In our last blog post, we talked about how utilization and profitability were two sides of the same coin and dove a little deeper into the first side: improving utilization. Today, we’ll talk about profitability, the flip side. For professional service firms, where knowledge is the product, maintaining healthy profit margins is nothing short of an art. It takes a lot of skill, a little bit of luck, and reliable processes and systems to ensure that your services team is running at maximum efficiency. If only one of the many factors affecting profitability falls out of sync it can have dramatic results on the bottom line—a project runs over budget and its margins shrink, key resources are over-worked leading to constant employee churn, or loose systems are employed that let billable time slip through the cracks.
Increasing profitability is a primary goal for almost any business. For professional service firms there are two main paths for increasing profitability—expand their portfolio by winning more projects, or streamline their operations. Revenue growth is definitely the sexier of those two options, but without the tools and processes in place to efficiently deliver work any gains in revenue won’t find their way down to the bottom line.
In our recent PSA software infographic, 8 Fast Facts about Professional Services Automation, we highlighted how service organizations that don’t use a PSA tend to generate less revenue and profit per resource than those that are using a professional services automation tool. In fact, organizations using Projector generated nearly 20% more revenue per resource which translates into 33% stronger profit margins. With a delivery management system properly implemented every new project a service firm wins or each new consultant they hire will have a greater impact on the success of the business.
Because professional services automation software touches every aspect of the delivery process there are many opportunities for it to help improve profitability, including:
At the most basic level service automation software eliminates opportunities for revenue leakage. Making sure that every hour gets billed for starts with the time entry process. PSA solutions offer low-friction time entry interfaces that are available across multiple devices alongside prominent reminders and indicators for missing time. Once time is in the system, the system ensures that every billable hour worked makes it onto an invoice.
Approval workflows can be wrapped around modifications to time submissions, variance reports can highlight where more or less time than planned was submitted, and the invoicing process will warn managers if unbilled time submissions haven’t made it through the process.
On the surface these items might seem trivial, but in the fast paced services world it is easy to forget to log that impromptu client call or after-hours support. If your service firm is running its business on a white board or in Excel, revenue leakage may be a problem too costly not to confront. With a delivery management solution in place every hour worked gets tracked, every resource is held accountable.
Savvy service managers know that one of the best ways to extend stronger project margins is by strategically deploying their resources. Swapping in a less costly resource where possible or substituting in more experienced team members when a schedule is tight can have a dramatic effect on a project’s profitability and overall client satisfaction.
To fully leverage their workforce service managers need to have a complete understanding of their project portfolio and resource pool. PSA solutions give managers enough high-level visibility into resource skills, availability, and costs to be able to match the right person with the right project, at the right time. More importantly, service automation platforms give managers the opportunity to use many different criteria when seeking the right person for a task. Whether sorted by geographical location, specific skill sets, availability, or seniority, resources can be presented to managers by how closely they match the current need.
Furthermore, basing staffing decisions on real-time data eliminates the costly “guess factor” of throwing resources at projects and gives a clearer understanding of the fluctuations in your resource pool. As an example, if you know that you have enough work in your backlog for 14 technical consultants when you only have 12 on staff lets you make practical staffing decisions ahead of time. Outsourcing overflow work to contractors, preparing your team for some overtime, or deprioritizing less time-sensitive work lets you defer the cost of hiring another resource and maintain the planned margin across your projects.
Fixed price projects are both a blessing and a curse for service firms. Managed well, they have the opportunity to produce high margins. One or two miscalculations can cause margins to sink, or worse, go negative. Without strong systems in place managing a portfolio of fixed price projects becomes a gamble instead of a competitive advantage.
Service firms that use a robust services automation platform are able to monitor their fixed price projects closely to spot issues quickly and avoid costly corrective actions. Project managers have a clear view of the actual amount of effort spent to date alongside the projected investment needed to complete the project.
Understanding the amount of effort remaining on a fixed price engagement is relatively simple; understanding the amount of revenue that effort represents is more complex. Margins could be strong at the start of the project but start eroding as the latter half of the project slips. Using a method called dynamic revenue allocation—a topic we covered in our managing fixed price projects blog post—service firms can understand how work performed today affects margins weeks or months away. They can then compensate by deploying less costly resources, adjusting the project scope, or negotiating for a change order with the client when things aren’t going according to plan. Regardless of the solution a project manager pursues, having a service automation platform in place helps managers spot issues within projects long before they would otherwise—greatly reducing the cost of corrective actions.
There are many competing factors that play into a service firm’s profitability. No service firm will be able to control all of those factors, but with reliable processes and systems in place, they will be able to keep a firm grasp on healthy profit margins. Firms that closely monitor project progress, level workloads among team members, and keep both resources and managers accountable are consistently able to achieve stronger project margins than their peers. As service firms grow, the efficiency of their project delivery system will determine how much top line growth will find its way down to bottom line success.