One area I had a large amount of input into when I was at Maxim/CPASS was the addition of cost rates to the recording of work in progress and the addition of the Budget tab as an optional screen in the Cases program. The goal was to provide a first cut at facilities to assist with putting more financial rigour into the management of clients and their matters.
The traditional financial measurement of the value of client to the firm is nett billings (ie. after recovering disbursements). While this is important information my interest was in understanding what level of gross margin or profit that the client was delivering.
As an example, a large corporate client with a high level of billings may also require a lot of (non-chargeable) attention to meet their particular needs and demand a level of discounting, just because they can! The net result of this could be that the profit contribution from that client could be significantly lower then expected and the effort doing the work for that client may earn a higher return elsewhere. Equally, small local clients are can seen as lucrative by the person that has built a strong relationship with them but what is the actual profit position? If it is not adequate then should we be servicing them? Then, who are the clients that are contributing the most profit to our business because these are the ones that we want to protect and nurture.
The two important pieces of financial information to measure this are gross margin and gross margin %. Gross Margin is the raw profit contributed by the client. Let's say fees are $1,000 and the cost of delivery is $600 then the Gross Margin is $400. The Gross Margin % is $400 over $1,000 or 40%. While gross margin is a direct amount and therefore can be easily understood the Gross Margin % is a ratio that is a measure of return on investment and, in some ways, an assessment of risk with the customer.
Now I am not saying that total billings isn't useful information as the volume of work provided is an important factor in understanding the totality of a client relationship. Equally, dominating market share in a particular segment may require retaining some less profitable customers.
In my view, however, the key driver for marketing and customer service strategy should be client profitability. We should be investing our money in the areas of the business that have the greatest likelihood of return. Without assessing this, obviously alongside other relevant information, we don't ensure that we have fully understood our offering to the market place.
So how does the system help? Firstly, there is the ability to set up cost rates for work in progress items in a similar way as you can set up charge out rates for time. When this is done the cost of the work or expense is calculated and recorded on the WIP item along with the charge for the item. If the charge is written off or down the cost remains regardless of how it is billed to the customer.
For time, costs rates are an hourly rate, similar to charge out rates. Say, the cost rate for a particular staff classification is $100 per hour and the charge out rate applicable for the work is $400 per hour. When 30 minutes of time is recorded in the timesheet program, a cost of $50 and a charge of $200 will be written to the work history table allowing the calculation of the gross margin for the item at $150 ($200 minus $50).
For disbursements, cost rates are a percentage of the disbursement amount. For examples, associates invoices, courier charges and the like would be defined as having a cost of 100% of the disbursement (because that is the true direct cost). Recoverables such as photocopying and fax charges, on the other hard, may be defined as having a cost of 50% of the disbursement because there is no directly related invoice and the firm has decided that this is the notional cost that is to be assigned to these type of expenses.
Following on the above example, an associates invoice of $1,000 would be recorded with a cost of $1,000 and hence have no contribution to gross margin and a sundries charge of $20 would have an associated cost of $10 giving a $10 contribution to the gross margin.
The system also provides for 2 cost rates, surprisingly enough called Cost Rate 1 and Cost Rate 2. The intention here was to allow calculation of gross margin under two different scenarios. For example cost rate 1 could be used for the direct cost of the time, a rate directly related to the staff salary or a blended salary for a staff classification. Cost rate 2 could then be be used to add on an some percentage of on costs to cover any taxes, insurance or superannuation/pension that are directly related to employment. Alternatively this rate could include all of that plus some notional portion of overhead (accommodation, admin support) as per the firm's accounting policies.
A little thought needs to be put into this as the raw information will read differently depending upon the approach taken but in the end the key thing is the relativity between the figures for different clients. Therefore it is not something you want to change once you have started the process of recording information.
In terms of the standard system, the only place the information is aggregated is on the Budget tab for the case. This calculates the net fees and the total cost to provide a gross margin for the case. The next step was to provide reports aggregating costs & fees and calculating margins for clients overall but we never got around to doing it because we got so little feedback on what was provided. I suspect no user has ever implemented this aspect of the system.
The other work that was done at the same was the ability to record a budget (and a revised budget) against a case and there is a simplistic little tool that helps you do this eg. enter a staff member or staff class and a number of hours plus disbursements and it calculates the total budget. When the budget is created it also records budgeted costs, if set up, and budgeted gross margin are compared against actual for the case as well as showing budget used.
The tab also summarises billing for the case by fees, disbursements etc.. and provides a list of all bills raised for case. These can then be displayed our re-printed. From memory there is also a site option to allow a warning to be displayed if the fees for the case go over budget and we (naively) provided a web part that displays the actual versus budget on Client WorkBench. I suspect no one will ever implement that bit!!
Of course, what is really needed to make the feature useful is some reporting. The ability to measure profitability by client, type of client, industry segment, technology specialisation, etc... allow key information to be available for strategic decision making. While there are no reports provided with the system they could easily be constructed. The beauty of the database is that all the information is collected in an elegant, normalised and generally easily understood manner.
The key is unlocking this rich information source.
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