The term leverage is frequently used in any number of business discussions. Often leverage is used to point out an advantage in negotiations or to describe the structure of a financial transaction. Having leverage is equivalent to an advantage and if it is an advantage I want it in my firm and business.
Let’s look at a short definition: According to Merriam Webster, leverage is:
- influence or power used to achieve a desired result
- the increase in force gained by using a lever
The increase in force gained by using a lever is another way of saying a lever provides a mechanical advantage when completing a task. A weight too heavy to lift by yourself s possible with a lever. The lever multiples your efforts to accomplish more.
In a Professional Service Firm (PSF), the lever is people. I’m sure this comes as no surprise. Many firms embrace the concept of leverage by hiring administrative staff and professional staff to spread the work load out and increase firm capacity. The challenge I’ve uncovered is we don’t embrace it enough. That is why I consider leverage a Power Principal for Practice Management. Leverage is the right number of professionals working on the right level of work.
LACK OF LEVERAGE SYMPTOMS
- Owners working on low value tasks
- Poor staff development
- Slow or declining revenue growth
- Staff turnover
- Below average owner compensation
- Too many owners.
Let’s take a look at the advantages created by a proper leverage model.
ADVANTAGES OF LEVERAGE
- Leverage is a multiplying factor for your firm’s productivity and profitability.
- Leverage provides the foundation for growth.
- Leverage removes barriers allowing Firm Leadership to focus on strategy. It eliminates the excuse “I’m too busy to grow the practice.”
- Leverage is an investment in your firm’s succession plan.
- Leverage makes time available to Firm Leadership
The financial formula for leverage is simple:
Employee revenue production
Employment related expenses
As long as the revenue exceeds the expenses you have created financial leverage within your firm or business. A model financial statement for a PSF would look something like this:
Salaries, Wages & Related Expenses 33%
Profit Before Owner Compensation 34%
If we translate this model financial statement into a Payroll Leverage Factor it would be 3 (100% / 33%). This is the Payroll % method. Another way to express a Leverage Factor is the Owner to Staff Ratio. If you have 3 owners and 10 staff your Leverage Factor is also 3. It is important to look at both leverage calculations since an underleveraged firm with few employees will have a HIGH Payroll Leverage Factor and LOW Staff to Owner Ratio.
IMPROVING YOUR LEVERAGE MODEL-A 5 STEP APPROACH
So how do you go about improving the leverage within your firm? Follow this 5 step approach.
Step 1: Access the type of work your firm does. If the work is routine and can be delegated, you should have a high staff to owner ratio. If the work is complex and technical (more like consulting) than you should have a lower staff to owner ratio. It seems most firms have work that can be delegated to less experienced professionals so there is an opportunity for improvement.
Step 2: Review your schedule and what you spend your time on. If you are working on lower value tasks, consider hiring additional staff so you can delegate the low value work and go after the high value work.
Step 3: Review billing rates and confirm you are achieving a Payroll Leverage Factor of at least 3.
Step 4: Increase your business development activities with a portion of any freed up time.
Step 5: Monitor and measure your results periodically to ensure you are making progress.
In order for your firm to break through to the next level of growth and development you must adequately leverage your most valuable resources-your people and your time.