Revenue leakage in professional services

Revenue leakage in professional services is work a firm delivers without billing it in full, usually because the engagement letter and reality have drifted apart. The four biggest sources are fixed fees for work that grows every year, retainers where the actual effort sits structurally above the agreement, work outside the scope that is treated as service, and costs and disbursements that are never recharged. The work is done by people with deep expertise and little time for administration, and that is exactly where the money falls through the cracks.

Professional services covers accountancy and bookkeeping practices, law firms and notaries, engineering and architecture practices, advisory firms, IT service providers and communications agencies. Their business models look alike: they sell expertise and time, by the hour, by the engagement or by the period. Revenue leakage in professional services therefore has a shared core, with a different emphasis in each profession. For advisory firms specifically, it is worked out in revenue leakage in consultancy firms.

What makes professional services prone to revenue leakage?

All professional services firms share three traits that make them vulnerable to leakage.

The engagement letter is the source of the revenue. It sets out what will be done, for what price, and what is billed separately. Once signed, it is rarely read again. The people doing the work work from the file, not from the engagement letter. The gap between what was agreed and what is invoiced is a classic case of revenue leakage between contract and invoice.

The professional decides the price. Whoever does the work records the time, and in doing so decides whether something gets billed. An accountant who answers an extra client question "quickly", a lawyer who does not record a phone call, an engineer who runs one more design option: each of them is making a pricing decision, usually without seeing it that way.

Administration is an afterthought. Professionals are trained, and assessed, on the quality of their work, not on the completeness of their records. Time recording, expense claims, recharges: it all happens, but reluctantly and late. How that leads to leakage in general is covered in revenue leakage from manual administration.

Four fee models, four leaks

Fixed annual fee

Many firms charge a fixed fee for recurring work: the annual accounts, payroll, managing a system, a yearly inspection or audit. The fee was once set on the basis of the size of the job. The client grows, adds entities, staff and transactions. The work grows with it. The fee does not.

The leak is gradual, which makes it hard to see. Each year the engagement takes a few more hours. Only when you put the hours per client over three or four years next to the fee do you see that the margin on a good client has evaporated.

Check: for each fixed-fee client, calculate the realised hourly rate over recent years: fixed fee divided by hours spent. A falling line is a client whose work has grown. An hourly rate far below your average rate is a client whose fee needs reviewing.

Retainer or subscription

A fixed monthly amount for a defined level of effort: a number of advisory hours, an on-call service, ongoing support. The agreement says, for example, twenty hours a month. In practice it becomes thirty, because the client calls and the professional helps.

Sometimes the agreement states that hours above the retainer are billed separately. That then does not happen, because nobody tracks monthly usage or because the professional does not want to raise it. Sometimes the agreement says nothing, and the retainer has in practice become an unlimited subscription.

Check: for each retainer client, compare the agreed hours with the actual hours, month by month, over the past year. Where usage is structurally higher, bill the excess if that was agreed, or adjust the retainer at the next renewal.

Time and materials

The classic model. Every hour is billed at a rate. The leaks are unrecorded hours, write-offs before the invoice goes out, rates that lag behind for long-standing clients and work in progress that sits too long. These are described in detail in the consultancy article. For lawyers and accountants there is an additional factor: part of the work happens in small units, a ten-minute call, a short email. Firms that record in units of six or ten minutes mostly lose out by not recording those small units at all.

Fee as a percentage

Engineering and architecture practices often work with a fee derived from the construction cost or project size. If the construction cost rises during the project, through client changes or price increases, the fee rises with it under the agreement. But the fee then has to be recalculated. That often does not happen, because the final construction cost is only known at the final account, and by then the practice is no longer involved in the project.

Check: for each project, track the construction cost on which the fee is based, and periodically ask the client for the current estimate. Recalculate at every material change. The recalculation terms differ per engagement and per set of standard terms used, so check them in your engagement letter.

Work outside the scope

A leak that occurs in every profession: the client asks a question that falls outside the engagement, and the professional answers it. A tax question to the accountant preparing the annual accounts. An employment law question to a lawyer handling a contract dispute. An extra calculation from an engineer drawing up a structure.

The professional sees it as service, and it is. But without a record, the firm does not know how much service it provides, and cannot make that choice consciously. One simple rule helps: work outside the scope is always recorded, on a separate code. Whether it is billed is a second decision. Then at the end of the year you know, per client, how much you gave away and whether that is in proportion to what the client brings in.

Costs and disbursements

Legal service providers incur costs on behalf of the client: court fees, bailiff costs, registry extracts, translations, couriers. Advisory and engineering firms buy in external data, research or calculations. Communications agencies buy in print, photography and media. Many engagement letters allow these costs to be recharged, often with a mark-up for handling.

The leak is in the route. Costs arrive as a supplier invoice in the finance team or as an expense claim from the professional. If they are not linked straight to a matter or engagement, they are booked as general overhead. Or they are linked, but recharged at cost instead of with the agreed mark-up.

Some firms charge a fixed percentage for office costs on top of the fee. Check that this percentage is applied to every invoice, including invoices created by hand.

Worked example

Worked example: take an accountancy and advisory firm with EUR 5 million in revenue, of which EUR 3 million comes from fixed annual fees for 400 clients and EUR 2 million from advisory work on time and materials.

• Fixed fees that do not grow. For 80 clients the work has grown by 20 percent over three years, while the fee has only been indexed. Their combined annual fee is EUR 800,000. Had the fee followed half of the growth in work, revenue would have been EUR 80,000 a year higher.
• Work outside the scope. On average three hours per fixed-fee client per year on questions outside the engagement, at a rate of EUR 110. For 400 clients that is EUR 132,000. Assume a quarter of that could reasonably be billed: EUR 33,000.
• Costs not recharged. EUR 40,000 in rechargeable costs, of which one fifth is not recharged: EUR 8,000.

Together that is EUR 121,000, around 2.4 percent of revenue. The figures are assumptions. The main point of the example is that the largest amount sits in the fixed fees, which is precisely the part of revenue seen as the most stable and reliable.

Checklist for professional services

1. Hourly rate per fixed-fee client. Calculate fixed fee divided by hours spent, over three years. Which clients are falling?
2. Retainer usage. For each retainer client: agreed versus actual hours, per month. Who is structurally above?
3. Work outside the scope. Is it recorded on a separate code? If not, start now.
4. Engagement letters. For the twenty largest clients, put the engagement letter next to the invoicing. Is what was agreed actually billed, including indexation and recharges?
5. Fees based on construction cost or project size. Is the basis current on running projects?
6. Costs and disbursements. Are they booked to the matter and recharged with the agreed mark-up?
7. Office cost percentage. Is it applied to every invoice?

The overview for advisory firms, with the related measures such as realisation and work in progress, is in Revenue Intelligence for consultancy. If you work with long-running projects and milestones, you will find the patterns per project phase in revenue leakage in project businesses.

Frequently asked questions

What is the biggest leak in professional services?

For firms with many fixed fees, usually the drift between fee and work. For firms that mostly bill by the hour, the combination of unrecorded hours and write-offs. Which one is largest for you becomes clear once you calculate the hourly rate per client and the realisation.

Should I charge clients for every question outside the scope?

No. But do record it. Then you can judge per client whether the service is in proportion to what the client brings in, and at the next fee review you can show why the fee needs to go up.

How do I revise a fixed fee that has become too low?

With figures. Show the client how the work has grown over recent years, in hours or in volume. Most clients understand that a bigger business creates more work. The conversation is easier if you have it every year than if you have to make a jump after five years.

Is leakage in professional services higher than in other sectors?

There is no reliable comparative figure for that. The commonly cited estimate of 1 to 5 percent of revenue applies to B2B companies in general. What is characteristic of professional services is that almost all leakage goes straight to the bottom line, because the work has already been done.

Which systems do I need to measure this?

Your time recording or practice management system, your billing and your engagement letters. For a first measurement, an export to a spreadsheet is enough. Continuous monitoring requires a connection between those systems.