Did we make a profit on that file?
There are two parts to my answer. The first part is the Accounting answer and the second part is the Professional Knowledge Firm answer.
Accounting answer
Firms that charge by the hour hope that they made a profit on a particular project based solely on the arbitrary hourly rates of the time recorders assigned at the beginning of the financial year. They don’t actually know how profitable the project was. They only know if the firm has been profitable by the end of the month/quarter/year.
That project could have been incredibly profitable but if the time recorders are otherwise under-utilised, the firm will likely make a loss for the month/quarter/year.
Profit over a period is the aggregate of profit and loss on individual transactions. Making a profit for the period is much more important than making a profit on a project.
If the time recorders are under-utilised and the firm is trading at a loss, one remedy is to lift their hourly rates. Query whether they will get the next piece of work from that customer whose last matter was “profitable”.
In an aligned pricing practice, there is no greater sense of knowing if the project was “profitable” from an accounting point of view than there is in a firm charging by the hour. We still look at the financials for the month/quarter/year. Again, the profitability will be an outworking of the performance in relation to the sum of the projects.
Perhaps we spend more time or less time on a matter than we might have budgeted to spend. If we are profitable at the end of the period, this doesn’t matter, providing the customer has also made a profit.
Professional Knowledge Firm (PKF) answer
Professionals in progressive firms are likely to have a more holistic view of “profit” than professionals in traditional firms.
In his book titled “Positioning for Professionals” Tim Williams reproduces a list of questions under the heading “Who(m) Do you Know Best?”
Does this client value what we do?
Is this client easy to work with?
Is this an innovative client willing to take some risk?
Will this client allow us to do our best work?
Will the client embrace us a partner instead of a vendor?
Do we like the people and will we enjoy working with this client?
2. So, quite apart from the financial return on a file, a PKF will ask whether the relationship with the customer was profitable or is likely to be profitable in the future.
3. A PKF will also ask a series of other questions to determine “profitability” such as:
What knowledge did we capture as a result of working on that project?
How did it help us improve our sector/industry reputation and our specialist expertise?
Did it correlate with the positioning strategy we have adopted?
Is it likely to lead to more profitable work from customers who are a good fit?
Will doing more of that type of work for that customer enhance our recruiting prospects?
4. It is axiomatic that progressive firms have progressive people in them. Progressive people are more likely to ask a series of better questions than traditional people in traditional firms wedded to the two dimensional view of “profit”. Progressive people also make better judgements in answering the questions.
5. Aligned pricing isn’t an end in itself but it is a great tool to deliver long term relationships with customers who are the right fit for a PKF.