Are your fee rates too low to build equity value?

Graphs croppedOver the past few years we have seen far too many firms working very hard at full utilisation but struggling to build any real equity value. Why is this? It’s not because they’re failing to grow. Often revenue growth looks good but profit margins are in single digits or even worse. A quick analysis of their financials almost always shows the same root cause. Gross Margin (GM) i.e. the difference between what you charge a client and what you pay consultants, is way too low.

For a firm to have intrinsic equity value, not only does it need to produce a good net profit, year on year, but also it needs to be able to grow that profit in absolute terms each year.

For example, if your GM is less than 50%, it is unlikely that you will be creating the funds for growth at the same time as delivering a net margin that will drive equity value.

Fortunately we don’t have to look too far for the symptoms. Take a look at your ‘blended fee rate’. This is the weighted average, taking into account the quantity of different skills at different rates, that you charge your clients.

In today’s market, if your firm’s blended rate is less than £750 then you are in the ‘busy fool’ trap. There are always exceptions to this rule of course depending on the type of work you are doing and the type of client. We all know that SME’s and local government don’t pay good rates. But in most cases, a good test of whether you are charging enough for your services is to go out to the contract or associate consultant market and find out how much per day you would need to pay to get the skill level required for your client.

If you are not charging twice as much, i.e. a GM of 50%, to the client for this work then you are probably selling yourself short.

But why would a client pay twice as much for my firm to do the work as opposed to employing a contractor to do the same at half the price, we hear you ask. The answer is a large part of the solution to how you build equity value in your firm. In our 8 Levers of Equity Value, we talk about the importance of building your Unique Value Proposition and it is this that you need to present to prospective clients.

If you are selling individual technical skills then don’t expect to make much of a margin on each consultant – employed or contract – that you provide to the client. If on the other hand you help the client diagnose their problem; you craft a solution to that problem with them; you commit to solve that problem at a fixed price with a well thought through ROI. And maybe you even put some of your fees at risk to demonstrate your commitment and confidence. You programme and project manage the delivery of the solution and have case studies and testimonials to prove your worth.

If you’re already doing some of this and are not charging for it, you have a problem. It could lie with your marketing or sales approach or it just could be that you haven’t tried.

Getting full value for your services takes more effort. Occasionally you will fail but that’s good because you will know then just how much your services are valued.

2 thoughts on “Are your fee rates too low to build equity value?

  1. A blended rate of £750 in proposals with a minimum gross margin target of 50%, tell only part of the story, if we don’t factor in utilisation across the year. Could you also mention the utilisation rate you would consider with these metrics?
    It would also be good to get a sense of the rates as they apply to different types of businesses and different markets (including markets in Asia).

    • Hi Devangshu, I think you are absolutely right to highlight the importance of utilization rates, however I believe we should also point out that a key point, as far as Asia is concerned (keeping in mind that “Asia” in not monolithic and that there are big differences between Asian countries) is not only utilization rates or daily rates, but the daily rates to daily costs ratio. Obviously, both daily rates and costs tend to be impacted by – but not in linear proportion to – the development level (broadly reflected in the GNP/head of each country), so it’s their relative ratio that is a key profitability lever. Also, given that the number of working days is on average higher in Asia, both daily rates and daily costs tend to be further lowered compared to Western countries. And finally, utilization rates tend indeed to be higher than in Western countries, for cultural reasons.

      All in all, comparing typical P&L structures and parameters between countries can’t be done without adjusting for economic differences – the only point that seems to remain more or less similar across the board is that at the end of the day, one should shoot for a GM of at least 50%.

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