Growing a Professional Services Firm: What it Takes to Make $10 Million in Profit

Author: Categories: Professional Services, PSA Software Infographics, Resource Utilization Management

Growing a Professional Services Firm

Face Off

Growing a professional services firm to $10 million in profit depends quite a bit on the systems, structures, and strategies deployed by the firm. See what the latest Professional Services Benchmark reveals about the impact these choices can have.

Growing a Professional Services Firm

When thinking about growing a professional services firm, many executives set out revenue targets to try to achieve. A revenue target is a tangible, concrete, easily understandable goal, but can sometimes promote dysfunctional behavior. Unless capturing market share at all costs, even if delivered at a loss, is the firm’s conscious strategy, a singular focus on revenue growth can lead to aggressive discounting to sell work. It may also lead to overstaffing “just in case” to enable the organization to deliver work that may just be a figment in a salesperson’s imagination. All of this may lead to significant sacrifices in the profit margins that the revenue generates…a difficult way, at best, to build a business.

Targeting Profit, Not Revenue

A recent article by Andris Zoltners promoted the practice of basing inventive structures on profit, rather than revenue targets. This gives the organization more flexibility in how it chooses to achieve those targets as it incorporates the effects of increased sales, cost control, efficient operation, and successful project delivery. Precisely because it incorporates all those inputs, it eliminates the need for an organization to sacrifice one for the other.

Recognizing that Systems Matter

The key to balancing all of the inputs that affect bottom-line profit is having the right systems and processes in place to measure and manage each of the different factors. For a professional services firm, the core system to manage the business is Professional Services Automation (PSA) software. It often sits between a CRM solution like Salesforce and an ERP/financial accounting application like SAP. PSA systems manage the process of delivering work from planning and staffing projects through to invoicing clients and recognizing revenue.

Click the image to view the infographic

PSA solutions are an essential investment for growing professional services firms—an investment that can pay off handsomely when properly selected and thoughtfully implemented. They replace the stand-alone tools that helped a professional services firm get off the ground with a consolidated suite that fuels growth. Siloed time tracking tools, budgeting spreadsheets, project management systems, scheduling whiteboards, and invoicing processes can all be replaced in favor of an integrated solution that offers a single version of the truth.

Having an average PSA solution in place has a significant impact on the staff needed to achieve a particular profit goal. The industry’s premiere benchmark survey of professional services firms conducted by Service Performance Insight shows that firms that don’t use commercial PSA software need to hire 42% more staff to deliver $10 million in profit than firms that do. That amounts to 85 additional employees! What’s even more startling is that choosing Projector as your PSA tool nearly doubles that effect. Firms that don’t use any PSA at all needed to hire twice the staff compared to organizations that use Projector: 154 additional employees to achieve $10 million in profit.

Decoding Professional Services Profitability

To illustrate the point, we put together an infographic that summarizes the performance of firms that don’t use PSA software, firms that use a commercial PSA solution other than Projector, and firms that chose Projector as reported by SPI’s benchmark data. It illustrates the impact that PSA solutions in general—and Projector in particular—have on each of the factors that influence what it takes for a professional services firm to generate $10 million in profit.

Projector

vs

No PSA

THE GOAL
$0
million in profit

Project Margin

PSA systems like Projector help services organizations generate more profit per dollar of revenue generated in several ways. They provide real-time visibility into the health of projects so that corrective actions can be taken early on when the effects of those actions are magnified, rather than late in the game when extraordinary measures are more often required. The resource scheduling components of PSA software ensure that just the right resource is in place on the right project at the right time. This ensures that more junior, higher margin resources are utilized when possible, and more senior, lower margin resources are leveraged only when necessary.

PSA solutions link 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. All of these factors, each seemingly small and insignificant, add up to less efficient organizations needing to generate more revenue in order to achieve the profit target than their more efficient peers.

0.4
project margin %

Project Margin

Project margins are the link between the top line and the bottom line by translating revenue into profit. PSA tools drive better profitability by ensuring projects stay on track and are delivered on time and under budget.

0.0
project margin %
 
 
 
 
 

Revenue Required

$ 24.2 $ 37.0
million in revenue million in revenue

Based on the project margins, there's a big difference in the top-line revenue required to achieve profit targets. (Despite conventional wisdom, here, more is not better.)

 

Average Bill Rates

Professional services firms always have to walk a fine line between maximizing bill rates and remaining competitive in their respective markets. Professional Services Automation software provides detailed analyses on what it took to deliver projects in the past and what activities took more or less time than expected. It provides insight into which project managers were more or less successful at sticking to plans and budgets, and which projects resulted in unexpected rate attrition. Firms that have access to this wealth of historical analytics can turn it into a competitive advantage, and can use it to drive a comprehensive strategy to determine bill rates.

Projector takes this data-driven strategy a step further by helping organizations understand where rate losses stemmed from. Starting from the sales process, through contract negotiation, and finally into delivery, Projector’s rate realization model helps managers pinpoint problem areas. All this historical analytics, along with Projector’s ability to tightly manage the project delivery process, enables organizations to successfully win new work while still maximizing bill rates.

$0.70
bill rate per hour

Average Bill Rates

Bill rates translate effort into dollars. PSA software like Projector helps you balance maximizing your bill rates and staying competitive. They also ensure you're able to bill for every hour you work, thus minimizing revenue leakage.

$0.38
bill rate per hour
 

Hours Required

158 291
thousands of hours thousands of hours

Services firms who don't use PSA software need to work a lot more hours than teams that use Projector.

 

Billable Utilization

Project margins and bill rates help translate profit into revenue and subsequently into billable hours. One of the most significant benefits a PSA solution provides is increasing billable utilization, which, in our model means that fewer billable people are needed to produce the same number of billable hours. Efficient resource scheduling, including understanding who has availability to work on other projects, is the key to improving utilization. Professional Services Automation software enables organizations to satisfy staffing requests faster, schedule resources more tightly, and make more efficient use of available resources. This isn’t about wringing the last drop of sweat equity out of each employee. Solutions like Projector take each individual’s skills, professional development goals, travel preferences, and more into account, which results in employees being happier in their jobs, rather than feeling like a cog in a machine.

0.0
billable utilization %

Billable Utilization

Billable utilization is an indicator of the percentage of a 2,000 hour year people spend generating revenue. One of the biggest benefits of PSA tools is how they help organizations efficiently schedule resources on projects, thus improving utilization.

0.3
billable utilization %
 
 

Billable Resources Needed

107 213
billable resources billable resources

Because firms who use Projector are able to utilize their resources more efficiently, they need to hire, ramp, and develop fewer people to achieve their profit targets.

 
 

Percent of Billable Staff

Finally, Professional Services Automation software helps to, well, automate your professional services organization. What that really means is that a lot of the mundane stuff—wrestling with spreadsheets, extracting and manipulating data, negotiating for staff, compiling manual status reports, hand-editing invoices, re-keying data, and more—gets streamlined into a single system. In turn, what this means is that organizations require less overhead to support their billable staff.

When we add together the reduction in billable resources needed to generate the revenue with fewer overhead personnel needed to support them, we end up with a smaller staff needed to generate a targeted profit. The difference in total number of staff needed to reach your profit goal is materially smaller in a more efficient organization. They key to that efficiency? Any Professional Services Automation solution allows you to enjoy some of those gains. Projector as your choice of Professional Services Automation software takes it to the next level.

0.5
% of staff billable

Percent of Staff Billable

Efficient services firms are able to deliver work with fewer overhead staff needed to support their billable teams. PSA tools automate time and expense tracking, invoicing, project management, and more, helping to boost efficiency.

0.0
% of staff billable
 

Total Staff Needed

134 288
total staff total staff

With more efficient systems and processes, organizations that use Projector need less in the way of support staff, resulting in lower overhead.

 

Getting to the Bottom Line

What’s interesting about this exercise is that each individual gain in each individual step sometimes seems trivial—a couple percentage points in utilization improvement, a few dollars per hour advantage in bill rates. Compounded together, however, and scaled to the size of a typical services firm, the impact is striking. Envision a world in which you had to hire, ramp, manage, support, and pay 154 fewer people, but were able to generate the same gross profit.

THE BOTTOM LINE OF THE BOTTOM LINE

So, to generate $10 million in profit, a professional services firm that uses Projector needs to hire half as many people as an organization that has not yet implemented Professional Services Automation.
Hofferberth, David and Urich, Jeanne (February 2018). " 2018 Professional Services Maturity Benchmark". Service Performance Insight.

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Professional Services Automation: A Quick Primer.

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