Maximising margins in professional services with automation
Ian Greenhalgh, Managing Partner at Delaware, considers how automation can help professional services firms achieve the maximum project margin.
It can be extremely difficult for professional services firms to get their financials back on track once profit margins begin to decline. Losing margin at the beginning of a project can be disastrous for profitability and, consequently, for employee morale when annual bonuses are also impacted.
To avoid these pitfalls, it’s important to be able to keep track of project financials in real-time all the way though the project delivery. The alternative – having to wait until the project is wrapping up to access the relevant data sets – is a sure-fire way to lose out on revenue and facilitate dwindling profit margins.
The challenge professional services firms face in achieving this often comes down to outdated-manual systems, particularly found in back-office administration and paper expense processing. These systems not only prevent organisations from effectively connecting people and processes, they are also costly and time-consuming.
What’s eating project margins?
To guarantee strong profit margins, it’s important to make sure that the profit margin doesn’t just cover project costs but also pre-sales activities. Businesses need to budget everything – not just projects but anything that’s significant such as pre-sales, project execution and even the billing itself.
Expenses from sales should be budgeted for and tracked, and these costs should be covered by profits. Revenue is important but businesses also need to get paid, so managing accounts receivable for potential issues is very important, as is staying on top of collections.
Payment terms that are maybe not as favourable for the business also impact cashflow, leading to revenue leakage and find you have to use loans to pay salaries and invoices. It’s important to negotiations terms and conditions and payment terms to make sure they work for the business as well as the customer.
Time reporting is critical in professional services companies. It should be made as easy as possible for employees to record their time. The easier it is, the less resistance there will be. Businesses also need to ensure that time is entered before invoicing is carried out and certainly before projects are closed. Closing a project before all time is recorded will mean that the unrecorded time is not billed, and this can add up to significant revenue losses.
Recording actual time is another area that is commonly missed. If employees are working 12-hour days but they are only logging eight hours, then the business is losing visibility of areas where additional revenue should be claimed, as well as the need to hire additional help instead of allowing those working 12-hours days to reach burnout.
Further reading: Profitability and project complexity main challenges for consultants.
The limitations of legacy systems
Outdated systems are often the source of the difficulties outlined above. The right system should enable real-time data entry and visibility. If employees are entering their time on the first day of the month but project managers are only reading the time sheets at the end of the month, that creates a 30-day gap where insights that could increase revenue and improve the financial efficiency of projects are being missed.
Reliance on spreadsheets is as dangerous to healthy revenues as outdated systems. Recording anything related to the financials of a project in a spreadsheet is an issue, as they don’t provide a holistic view of what’s happening within each project or across the full range of projects employees are working on at any given time. The right platform will make this possible through a simple, user-friendly dashboard.
Lack of KPI measurement is another common challenge. Project margins and utilisation targets enable project managers to track their profit margins and KPIs themselves instead of going through the lengthy process of having a back office provide them with the data. Enabling project managers to access the data they need whenever they need it, whether for communicating with a customer or one of their consultants, can boost efficiency and improve customer and team relations.
Self-service and automation are key
Enabling self-service for project managers through a dashboard can drive efficiency in a number of ways, from approving timesheets to manging scheduling, approving expenses, and performing billing. Not only does this benefit the project managers, it will benefit profit margins too.
Real-time visibility of project data not only helps to improve processes and understand profit margins better, it helps with pricing projects the business is bidding on more accurately. In turn, this reduces the risk of losing revenue in future projects and helps to maximise profit margins. Customers will commonly ask professional services firms for fixed price projects, and without the ability to track costs, these projects can result in a low margin. Yet with access to the right data, fixed price projects can be more profitable too.
Anything that can be automated or simplified will help to protect and grow profit margins. In addition to providing dashboards for reporting, it’s important for systems to remind employees that they should be reporting. This can be done at a project manager level, notifying them when team members haven’t completed time sheets, for example.
It should also happen on an individual level, reminding employees that they need to record their time regularly. Project managers can also be automatically notified by the system when a project is within a 10% margin of its estimated budget.
Implementing a system that makes it easy for employees to log time and costs, and provides project managers and employees with a holistic view of data across their projects, will enable oversights to be replaced by action. When this is achieved, professional services firms can watch their profit margins flourish.