The following article is a guest post authored by Phil Pedlikin. Phil is a professional services executive with a proven track record of growth and profitability–increasing revenues and profits wherever he has been a leader. In this guest post Phil outlines how he has leveraged incrementalism to drive significant improvements in professional services profitability.
As services companies strive to improve profitability, they examine their metrics. They try to improve those numbers: utilization, direct cost percentage, backlog percentages, and many others. As companies look for ways to improve these numbers, they make one fundamental error. They rush to improve all of their numbers.The better approach is incremental. Most people think of incrementalism as something used in the public sector. Businesses in contrast need to be fast and nimble. While true, this does not mean rushing into mistakes. It means assessing how to improve your business incrementally and efficiently.
Two examples for your consideration: in the first, the embedded services division of a software company needed to determine why it could not generate its required gross profit. This gross profit was how it contributed, turning profits over to be spent on expansion. The services team targeted utilization as its key metric. Delivery personnel were given clear utilization targets, putting pressure on the whole organization to find more billable and eliminate non-billable work. Over three months, the utilization increased from 70 to 76 percent and continued that trend from there. This was not radical, it was incremental. Because there were no extra costs incurred, the revenue increase went to gross profit.
In the second case, an independent services company needed to eliminate hours spent on over-budget projects. They identified a significant number of projects that were more than 20 percent over-budget. If they could lower this number by getting projects under control, they could increase profitability and company valuation. They generated a plan for each project that was over-budget, changed incentives for the project managers, and used the lessons learned to sell correctly estimated new projects. Over six months, they targeted the right numbers and significantly improved valuation of the company. The company saw a drop from 42 percent of projects significantly over budget, to just fewer than 15 percent. The company’s patient approach paid off.
These are simple, useful examples. In each case, the company established incremental targets and an effective plan to address a key metric. They could have rushed, targeting multiple short-term unachievable targets, but instead chose an incremental approach that achieved their goals in an appropriate amount of time. For services companies, this is the proper methodology.
For more detailed information on metrics and incrementalism, please listen to the recorded webinar that I conducted for the Projector e3 community on May 12th. I covered more examples of both metrics and approaches that could be useful. If you would like to contact me with questions or comments, I can be reached at Philip.firstname.lastname@example.org or you can find me on LinkedIn at https://www.linkedin.com/in/philpedlikin.
About the Author
Phil Pedlikin has been the executive responsible for selecting and implementing Projector at two different companies. He has managed services organizations all over the world and is a renowned expert in cloud services having built and rebuilt organizations inside and outside of software companies. He is currently advising a series of companies on how to improve and expand their services and implementation businesses.