Ouch, Look At Those Write-downs!

Virtually every accountant I’ve spoken with in the past six months has told me their write-downs (or write-offs) have increased, both as a percentage of total hours expended on client work and as a percentage of what can be theoretically invoiced if all hours worked were billable. Some of the larger firms adopt “realization rates” that anticipate a given percentage of staff and/or partner hours will be written down or in some other manner go unbilled. From the feedback I’ve received these percentages have grown also.

The reasons for more write-downs can be complex, but the most obvious driver is pressure from disgruntled clients. The partner reviews the invoice, comes to the realization they’d better reduce the total or possibly lose the client (or simply not get paid), and makes a write-down.

In firms with multiple partners/shareholders, peer pressure about write-downs can be onerous. If partner A is able to bill all their work and partner B is writing down 25% of their invoices, then A may be quite upset with B if the profit pool is an equal split or in some other manner the firm’s profit distribution doesn’t penalize write-downs.

Faced with tightening their belts, some firms have found their partners are doing more of their own work and delegating less. Assuming for a moment the partner’s compensation scheme encourages delegation, we find the reason for the partner doing more of the work is because they can do it more quickly than the staffer and thereby avoid write-downs and the subsequent snarky glances and dark mutterings from their fellow partners.

But, what if the staff are on salary and get paid no matter how many hours they work? Now things can get truly messy because the partner’s failure to delegate can become a double whammy. To explain, the partner retaining the work saves preparation time, but the firm is paying the staffer to sit there. If the staffer’s salary is predicated upon a formula that assumes, say, 1500 hours a year at a charge rate of $125, and he or she doesn’t bill an average of 125 hours per month, then they are “upside down.” In other words, they aren’t being fully utilized and yet the firm is paying them as if they are. The net effect is that delegating work to this staffer is, essentially, free. The firm is going to pay her anyway, so shouldn’t they be given the work?

On the other hand, the partner’s time isn’t free. Failure to delegate means first of all the partner is doing work a less expensive resource can accomplish, but even more painful is the partner is not performing work only he or she can do, i.e. providing management input to the firm and finding new and/or additional work to increase the number of available billable hours (which, stating the obvious, will get that staffer busy again).
Because of their status as shareholders/owners, partners are really the only effective business developers. The combination of ownership, status, experience, contacts, etc. uniquely position them for this role. Staffers CAN’T develop meaningful revenue streams.

If your firm is suffering increased write-downs, this blogger’s recommendation is – Delegate everything you can to staffers (it may even be “free” as explained above);
– Accept that the staffer can’t do the work as quickly as the partner;
– Coach/mentor the staffer so they learn and become more efficient in the future, thereby increasing their future value to the firm;
– Dedicate the time you free up to business development and looking at things you can do to reduce costs and make the firm more efficient (in reasonably well-run firms partners should focus less effort on cost containment because the bottom line upside is much less than adding high quality clients);
– Begin with examining your present (solvent) clients and look for more work you can do for them. This is the lowest hanging fruit on the business development tree. And, put your efforts into finding new clients. Various techniques to do so have been addressed many, many times in this blog over the past couple of years. See, for example, the post explaining how to use a highly pointed newsletter to find niche clients (9/15/09), or tips to make your marketing pay off (6/15/09), or even basic approaches to personal marketing (12/3/09);
– Take an aggressive approach … there are great prospects out there no one is even talking with. Many firms are circling the wagons, cutting costs and hunkering down. Don’t fall into that trap. It’s not just the short term benefit new clients bring, there’s also the inertia you can create and maintain that will pay huge business development dividends when the recovery kicks in.