Lastly, identify your time costs by client or at least by client segment. The best way to get the most precise data is to have the individuals whose time was not included in the support staff allocation track their time to see which clients are requiring the most of this resource. However, this is not a popular option for most advisory firms, so I will suggest a method that is less precise but perhaps less painful. If you have segmented your clients (A, B, C), define the time required for each level of staff for the desired client experience you want to deliver to the typical A, B and C client. Such a strategy might look something like Figure 4.

Then assess the cost (to the organization) of the individual(s) providing this client service. I am not suggesting you need to charge clients hourly, but I am suggesting you need to know what an hour of every employee's time is costing you so you can assess the cost of delivery to clients.

For simplicity's sake, let's assume we have one employee (if you have more than one, you would just repeat this exercise for each). (See Figure 5.)

So to "break even" on the cost of this employee, we need him to generate \$375,000 in revenue from client-facing activities. This employee is not going to spend every working hour with clients, of course. Let's assume he spends 2,400 total hours working during the year. He is going to spend 200 hours on vacation, 60 hours in continuing education and 60 hours on paid holidays, which means he is in the office 2,080 hours in a year. Of that, he might spend 280 hours developing business, 300 hours training and developing staff and 300 hours on other firm/management responsibilities, which leaves 1,200 hours for client work. This tells us how much revenue we need to make for every hour this individual spends with clients:

Example:
Target Revenue (see above) = \$375,000
Number of Client-Facing Hours (see above) = 1,200
Hourly Cost: \$375,000/1,200 = \$313/hour

Again, this is not a rate that needs to be charged directly to clients, it is just an amount that needs to be captured in the fee you are charging. If we combine this with Figure 6 that describes how many hours will be spent with a typical client in each segment, we can see what the time cost is for the typical client in each segment. (This assumes that we only have this one employee. If you have more, you would look at the proactive and reactive time for each segment at the different hourly costs of the individuals involved.)

Now, to get a sense of the total cost per client in each segment, we take the sum of the fixed, variable and time costs we calculated for each segment. (See Figure 7.)

This tells us the total cost-the minimum fee-per typical client in a given segment. The minimum fee would, of course, increase or decrease for specific clients if they require more time or variable cost than the typical client in that segment.

For most firms that struggle with profitability, the key to their struggle is in their pricing. To truly understand where their pricing should be, most firms need to get a better handle on 1) the market; 2) the value they deliver; and 3) the cost of delivery. If you understand your economics, you can set prices at appropriate levels. Then you can convey to clients a clear message about what is being delivered, the value of what is being delivered and how that is reflected in the pricing of your services.

Rebecca Pomering is a principal of Moss Adams LLP and practice leader for Moss Adams Business Consulting.  She consults with financial advisory practices on matters related to strategy, compensation, organizational design and financial management.

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