Understand why recovery rates are one of the critical things you need to be measuring for a high-performance services business.
In the professional services industry, one of the key metrics for measuring business success is profit. If your business is making a profit then all is well, or is it?
While making a profit is good, fattening up the bottom line is better. There are a number of strategies a business can employ to improve its profit margins. Most commonly, business owners are recommended to examine and make changes to how they price and sell their services, and how they plan and steer incoming and existing work.
One factor that is often overlooked is how good the business is at turning hours into billable hours.
Recovery rates are a business metric that look at just that—they measure what percentage of a team’s billable time can actually be billed to the client, or in this case, time that can be “recovered”. So, what are recovery rates, how can you improve them, and what factors contribute to them?
The recovery rate is calculated by dividing the hours you billed to your client by your team’s billable utilization (the hours that were logged against a billable project) and is expressed as a percentage.
Recovery Rate = (Billed Hours) / (Billable Utilization)
Here’s an example. Your web development team adds a new feature to your client’s website, it takes them a total of 120 hours to complete the work. However, the project was budgeted and billed to your client at $10,000 based on 100 hours at $100/hour. When you divide the 100 hours you billed by the 120 hours your team logged, you get a recovery rate of 80%. (100 / 120 = 0.8 = 80%)
In addition to looking only at the recovery rate, you can bubble up the cost associated with the write-off. In this example your business lost $2,000.
Most commonly, write-offs are a result of a team taking longer to complete work than was originally quoted or when fee discounts are given. It might take longer to complete the work than anticipated because of:
Generally, recovery rates are measured by the billable utilization for a specific person, project or the organization as a whole. Besides a project taking longer to complete than anticipated, there can be additional hidden write-offs further up or down the line.
If we take our first example with the $2000 write-off and expand on it to show the actual time worked and the time paid, we will see a greater discrepancy with an additional $2000 loss resulting from differences between the time worked and time recorded, and time billed and time paid. This results in a total $4000 write off, 30% less of what you should have been paid if you had a higher recovery rate!
When looking at time worked and time recorded, write-offs are very difficult to spot and measure. Most commonly they occur due to sloppy time-keeping practices or an employee not wanting to record hours they actually worked because of inexperience, competition with other team members or fear of “looking bad”.
To keep the gap between time worked and time recorded at a minimum, make sure your team records their hours at the end of the day while they can still remember what they did.
Build a work culture of trust and mutual respect. Remind your employees why correct time keeping is important for the overall health of the business and encourage them to speak up and ask for help when needed.
Once you’ve reconciled your team’s hours and sent off the bill, there are times when your client might disagree with the billed work. This can be for many reasons, but often is a case of unmet milestones and expectations. Clients are known then to ask for hours to be chopped off the bill. If you decide to give a 10% discount to smooth over the billing, it results in an additional write off. If we use our example from above, this 10% discount would give a $1000 write-off, totaling $4000 in write-offs.
Getting around write-offs at this level goes back to setting clear expectations up front and establishing solid communication channels and regular check-ins with your client.
You deserve to be paid for the work you and your team do, so start measuring your recovery rates today and review your projects regularly. Look at projects with poor recovery rates, analyze where things went wrong and come up with a plan on how to minimize revenue shortfalls in the future. Likewise, take a look at your projects with great recovery rates and see how you can apply what went well to all your projects across the entire organization.
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