Delegate or Stagnate

By Kenneth J. Burke, CPA

Have you ever said to yourself, "I need to delegate more?"  Lack of delegation is a problem that many service companies have.  The consequences of not delegating directly impact profitability, motivation, morale and overall competitiveness of the service organization.

What are some of the factors that influence delegation?

There are several factors that may create an environment where delegation issues thrive:

• Inadequate staffing levels
• Individual productivity goals
• Lack of confidence in staff
• Client expectations

How many delegation issues potentially exist?

According to David H. Maister in "Managing the Professional Service Firm," between 40 and 50% of a firm's productivity capacity is consumed with a higher priced person performing a lower-value task.  Masiter goes on to say that in a manufacturing environment, terms like "inefficient," "under productive" and "wasteful" would be used to describe this operation.

How does this impact profitability?

Fees for professional services are subject to market influences, just like any other business.  In very simple terms, if it costs Firm A more to provide a level of service to a client than Firm B, then Firm A will be less profitable. Therefore, assuming that inefficiencies can't be billed to the client, these inefficiencies fall to the firm’s bottom line.

We don't often view service firms like a manufacturer producing a product.  Generally, service firms are concerned with quality and timely service, without an emphasis on the costs usually associated with the service activity.  The focus is on realization (billings to total time charges), and realization tends to be the single profitability measurement tool used.

There may be instances, however, where the gross billings and realization are the same but the profitability is different.  The gross profit percentage at each level within the firm is usually different, based upon direct payroll costs, and if the proper mix of staff is used, the firm may be able to maximize the gross profit from an engagement.

A good exercise to undertake is to examine an engagement in detail by adding the relevant labor cost component for each level within the firm.  Then determine if the mix of hours by level is the most efficient.  If not, make appropriate changes, and recalculate the gross profit on the engagement to see if the bottom line profitability may be improved.

Here is an example:

Profitability Example
Actual Job
				Gross Profit		Total	Total	Gross
Level	Hours	Fees	Cost	Per Hour		Fees	Costs	Profit
1	50	$     100	$       33	$          67		$       5,000	$      1,650	$         3,350
2	50	150	60	90		7,500	3,000	4,500
3	50	200	100	100		10,000	5,000	5,000
	150					$     22,500	$      9,650	$       12,850
Efficiency Adjustments
				Gross Profit		Total	Total	Gross
Level	Hours	Fees	Cost	Per Hour		Fees	Costs	Profit
1	100	$     100	$       33	$          67		$     10,000	$      3,300	$         6,700
2	50	150	60	90		7,500	3,000	4,500
3	25	200	100	100		5,000	2,500	2,500
	175					$     22,500	$      8,800	$       13,700
				Additional gross profit				$            850
				% Increase in gross profit				3.78%
				Gross billings of firm				5,000,000
				% Increase in gross profit				3.78%
				Additional gross profit				188,889