Professional services firms are never allowed to be complacent with their strategic initiatives and tactical implementations; clients frequently request business cases supported by quantitative data and independent research to justify their recommendations and overall value. Recent articles on this blog have advocated that professional service organizations hold PSA software vendors to an exceptional standard, and as part of that continued evaluation, it is important to set statistical benchmarks.
Return on Investment (ROI) is the fundamental metric that should be used to evaluate a software investment, but within professional services it can be interpreted in several different ways. Organizations can generate a significant ROI by leveraging PSA software to improve profit margins, reduce revenue leakage, and enhance project delivery speed. Taken together, these ROI metrics provide a holistic picture of a PSA solutions actual value to a professional services firm.
- The Relationship between Resource Utilization and Profit Margins
- Determining Profit Margin Improvements
- PSA-driven Methods to Reduce Revenue Leakage
- The Relationship between Project Delivery and ROI
Resource Utilization: The Common Thread in ROI Calculation
Profit margins and ROI tie directly back to effectively utilizing the billable resources at a firm’s disposal. Identifying new opportunities to deploy an organization’s talent, and maximizing their collective skill-sets, facilitates expedited project delivery, greater client satisfaction, and further revenue growth. SPI Research conducted a PSA Software End User Survey that revealed that post-PSA adoption “shows billable utilization improved by 6.0% on an absolute basis” and would drive significantly higher revenue even at pre-PSA profit margins. SPI concludes that “the results taken from 68 firms highlight just how many more billable hours are possible when the organization is run with stronger resource management and tighter project management.” The utilization gains made by PSA software yield benefits across all of the ROI metrics we will be discussing.
Identifying Profit Margin Improvements Completed by PSA Software
My previous blog post emphasized the importance of maximizing profit margins regardless of shifting market conditions, and PSA applications can certainly play a significant role in identifying opportunities to derive additional profit within a services portfolio. However, it is important to first determine the impact that a PSA solution has had on your profit margins since it was initially adopted. The first step is to take a look at the average profit margin created by projects in the most recent years prior to PSA adoption, and compare them against the combined average of profit margins generated since PSA implementation in the same time frame.
Once the profit margin number is determined on each end, use this equation for both the pre and post-PSA margin totals:
(Billable Employees x Annual Revenue by Billable Resource) * Profit Margin
The numbers you discover will immediately identify any discernible difference a PSA application has made in driving additional profit to an organization.
Determine a PSA's Effectiveness in Plugging Revenue Leakage
Ernst & Young has stated that “1 to 5% of EBITA flows unnoticed out of companies because they do not have their contract management and payment follow-up processes completely in order.” PSA software can help minimize revenue leakage, as noted by our COO Steve Chong, by “ together time and expense tracking with bill rate management and invoicing capabilities into a single project accounting system. By doing this, they provide an important control that ensures that every hour that can be invoiced to the client is billed properly, thus reducing sources of revenue leakage.”
You cannot assume, however, that just having a PSA system is adequately addressing revenue leakage – you need to calculate its true impact. This is accomplished by again testing pre-PSA revenue leakage against post-PSA leakage with the following formula:
(Billable Employees x Annual Revenue by Billable Resource) * Profit Margin * Revenue Unable to Be Billed (Leakage)
A direct comparison of these number will reveal the quantifiable impact that your existing PSA platform has made in recovering money that an organization had previously lost due to missing or improper tracking and invoicing.
Calculating the Relationship Between Project Delivery and ROI
Projector leadership has often emphasized the ties between project delivery and growth, stating that “on time delivery, quality of work and referenceability are all performance indicators that, when in line with expectations, create a feedback loop fueling growth.” While determining the value of a PSA system in accelerating project delivery and improving quality does not have a concrete definition, a formula can be established to provide a ballpark estimate.
(Billable Employees x Annual Revenue by Billable Resource) * Profit Margin * Revenue Unable to Be Billed (Leakage) * Project Margin * The Percentage of Projects On-Time and Under Budget
One of the core benefits of professional services automation software is that it does provide a comprehensive historical database for project histories, and can quickly identify the projects that have achieved the proper delivery milestones, and identify improvement opportunities. This institutional knowledge provides an immediate value add for firms, even before these ROI calculations are made.
Three ROI Metrics
The numbers generated by each of these formulas can now be divided by the annual cost of your PSA software into three separate ROI totals, the ROI generated by profit margin gain, revenue leakage reduction, and delivery improvement. Creating three separate ROI metrics identifies where the software has been most valuable, and where the platform is falling short.
Best-of-breed, industry-focused PSA systems should be driving 2 – 3x net dollar amount improvements in these key ROI metrics upon adoption, per Projector’s internal research. If these benchmarks are not being reached with the existing PSA solution, it is possible to successfully address these performance gaps within professional services automation, if it is a best-of-breed, industry-focused system. Proactively reaching out to industry-focused vendors, who have accumulated significant experience and expertise with professional services technology, can lead to learning new strategies and functionality that can remediate ROI shortfalls. Organizations that apply the same strategic agility to their technology stack that they apply to their clients’ service plans open new pathways to leadership in a crowded and savvy marketplace.