Engagement Economics

July 2008

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 Firm Revenue

FIRM REVENUE

CLIENT VIEW STAFFED VIEW

Client Revenue Based on Revenue Generated by Staff
Lead Client Service Performing Work
Partner (Revenue follows
the person
Financial Stmts)

MANAGED VIEW
Revenue Managed by WBS
Partner

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Profit Contribution Statement
Services at Billing Rates
<Current Discount>
Current Service Revenue
± Unbilled Adj/Equalization
± Closeout Adjustments
± Other Adjustments (G/L JE)
Net Service Revenue
+ Other Revenue
Net Revenue
<Client Service Salaries>
± CS Salary Transfers

Direct Margin

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Profit Contribution Statement
Direct Margin
<P&A>
<Provision for Bad Debt>
<Interest on Rec’s>
Controllable Margin
<Allocations>

Net Earnings

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Key Calculations

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 Services at Billing Rates

=Chargeable Hours x Billing Rate

Services at billing rate represents hours

charged to a project priced at the Deloitte US
Entities rates. Services at Billing Rates are also
called: Fees at 100% recognition or gross fees.
*Generally, use National Billing Rates for US Personnel
**When establishing India bill rate type, select “Use U.S. Rates” so the Region 10 rates will be
subject to the engagement discount rate. Do not select “Use India Rates” as your engagements
will be charged a potentially higher average R10 rate that is not subject to discount.

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 FAS Standard Billing Rates
US Levels Rate India Levels Rate

PPD > 1 yr 875

PPD < 1 yr 810 Director 570

Sr Mgr 770 Sr Mgr 570

Mgr 665 Mgr 495

Sr Assoc 510 Sr Assoc 375

Assoc 410 Assoc 375

Jr Staff 300 Jr Staff 215

Intern 300 Intern 160

DRS Standard Billing Rates

US Levels Rate India Levels Rate

PPD > 1 yr 515

PPD < 1 yr 515 Director 220

Sr Mgr 405 Sr Mgr 220

Mgr 305 Mgr 220

Sr Assoc 210 Sr Assoc 220

Assoc 165 Assoc 115

Paraprofessional 135 Intern 95

 Current Service Revenue

The product of “Services at Bill Rates” and discount.

This is the fee amount that is accrued for a specified
time period for an individual or project.

Services @ Bill Rate

x (1 – Discount Rate %)
Current Service Revenue

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 Net Service Revenue
Current Service Revenues plus/minus unbilled
adjustments/equalization, closeout adjustments and
journal entries.
Do not confuse Net Service Revenue with amount
billed to the client as they are not necessarily the
same. One is a P&L item and one is a balance sheet
item.

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 Billing Rate Types
US Personnel:
National Rates
Local Rates
Project Specific Rates (Spec Billing)
India Personnel:
Indian Rates: Priced at low cost Indian rates
which are exempt from the project discount.
US Rates: Priced at a “US Rate” and subject
to the discount rate.

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 Discount Rate
Used to realize revenue over time.
Revenue must accrue at a rate equal to
what we think we can collect from the
client.
Determined at beginning of an
engagement and may be adjusted
throughout and at the end of the
engagement as needed.

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 Discount Rate Change
Menu path: DPS>Project Setup>Modify
Existing Project
Make sure you fill in the actual discount rate
box, not the estimated rate.
Remember—not retroactive; affects only
future billings and revenues.
Can use DPS Express:
“Update Discount Rate”—easiest way.

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 Example
Standard Billing Rate $500/HR
Discount Rate 40%
Current Service Revenue $300/HR
Bill Client fixed fee $250/HR
Shortfall $50/HR
Need to adjust Discount Rate to 50%
And write down all unbilled revenue already
accrued

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 Fill In The Blanks
Standard Billing Rate $600/HR
Discount Rate 70%
Current Service Revenue $______

Standard Billing Rate $400

Current Service Revenue $300
Discount Rate ____%

Standard Bill Rate $500

Current Service Revenue $400
Realization Rate ____%

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 Fill In The Blank

• Standard Billing Rate $500/HR

• Discount Rate 40%
• Expenses $50/HR
• Bill Client Fixed Fee (exp. inclusive) $300/HR
• Is Discount Rate too low, too high or ok?
• Discount Rate (at which no adjustment Required) ____%

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Basic Income Statement

Revenue
- Client Service Salaries
Direct Margin
- Operating Costs Function Costs
Controllable Margin
- C&I and Firmwide Direct
Earnings Before Allocations
- Enabling Area Allocations
- Parent Allocations
Allocated Costs
Net Earnings

FAS is measured based on Earnings

before Allocations (EBA)

Copyright © 2007 Deloitte Development LLC. All rights reserved. 16

FAS FY10 Plan

Net Revenue 397.3

Client Service Salaries (176.9)
Direct Margin 220.5
DM % 55%
Operating Expenses (28.4)
Controllable Margin 192.1
CM % 48%
Firmwide (6.8)
Earnings Before Allocations 185.3
EBA % 47%

Copyright © 2007 Deloitte Development LLC. All rights reserved. 17

FAS FY10 Plan - Revenue

Net Revenue 397.3

Client Service Salaries (176.9)
Components of Revenue
Direct Margin 220.5
DM % 55% Services @ Bill Rates 839.8
Current Discount (448.7)
Operating Expenses (28.4) Current Service Revenue 391.1
Controllable Margin 192.1 Adjustments 6.2
CM % 48% Net Service Revenue 397.3
Other Revenue -
Firmwide (6.8) Net Revenue 397.3

Earnings Before Allocations 185.3

EBA % 47%

Copyright © 2007 Deloitte Development LLC. All rights reserved. 18

FAS FY10 Plan – Client Service Salaries

Net Revenue 397.3

Client Service Salaries (176.9)
Components of CS Salaries
Direct Margin 220.5
DM % 55% Base Salaries 133.3
Performance Bonus 6.2
Operating Expenses (28.4)
Fringe Benefits 27.8
Controllable Margin 192.1 Severance 3.5
CM % 48% Other CS Salary Costs 6.1
Total CS Salaries 176.9
Firmwide (6.8)
Earnings Before Allocations 185.3
EBA % 47%

Copyright © 2007 Deloitte Development LLC. All rights reserved. 19

FAS FY10 Plan – Operating Expenses

Net Revenue 397.3

Client Service Salaries (176.9)
Operating Expenses
Direct Margin 220.5
DM % 55% Professional & Administrative
Expenses 17.2
Operating Expenses (28.4) Admin Salaries 0.3
Controllable Margin 192.1 Provision for Bad Debts 1.8
Interest on Receivables 6.6
CM % 48%
Firm Project Costs 2.5
Total Operating Expenses 28.4
Firmwide (6.8)
Earnings Before Allocations 185.3
EBA % 47%

Copyright © 2007 Deloitte Development LLC. All rights reserved. 20

FAS FY10 Plan – Firmwide

Net Revenue 397.3

Client Service Salaries (176.9)
Firmwide Costs
Direct Margin 220.5
DM % 55% Firmwide Costs 5.6
Claims & Insurance 1.2
Operating Expenses (28.4) Total Firmwide 6.8
Controllable Margin 192.1
CM % 48%
Firmwide (6.8)
Earnings Before Allocations 185.3
EBA % 47%

Copyright © 2007 Deloitte Development LLC. All rights reserved. 21

Three Views of Revenue

Revenue
$

CLIENT

• Staffed revenue follows the employee - this view is used for our Profit
Contribution Statements (Income Statement)
• Managed revenue follows the Partner/ Principal/ Director (this view is used to
track goals and for Accounts Receivable purposes)
• Client view of revenue is for all services provided by Deloitte U.S. Entities and
is based on client geography and industry
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 Billing/Fee Types

• Describes the method by which the client will

be billed. DPS provides for 4 types:
– Fees inclusive of expenses (FAS Recommended)
– Fees Plus Expenses
– Specific Hours and Expenses
– Value Based (rarely used)

Fee Type Time Expense

Fees Inclusive User Specified User Specified
Fees Plus Expenses User Specified Automated
SPEC Automated Automated

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 Fees Inclusive of Expenses

• Invoices are based on a specified dollar

amount that includes expenses and are
indirectly related to hours charged to the
project (can be calculated based on hours
but does not need to be).

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 Fees Plus Expenses

• Invoices are based on a specified dollar

amount of fees plus expenses calculated
from actual charges to the project. Thus the
fee amounts are indirectly related to hours
charged to the project, while expenses billed
are directly related to those charged to the
project.

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 Specific Hours & Expenses

• Fees are specified at hourly rates. Invoices

are calculated from specific (that is, actual
minus exclusions) hours and expenses
charged to the project. This can be referred
to as “hours-based billing.”

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Value-Based Fees

• Fees are based on the value realized by the

client. Invoices are based on a specified
dollar amount of fees and expenses.

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 Billing Rate Types

• US Personnel:
– National Rates (should be used)
– Local Rates
– Project Specific Rates (Spec Billing)
• India Personnel:
– US Rates (should be used): Priced at a “US
Rate” and subject to the discount rate.
– Indian Rates: Priced at low cost Indian rates
which are exempt from the project discount.

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Standard Bill Rates
Service @ Bill Rates
• Standard Bill Rates are set for each level by
Current Discount
Current Service Revenue
the firm; re-evaluated end of each fiscal year
Unbilled Adj/Equalization and in January
Closeout Adjustments • Standard Bill Rates are typically discounted
Other Adjustments
Net Service Revenue
• No relationship to salary
Other Revenue • May change multiple times during a year:
Net Revenue – Beginning of fiscal year
Client Service Salary Cost • Standard Bill Rate changes
Direct Margin
• Year change (1st year to 2nd year)
Prof &Admin Expenses
Occupancy
– Promotions
Admin Salary Costs • First bi-weekly period in September
Provisions for Bad Debt – January
Interest on Receivables • General percentage increase likely for some or
Firm Project Costs all levels
Org-Wide Costs – At the discretion of the Functions
Interest Credit
Claims & Insurance Costs
Earnings

Copyright © 2007 Deloitte Development LLC. All rights reserved. 29

Gross Services Calculation
Service @ Bill Rates
Current Discount
Current Service Revenue
Gross Services Calculation
Unbilled Adj/Equalization
Closeout Adjustments
Other Adjustments Hours Charged to Project
Net Service Revenue
X
Other Revenue
Standard Bill Rate
Net Revenue
Client Service Salary Cost
Direct Margin
Prof &Admin Expenses
Occupancy Example
Admin Salary Costs
Provisions for Bad Debt
Interest on Receivables Manager’s Client Service Hours 90
Firm Project Costs
Org-Wide Costs
Manager’s Standard Bill Rate $585
Interest Credit
Claims & Insurance Costs
Services at Bill Rate $52,650
Earnings

Copyright © 2007 Deloitte Development LLC. All rights reserved. 30

Discount Rate Types
Service @ Bill Rates
Current Discount Deloitte has three types of discount rates…
Current Service Revenue
Unbilled Adj/Equalization
Closeout Adjustments Planned Discount Rate
Other Adjustments Discount Rate of record in DPS
Net Service Revenue  Used to accrue revenue as reported by the firm
Other Revenue  Percentage by which engagement is measured
Net Revenue  Can be adjusted at any time during the project
Client Service Salary Cost
Direct Margin Current / Actual Discount Rate
Prof &Admin Expenses • Discount Rate that includes all activity through current
Occupancy period
Admin Salary Costs • Current “snapshot” of financial status
Provisions for Bad Debt • May be same as planned discount rate
Interest on Receivables
Firm Project Costs Final Discount Rate
Org-Wide Costs  Calculation of collected amounts minus all activity on
Interest Credit the project/Gross Services
Claims & Insurance Costs  Calculated automatically in DPS when the project closes
Earnings

Copyright © 2007 Deloitte Development LLC. All rights reserved. 31

Current / Actual Discount Rate Calculation
Current/Actual Discount Rate Calculation

Current Billed – Expenses

Current / Actual
Discount Rate = 1-
Gross Services

Example

Current Billed $35,000

Expenses $6,400
Gross Services $47,700
Actual Discount Rate 40%

Copyright © 2007 Deloitte Development LLC. All rights reserved. 32

Discount Rate Drivers
 Non-billable fees and expenses
 Proper levels and effort (mix)
 Transition costs (time and
expense)
 Try & Buys / Trainees
 Promotions
 Standard rate changes
 Mix change – timing  Billing by deliverables
 Partner/Senior Manager time  Failure to include accruals
 Expense Contingency  Scope changes
 External resources  Low estimates / unaccounted costs
 Non-billable Project Team and
 Cap on billable hours
Team building training
 Cost of post implementation
 Exceeding client budget
support  Fixed Price
 Software purchases  Blended Rates
 Long term travel tax equalization  Overhead

Copyright © 2007 Deloitte Development LLC. All rights reserved. 33

Write-Ups and Write-Downs
Service @ Bill Rates
Current Discount – Write-ups and Write-downs are the Firm’s method
Current Service Revenue of adjusting booked revenues
Unbilled Adj/Equalization – Changes to Discount Rate prior to WBS close
Closeout Adjustments require a full percentage point adjustment
Other Adjustments – Are also called unbilled adjustments
Net Service Revenue
Other Revenue
Net Revenue Write-Down
Client Service Salary Cost
Direct Margin  Indicates Current/Actual Discount is higher than accrued
 Will result in the final Discount being higher than planned
Prof &Admin Expenses
 Costs exceed billings
Occupancy  Indicated by a positive unbilled balance on the management
Admin Salary Costs report
Provisions for Bad Debt
Interest on Receivables Write-Up
Firm Project Costs
Org-Wide Costs  Indicates Current/Actual Discount is lower than accrued
 Will result in the final Discount being lower than planned
Interest Credit  Billings exceed costs
Claims & Insurance Costs  Indicated by a negative unbilled balance on the management
Earnings report

Copyright © 2007 Deloitte Development LLC. All rights reserved. 34

Net Services Calculation
Service @ Bill Rates
Current Discount
Current Service Revenue
Net Services Calculation
Unbilled Adj/Equalization
Closeout Adjustments
Other Adjustments
Net Service Revenue
Other Revenue Gross Services x (1 – Planned Discount Rate)
Net Revenue
Client Service Salary Cost
Direct Margin
Prof &Admin Expenses
Occupancy Example
Admin Salary Costs
Provisions for Bad Debt
Interest on Receivables Manager’s Gross Services $47,700
Firm Project Costs
Org-Wide Costs Discount Rate 25%
Interest Credit Net Services $35,775
Claims & Insurance Costs
Earnings

Copyright © 2007 Deloitte Development LLC. All rights reserved. 35