Measuring and targeting realization percentage is a BAD idea. Here’s why…
The traditional practice model is fundamentally floored for maximum performance.
Most firms are either:
1. “time X rate – write off = Price” (time based billing in arrears) or…
2. “Implied (internal to team) price = dollars budget to team member” or …
3. “Fixed (external to client) price = dollars budget to team member”
Then you measure the realization % of the team members’ work. So if $5,000 was the implied or fixed price and the team member came in at $5,750 you write off $750 or you achieved 87% realization.
You wrote off 13% but it feels better to say you realized 87%. For a $3M firm with 87% realization that means that gross revenue was $3,450,000 and net was $3,000,000. You wrote off $450K. In some locations you can buy a house for that. In all locations you can buy 3 or 4 luxury cars! You destroyed a small house or a garage of luxury cars.
Here’s a bigger problem. Managing price and scope of work in any one of these 3 ways encourages team members NOT to put the time on the clock. My research (around 3,000 accountants surveyed) indicates 15% of work done for a client doesn’t even get to the time recording system. So the team is writing off before you even get a chance to write some off.
And to make it worse some firms even target a write off / realization percentage. That $5,000 job, it’s ok that it was $5,750 because our realization target was 85%…winning!
No, no, no….losing!
At last year’s team meeting …. “team, our realization was 80% last year, this year we’re targeting 85% – go team”.
Targeting for write offs? Why on earth would any firm expect to fail before they start?
The team then think ….“No worries boss. I’ll pad out time sheets, I’ll stop the clock, start the clock, do extra work and not charge for it and make sure the figure is around 85%”.
I kid you not. You used to do this before you were a Partner and now your team does it. It’s not their fault. It’s the way your system is set up.
Then as a management group you say “we need to get the hours up and the realization % up”. It just doesn’t work.
All 3 versions above encourage inefficiencies, slowness, the wrong price, low average hourly rate, job hogging, low profits, too many team members, bad morale, stress and Partners being overworked.
There has to be a better way. There is…
1. Price the job as high as you can based on the value contribution to the client – nothing to do with hours X rate. We have training and courage pills to help you with this BTW.
2. Client signs off on price and scope.
3. Select an arbitrary hours budget for the job.
4. Brainstorm with the team how you can get more efficient with this job. Lock in maximum hours for the job. We have training and systems for this.
5. Measure time under budget (TUB) and average hourly rate (AHR).
6. Calculate AHR as an output number not an input number.
7. Brainstorm at the end how to make it even more efficient next time.
8. Sell the new capacity at a higher margin.
Rinse & Repeat.
Reward and applaud team members for less time on the job – not more.
As a result of this your realization will go from 87% to 100%+ and after a while you will not worry about it any more because it is a moot point.
What you need to obsess over is your AHR steadily climbing.
Every firm we coach eliminates write offs (net) and improves AHR.
It’s your choice. Continue destroying the value of a house / luxury cars or buying houses and luxury cars.
PS. If you want to improve the financial performance of your firm then maybe we can help. If you’re over $1M in revenue, 5 Partners or less, you’re ambitious and you’re coachable then lets meet. Send me a message and we’ll book a zoom.