Professional services firms live and die by their ability to forecast revenue. Although there are many types of forecasts that service firms perform—utilization, profitability, or backlog—they all tie into an underlying revenue forecast. Get your revenue forecasting right, and you have an appropriately sized firm that has a healthy service mix. Get your predictions wrong, and you will be under or over staffed in key areas and suffer from low utilization rates, high turnover, or a general lack of direction. This is why revenue forecasts are so important. Unfortunately, they don’t always receive the attention they deserve.
One thing that separates high-performing professional services firms from their peers is their ability to forecast revenue reliably. In our last post we explored the different revenue forecasting models that professional services firms use and concluded that there is no one size fits all approach. In this first part of a two-part series, we will dive into 3 of the common resource-driven revenue forecasting mistakes that services firms make along their journey to the top.
1. For Goodness’ Sake, Schedule your People
In top-performing professional services firms, you’ll often find quite a bit of attention paid to matching people with the right project and scheduling out work. Resource scheduling software is central to this process and these firms routinely have an entire group of resource managers that control the flow of people and work.
Less disciplined firms often skip this step claiming that they don’t have enough time or the future is too opaque to commit to. Whereas in reality, project managers are still building schedules for their projects, they just aren’t doing it in a consistent and measurable fashion. They are building Excel spreadsheets or utilizing personal calendars. This valuable information is then lost to the firm’s decision makers and staffing, profitability, or growth issues arise on a regular basis.
As such, the scheduling process should be decentralized and focused on the best estimate at the time. Project managers should be responsible for updating the schedules on all of their projects on a regular basis. If they don’t know who will perform the work yet, they should be utilizing unnamed resource placeholders to model the work. With a consistent process in place, the organization will have the underlying data it needs to begin building a revenue forecast that represents when the revenue is earned, instead of ambiguous backlog totals.
Scheduling in Action
We recently worked with a smaller (about 25 people), but sophisticated, services firm that was a remarkable example of the value of this approach. They employed a simple rule: If the person isn’t scheduled on your project, they aren’t working on it. It doesn’t matter if the work is last minute and happening tomorrow or if it might happen sometime next month, project managers were expected to keep up-to-date project schedules.
From the project manager’s perspective, this added about 20 minutes of administrative work to their day, but it was work they were already doing—albeit in a different medium. From the leadership team’s perspective, this provided a treasure trove of data that they could use to make more impactful decisions.
The leadership team utilized a series of automated dashboards to translate the schedule information into revenue forecasts and then compared forecasted revenue to the firm’s revenue potential. They set benchmarks for themselves to achieve and managed the flow of work to ensure healthy utilization, profitability, and backlog. Having actionable information available to them has enabled them to maintain utilization rates will above the market average, as well as grow the size of their firm with healthy margins.
2. Get your Rates Right!
Okay, you get it. Scheduling your team, no matter the size, is important. It’s the first step to building a reliable revenue forecast. Once you have that information it needs to be translated into revenue. That’s where rates come in.
Billing rates are a relatively straightforward concept. Unfortunately, because rates are easy to grasp, much of the nuance of rate management can get lost in revenue forecasts. It’s possible that every type of person in your organization carries a standard rate, but every contract you negotiate may represent a discount to that rate. Furthermore, different types of work may bring different rates. If a professional services firm simply says “we bill at $175 an hour” and derives their revenue forecast from that rate, it’s likely that they will be overstating their earning potential. As such, rates should be tied to the most granular item they can be—ideally each scheduled hour.
The story becomes a bit more complicated if you do fixed-price work. The tendency is to view this type of work as easier to forecast because the price is fixed, but the total value of the work is not the only component. Professional services firms must also consider when the revenue will be realized. Unless you’re running your services business on a cash basis, matching revenue with when work is performed is critical. For work that has already been performed revenue recognition tools allocate the proper amount to each hour worked. Future hours, on the other hand, need to have revenue assigned to them based on the value of the contract that is remaining.
We put together a great post on managing fixed price projects a few months ago that dives into this topic in much greater detail.
3. Not All Projects are Created Equal
With a reliable schedule and realistic rates in place, a revenue forecast starts to form. From here it’s imperative the professional services firms begin to segment the types of projects that revenue is forecasted to. Quite a bit of attention is often paid to pipeline projects to downplay their effect on the overall estimate. We know that not every single project will be won, and we have information about projects in different stages of the sales cycle—opportunity vs. proposal—so it comes as no surprise that the revenue those projects represent should be factored down.
What is overlooked, however, are the projects at the other end of the project lifecycle—those that are in an at-risk state. These projects could either stop abruptly or start collecting a lot of non-billable work to correct them. Regardless of how those at-risk projects are managed off the brink, it’s likely that they are representing revenue that will never be earned. Service firms should either adjust forward-looking rates on these projects appropriately or establish a reasonable way to factor the revenue associated with at-risk work.
For 3 more common revenue forecasting mistakes, take a look at 6 Revenue Forecasting Mistakes Professional Services Firms Make – Part 2
How to Get Started
If any of these common revenue forecasting mistakes sound familiar to you, they’re likely the result of a troublesome platform or process. It could be that your schedules all live in Excel files and you don’t have the sophistication you need in your tool set to aggregate and disseminate the information quickly. Alternatively, you could be having a hard time getting the all of the data you need in one place because of a highly centralized process. The most successful professional services firms address these issues by utilizing professional services automation software to model and measure their forecasted work. PSA tools help services firms decentralize the scheduling workflow and quickly provide a consolidated view of the organization.
If you’d like to learn more about how PSA software can help with this process, check out our latest eBook, Professional Services Automation: A Quick Primer.