How consulting firms can maintain consistent profitability

09 February 2018 Consultancy.uk

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.

How consulting firms can  maintain consistent profitability

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.”

Quote - Fergus Gilmore, Deltek

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.”

Optimising project and financial management capabilities is a key success factor for consulting firms

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.

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Accenture's push into the creative sector is an identity crisis

18 April 2019 Consultancy.uk

In its latest push into the creative sector, Accenture Interactive acquired New York and London-based ad agency Droga5 earlier this month, adding illustrious clients such as HBO, Amazon and The New York Times to its roster of clients. With the latest in a long line of similar purchases, Accenture Interactive further demonstrated its ambition of becoming the globe’s leading trusted advisor to chief marketing officers. Yet according to Ben Langdon, Chairman of Class35, Accenture’s strategy may be heading in the wrong direction.

A press release on Accenture’s website announcing the acquisition sits next to a quote stating that “brands aren’t built through advertising” – a huge contradiction from a consultancy firm hell-bent on becoming the ‘CMO agency of choice’. It’s not alone of course. The entire consulting industry wants a piece of the creative pie right now. In addition to Accenture Interactive, recent acquisitions by PwC Digital, IBM iX, and Deloitte Digital meant that in 2017, for the first time ever, four of the world’s ten largest creative agencies were consultancies.

So just what it is that Accenture wants to achieve from this? For one thing, it’s clearly trying to be a digital transformation business. A one-stop creative shop rivalling more traditional models, it wants to lure CMOs in with the promise of lower ad spend and a “more impactful customer experience”. At the same time, though, it’s still in thrall to those same slinky, shiny branding and advertising agencies it’s attempting to disrupt. The Droga5 acquisition and that of Karmarama a few years before are both testament to this.

There’s a fundamental problem with this, though. Digital transformation businesses don’t sell to CMOs. These people have enough on their plates trying to transform their own marketing skills in order to keep up with an ever-changing market – they just don’t have the time or the energy to concern themselves with digitally transforming a whole business. If Accenture’s purpose is digital transformation, then going after creative agencies is barking up the wrong tree.Is Accenture's push into the creative sector an identity crisis?

Worlds apart

Perhaps more importantly, these two industries are worlds apart in terms of the way they think. Creative agencies are all about ideas, campaigns and consumers. Digital businesses, on the other hand, are customer-driven – they think in terms such as lifetime value, measurement, and efficiency. Customer-led thinking is an entirely different beast to consumer-led thinking.

The reality is that the arrival of digital and an all-encompassing obsession with technology, measurement and social has led to the death of agencies in a reductive, zero-sum, efficiency-focused battle with brands. Indeed, agencies have become so obsessed with the latest tech fads, they’re beginning to forget how brands work. Worse still, they’re beginning to forget how brands are built. And, by forgetting, they’re destroying their own values.

Killing creativity

All things considered, it really feels to me as though Accenture is a chip leader in a game it doesn’t understand. Expensive acquisitions like these show that they’ve got the big money, but they don’t appear to have any idea what they’re doing with it. Take talent, for example. The best talent in the creative industry right now is out in the market; it’s not tied to any one agency. Both agencies might well be at the top of their game, but why would a consulting firm waste so much money on buying them when they could hire high-quality creative talent on a contingent basis instead?

As their presence in the top 10 creative agencies shows, there is a growing trend in which Accenture, like many of the other big players, are buying up agencies as if they were nothing more than keywords. What they’re really buying, though, is a collection of credentials, clients and IP. Unfortunately, the talent that created those credentials aren’t going to stay at the business, the clients that hired the agency in the first place won’t be interested in buying what is basically just another part of Accenture, and the IP never really existed to begin with.

Droga5, for example, was one of the few agencies that did great brand work the old-fashioned way – undoubtedly something that made it attractive to Accenture in the first place. The irony, though, is that by leading it further away from the way of working that made it so special, the consulting giant will kill its creativity.

“Accenture Interactive has been dazzled by its ambitions to become the CMO agency of record…. But, in flashing its cash, it is spending millions on acquiring nothing of any value.”

If pressed, the recently acquired agency staff at Accenture will tell you just how dysfunctional the new arrangement is. They’re largely unfulfilled. Rarely do they feel their work has any sort of meaning or purpose. What’s more, the different disciplines have found little or no common ground, and find it hard to work together as a cohesive whole. It’s not surprising, then, to see talented people leaving in droves.

Beyond the window dressing 

It’s clear, then, that consulting firms and creative agencies are no easy bedfellows. But in his company’s defence, Accenture Interactive’s Senior Managing Director for North America, Glen Hartman, described its culture as being “far, far away from what a stereotypical consulting firm would look like. Our office and studios look a lot like Droga5’s.”

In demonstrating a belief that office design equates to workplace culture, this statement serves as an illustration of how confused Accenture is right now. It wants to justify its new strategy so badly, it’s started dressing like a creative agency. But if you look beyond the window dressing and see that you and your partners are speaking a different language with a different purpose, selling to different people in a different market, there’s no getting away from the fact that you’re different.

Accenture Interactive has been dazzled by its ambitions to become the CMO agency of record, and it wants to dazzle others with its new direction. But, in flashing its cash, it is spending millions on acquiring nothing of any value.

Related: Space between consulting firms and creative agencies is converging.