Using your time profitably

20/03/2012 Comments Off on Using your time profitably

Consultants sell their time. Okay, they sell their expertise, but their main factor of of production is time. A successful consultant works on maximising the value from their time. Here’s how I think of it.

There are essentially four types of activities for a consultant:

  1. paid work
  2. sales, marketing, and networking
  3. investment in new skills
  4. administrivia.

The paid work is what brings in the money. It pays for all your time and all your overheads, and funds that lavish lifestyle all consultants lead (oops, almost spilled my morning martini). Obviously, therefore, more is better.

But wait — how do you get the paid work? Well, that’s where the sales, marketing, and networking come in. You need to have work and potential work lined up, so that you can finish your current project and move on to the next and then the next. If you don’t spend some time on generating work, pretty soon the work will dry up. On the other hand, if you spend too much time networking, you won’t get any billable work done.

Let’s say you have a target income of $150,000. Maybe you know from experience that your average project size is $10,000. You therefore need 15 projects per year to make your target income. Maybe you are successful with one out of every five proposals you write, or 20%. That means you need to write 75 proposals to get 15 projects.

Now we can put some hours into the calculations. If it takes 10 hours to write a proposal, that’s 750 hours. Working 37.5 hours per week for 46 weeks (remember — 4 weeks holidays plus 11 statutory holidays), you have 1725 work hours in a year. After writing proposals, you have 975 hours to do the work. At a billing rate of, say, $150 per hour, that $146,000. It’s not quite your target but pretty close.

We can think of this as an optimisation problem. One line is the sales, or total project revenue obtained. The other line is billings, or revenue earned. The intersection gives the equilibrium earnings.

There are a two things to note. First, this consultant is spending 43% of work hours on sales! While that’s a bit excessive, it is probably right for newer consultants or for established consultants breaking into new markets. The rule of thumb for small businesses in general is to spend 25% of time on sales on marketing.

Secondly, this diagram tells us what we can change if we want to raise our income. We can try to rotate the blue ‘supply’ curve anti-clockwise. Alternatively, we can shift the red ‘demand’ curve rightward. How do we do that? It’s all about changing the components of those curves:

  • become more efficient at writing proposals
  • make each project a little larger
  • increase your success rate
  • raise your charge-out rate
  • increase your work hours.

In this example, changing the success rate from 20% to 25% reduces the number of proposals you need to submit, freeing up time for billable work. Over 60% of your time can be billed, raising income to over $160,000.

I’ve talked about just the first two uses of your time. The other two will have to wait for another day. However, the basic principal is this: equalise the marginal return on time spent on each task. Think about whether that hour you spend blogging is generating as much value as an hour spent writing a proposal.

Oh, wait….

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