Why profitability has to be top of mind for consulting firms

15 March 2021 Consultancy.uk 4 min. read
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In these straitened times, and facing a complex landscape including mounting competition and an unpredictable environment, financial considerations are top of mind for management consultancies. Nigel Grillet, a leader at delaware, explains why consulting firms need to increase their focus on the bottom line and how they can keep on top of costs and revenues.

Not only should businesses concentrate on managing cash well and handling the financial close process more efficiently, but a key concern is around achieving straightforward profitability. Central to this is the need to provide value by charging rates that are fair and in line with industry standards, but that allow the business to be profitable. 

Unfortunately, today many management consultancies don’t have the right kinds of technologies or processes in place to ensure their finances are tightly controlled and managed, despite the fact that profitability is their primary goal. These organisations often employ independent highly mobile experts to generate their revenues for them.

Why profitability has to be top of mind for consulting firmsTheir main ‘end product’ is the sale of niche expertise – and that brings challenges when it comes to processes such as contract and project management, management of recurring business and billing, and project budget and cost follow-up.

A systems gap

Many consultancies don’t have the right tools or technologies in place to address their financial management challenges. Many have not yet implemented fully integrated systems, and some are still conducting their financial management in Excel spreadsheets, an approach which is likely to be cumbersome and result in errors. 

Part of the reason for this slow adoption of the latest tools is that as recently as five years ago there was little in the way of data analytics technology available for them to tightly control their financial management. Part of it is also down to the fact that, historically, competition in the sector has been less intense and there has therefore been less need for consultancies to keep a tight rein on their finances. But this is changing now and the need for consulting firms to start monitoring and measuring their financial performance has become paramount to success. 

Scoping out a future path

To improve their financial position, consultancies should be concentrating on areas such as advanced analytics, automation, and real-time revenue recognition. They need, of course, to choose tools that are user-friendly, not just for employees in the back office but also for consultants themselves, recording their time. 

There are a lot of consultancies losing out on revenue, simply because consultants are not inputting time, or they input it into the system too late. Having a system that is very easy to use, no matter where they are geographically or what device they are using, can be helpful, enabling consultants to enter their time with ease. 

Tools also need to have a self-service capability in order to drive efficiency. A consultancy will not necessarily want a project manager to be sending emails to back office staff with document change requests, for example. Instead, managers should have the capability to execute tasks themselves by logging in to the system and making the relevant changes, approving documents and sending out bills to customers. 

An integrated system

In this context, using an integrated cloud ERP system with embedded analytics capabilities, for example SAP S/4HANA Cloud, will give the business data and insights it can rely on in terms of actual costs and actual revenues, together with the profitability of customer accounts, projects undertaken and lines of business. It will also help the business to pinpoint pre-sales costs and the cost of sales generally. 

In short, a fully integrated system can tell the consultancy everything it needs to know about its actual profitability. Such an approach will enable the consultancy to drill down into the detail of their financial position and get down into the nuances of specific problems, as well as benefit from better forecasting and predictive insights. 

Having access to this kind of data could ultimately mean the difference between setting management consultancy businesses up either for growth or stagnation. It will help businesses to focus on growth in the areas where they are most profitable, specialise in the areas that their customers are happiest with, and identify areas that they might have previously thought were profitable but in reality are not.