Report Builder, and adjust as necessary to show Recoverability by Job Manager, Recoverability by Job Category, Recoverability by Client or Client Group, or Recoverability by Partner, as some examples of ways you can view this information.
• Closing WIP balance is the WIP value of billable but unbilled time at the end of a period after invoicing has been done. Use the WIP Dashboard and the As At date combined with Filters to monitor this KPI. This third crucial KPI will be covered in detail in part two of this article.
What is WIP?
If you’re a timesheeting firm, you’ve most likely calculated some charge-out rates for your staff. XPM will use these rates (provided that your practice settings are configured in a particular way: see image below) and the amount of time entered to calculate an estimate of what you can bill. This is called Work in Progress or WIP value. In the truest sense, WIP is the value of unbilled time & costs that we are expecting to invoice in the future. When we have WIP which is then invoiced, we can compare the WIP value (for a job, or a staff member, or a business division) to the invoiced value, and the difference is the write-on or write-off.
If you’re tracking write-ons and write-offs, the assumption is that it’s giving you an indication of the profitability of jobs or staff members or clients. If we have no write-offs in a period, we think that’s a good sign… but is it?
The answer is it can be, but we need to make sure TWO important details are right, before we can confidently land on that conclusion.
1) Calculating Charge-out rates
If you want to use write-ons and write-offs (also known as “recoverability”) as an indication of profitability, correctly calculating the charge-out rates of each staff member is crucial. To illustrate this concept: imagine a full time staff member who is paid $100K per year, whose charge-out rate is $50/hour. Even if we recover all of the WIP of this staff member, we wouldn’t be receiving enough income to pay the staff member’s salary, let alone cover overheads or any profit. We need to make sure that the calculated WIP value means we can pay the staff member, pay our overheads, and make some profit!
There are many models used to calculate charge-out rates. One common model uses a three-times multiplier of the staff cost, to arrive at the charge-out rate for each staff member. Whatever model you use, it’s wise to make sure that your predicted revenue based on capacity can adequately cover your overheads and provide some profit - I don’t need to lecture accountants on the importance of a budget forecast for your business.
The Productivity Dashboard in XPM can be a useful tool when preparing your budget forecast. After you’ve entered your staff charge-out rates and configured the Capacity Settings page, you can enter any date range (including future periods - which can take into account approved scheduled leave), and use the third column to predict the dollar value of potential revenue from each staff member, taking into account their productivity target that you have set on the Capacity Settings page.
2) Stop Carrying Forward Time!
Now that we have our WIP calculating correctly, we know what we need to be invoicing in orderto cover our staff costs and overheads in our budget. But for many firms, we look at the WIP figure for a client and we suspect the client will not be willing to pay that amount for the services they’ve received! So, we pull some of the timesheets onto our invoice, that roughly equate to the value we think we can charge, and we carry forward the rest. If your invoicing process includes carrying forward some of the time posted, with the hope that we might recover it down the track, this means your write-on/off figure does not indicate profitability.
It can be very difficult for the firm Partners to write off WIP, because they generally have already paid the staff member for that time, and they’re hanging on to a whisper of hope that the dollars may be recovered in future. If this is you, consider a few key ideas:
• Shifting to Value Pricing - The shift from time-based billing in arrears, to value-based pricing, means that when you write off WIP, you will have the information at hand next year to offer a more appropriate price. You’ll also be creating an efficiency driver in your firm: If the fee is fixed, and staff are rewarded for reducing the time spent on the job, they’ll seek out ways to become more efficient, and individual jobs will become more profitable. In the time based billing model, only the client wins when the firm becomes more efficient.
• Information is Not Lost - You’re never losing the information about what time was spent, when you write off WIP. In fact, quite the opposite: we’re gaining information via our KPIs, which can help us make important business decisions! Which of your clients are not worth your efforts? Which service lines are not profitable? Which staff members are not working as efficiently as they could? And the opposite of those statements - which service lines should you put your energy into? Which staff members could be rewarded? Your recoverability reports will give you this information, if you have the right invoicing procedure in place.
In XPM, this means: do not click into individual tasks and select “Future” on certain timesheets, unless that time is part of a separate piece of work that you’re expecting to invoice soon. In that case, move the time to a job set up for that particular piece of work. If you can’t actually bill some of the time spent on this piece of work, write it off. XPM helps you make this shift, because it’s actually impossible to carry forward a portion of a timesheet.
The third and crucial part of the complete picture is your closing WIP balance. We’ll explore why it’s so crucial, how to split your WIP into meaningful segments, and how to monitor their closing balance, in Part Two of this article.