How consulting firms can maintain consistent profitability

For project focussed businesses such as consulting firms, keeping a close eye on profitability metrics such as project performance, billable utilisation of resources, write off hours that should be billed and working capital are a core part of solid project management. Maintaining complete visibility of projects and gaining tighter control over financial results is, however, a challenging task in practice.

To grow profitably in the increasingly complex world of professional services, consulting firms must, according to Fergus Gilmore, Vice President at Deltek, an IT services firm to the industry, maintain absolute control over five key areas to stand a chance at driving up profitability:

• Win - finding and retaining clients is the primary means of growing your business
• Manage – how do you maximize billable time, without overstretching your staff?
• Develop – attract, nurture and retain talent to positively affect business
• Deliver – be in total control of your financial position
• Measure - track and pinpoint what works and what needs to change

Gilmore, who has over 20 years of experience working with consulting firms, says that all five areas are equally weighted in terms of controllability. “The leadership of any consultancy can successfully manage the business by making smart, effective decisions in how they deploy resources, allocate work, charge for services, nurture talent and measure results. However, management’s ability to fully control these levers varies because of external influences.”

“For example, fees are often driven by external factors, such as competition levels within the industry and the ‘going rate’ the market will bear. Consultancy firms certainly have control over what they choose to pay their people but they must optimise employee utilisation to protect or improve margins,” he remarks.

The expert highlights that, for maximum effect – for the consultancy and its clients – leaders of consultancies need to maximise real-time visibility and process execution around five levers to deploy resources. Gilmore explains: “it’s much more pragmatic for consulting firms to focus on 2 key areas that cover all of the management levers, rather than spread their attention by dealing directly with all five. The two areas of recommended focus are Resource Management (manage) and Financial Management (deliver). Though notably more pragmatic, challenges in the existing environment make both of these key areas difficult to address.”

The resourcing challenge

The time-and-materials legacy within consulting has historically generated high margins for boutiques, sometimes exceeding 30% - 40%. Though this has been a common concern for firms in the past, consultancies have witnessed a tremendous change in the past five years regarding the way engagements are performed. The clients of consultancies have become more sophisticated about how they purchase professional services, engagements now see fewer team members on site, and projects have more built-in milestones, among others.

Gilmore remarks “not only are many client companies staffed with ex-consultants who work with external engagement teams, but the procurement departments within many companies have taken an active role in managing overall spending on consulting services. Facing these buy-side pressures, firms see internal issues as well. As they grow larger and expand into competitive markets where discounting eats into margins, holistic management is critical to remain profitable. Time and resources, and therefore profit margins, can be consumed by wasteful practices, such as poor prioritisation or overstaffing/understaffing projects or not planning at all.”

How efficient resource management can drive consistent profitability
To optimise their processes, consulting firms have access to multiple business management applications. Project-based enterprise resource planning (ERP) and professional services automation (PSA) are two of the most comprehensive systems on the market.

Gilmore says “the unified approach of today’s business management applications not only allows firms to track operational metrics, but also provides firm leaders and engagement managers access to real-time information. Consultancies must recognise how these business solutions can streamline project management, and track operational metrics quickly and efficiently. A unified approach addresses one of the fundamental needs for effective resourcing: a holistic view of capacity and workload, including proposed work, engagements-in-process and past work. This 360-degree view of a unified resource management approach brings both the engagement manager and the CFO tighter control over costs and invoicing and enables project teams to remain agile and in control when it comes to delivering on the project’s agreed statement of work (SOW). Therefore, reducing the risk of scope creep and project failure, the silent killers of project-based businesses.”

Stitching together original estimates with completed billable work and time remaining establishes cause-and-effect relationships between decisions and their impact on expected profit or service, while thresholds and associated alerts provide early warning of potential cost overruns or missed deadlines. “This visibility guides decisions such as adding resources, extending deadlines, billing time and even declining new work,” says Gilmore.

The financial management challenge

When consultancies first originate, many often build their own systems or adapt off-the-shelf solutions that are popular within key process areas. In these cases, the typical environment consists of multiple stand-alone products linked by people, not process. For example, a firm’s CRM processes may perform exceptionally well in client-tracking and prospecting, yet the CRM system doesn’t connect with expense and invoicing applications used by the finance department.

Gilmore indicates “the problem, is that disconnected systems put a wrench in the works when it comes to data sharing. Because information can’t be easily shared across processes and is often inaccessible to those who need it most, disconnected systems inevitably lead to inefficiency and inaccuracy. Consider the simple act of producing an invoice. When the accounting team needs to break down the billed work into tasks or verify expenses if questioned by the client, it must access the tasks and deliverables from the standalone project-management system. Inability to do this means a series of costly, yet non-billable, phone calls, e-mails or even internal meetings to identify and properly invoice the deliverables.”

Disconnected processes– from planning to delivery to financial accounting – foster suboptimal decisions, which lead to higher than expected costs, says the Deltek Vice President. “Consider a consultant faced with recording or absorbing time associated with a moderate scope change on a given engagement. With the project management system detached from the financial system, the consultant can’t see that the account is in arrears, or that the practice has hit its threshold of allowable non-billable time.” With no way to establish process controls to identify –  let alone limit – pro bono work, managing partners are “left in the dark until the engagement concludes, and anticipated profit isn’t as expected.”

How financial management & reporting can drive improved margins

According to Gilmore, today’s business solutions can streamline financial management by unifying disconnected processes and fragmented information into a common, shared environment. “For decision-makers at all levels, such solutions present a current view of clients, workload, resources and finances.” He adds, “unified business solutions allow firms to better manage budgets, create and consolidate reports and look for trends and relationships in all parts of the business. Firms also gain more visibility into financial and project accounting, allowing them to maintain tighter control over costs, shorten billing cycles and monitor variations in estimates.”

A unified financial management approach also accelerates cash flow while streamlining administrative overhead. Time capture is immediate, so billability increases as billable hours are no longer “lost” when actual-worked time is forgotten at the end of a week. Billing becomes more efficient, since billable hours are immediately posted,  eliminating phone calls and e-mails among finance staff and consultants which would otherwise be needed to identify, correct and reconcile billable time.

Moreover, clients nowadays are requesting complex and time-consuming project reporting and financial accounting. “Though critically important for client relations and compliance, this non-billable work is nonetheless an opportunity cost, in that, resources engaged in providing invoice transparency are not billable to other work that would otherwise be driving consultancies’ growth,” says Gilmore.

Modern financial management solutions take care of this, he points out, by placing controls on each engagement that enforce client requirements, enabling consultants to record billable time to the appropriate phase, task or cost-centre. “Correct and client-acceptable invoices enable accounting teams to bill faster, reducing service-delivery cash cycles while delivering a higher level of client satisfaction.”

Gilmore concludes “consulting is an industry that will always ride the economic roller coaster. But that doesn’t need to make management queasy. Consultancies must smooth the jagged peaks and fill the deep valleys of an otherwise cyclical business. The only way to accomplish this is by truly optimising project and financial management capabilities. Only then will a firm be able to profit consistently.”

For more information Deltek’s view on how consultancies can improve profitability, download the report ‘How to turn project efficiency into business profit’ on the company’s website.

Related: Five tips for consulting firms to manage changing market conditions.