Trend for consulting firms in 2023: Maximising margins and profit
Despite enjoying growth last year, the consulting industry needs to intensely monitor profit margins in 2023, amid an increasingly challenging and volatile economic landscape. Neil Davidson, Group Vice President at Deltek, outlines how consultancies can maximise margins and profit through focus on best practice internal operations.
Now in its 16th year, the annual Professional Services Maturity Benchmark Report by Service Performance Insight (SPI) sheds light on the top trends and metrics in the professional services landscape. The 2023 edition has revealed that more than a third (35%) of UK consultancies improved profitability in 2022.
Whilst this was positive news, profitability across the consulting landscape declined compared to the year previous, suggesting consulting firms needs to monitor profit margins.
Resilience and agility are core trends we expect to continue to see in 2023 and be carried into next year. To be resilient, consulting leaders are taking a proactive approach through smart investments and implementing efficiencies. They are doing this by looking ahead and investing in areas that will future proof their business, and leverage disruption.
Examples might include exploring and investing in opportunities within and outside their core business and investing in digital technologies that extend the organisations lead in years to come. Investments in AI and technologies like ChatGPT is growing rapidly (case study: McKinsey & Company), however AI is pervasive, implementing this technology in a consultancy with obligations to their customers on GDPR, intellectual property and data privacy will take careful thought.
To maximise profits, companies need to actively monitor lagging and leading indicators across their business; from costs and pricing strategies through to people and products.
It is a huge undertaking, but without it, it is impossible to make a call on strategic investments or reprioritisation of strategy and de-investment of low margin services. When the data is available, the insights provided are well worth the effort – particularly as the economic landscape looks uncertain ahead.
In a bid to maximise profit potential, consulting leaders are advised to focus on three key areas:
Unleashing profit through sharp insights
To make informed decisions, business leaders need to have full visibility into their business’ data so they can access the insights needed to make strategic business decisions around profit margins.
Business leaders should be able to access team resources, outstanding invoices, project pipeline insights and see the status of various projects in an instant. However, this is not always the case. Legacy systems and processes, such as storing data in multiple disorganised spreadsheets, can significantly hamper the job of aggregating different data sets to obtain an accurate picture of the state of the business – and can make collating data an additional project.
This means, business leaders are unable to make effective data-driven decisions and may often only realise an investment is needed in reaction to an issue, rather than being able to make the proactive decisions the business needs to grow.
This is where digital transformation comes into play. According to recent research by Deltek (‘Trends and Insights for Architecture, Engineering and Consulting Firms’), 74% of architecture, engineering and consultancy firms believe that they will lose market share in the next three years if they fail to invest in digital transformation.
This transformation does not have to mean embedding artificial intelligence throughout the company’s operations. Digital transformation needn’t take long and can still create tremendous value.
Take enterprise resource planning (ERP) systems for example. The software brings together all the business’s insights into one verified and unified platform. In moments, business leaders can pull vital information about the state of the business from the platform and use these insights to increase profit margins, have better visibility on where the company can make wider efficiencies and take corrective action where needed.
Fuelling profitability through project management
Outside the business-wide insights provided by ERP software, on a more granular level, digital transformation will benefit each project individually. Across the consultancy, several different project managers will be responsible for the successful execution and reporting of projects. It is the nature of working in a project-based business. However, different individuals have different preferences when it comes to the way that they like to execute a project.
One project manager’s preference might be using written documents to keep track of the status of their projects when another might keep written notes. The problem is, there is no unified system for these individuals to work with, which means, the insights of their projects are lost. Opportunities to increase profit margins cannot be identified across multiped systems and multiple platforms.
Bringing all the projects into one platform not only feeds directly into business insights, but they provide live insights directly back to the project managers. The team can customise reports which shows the budget, deliverables and where the project is in terms of its KPIs.
Using this insight, individual teams can identify growth opportunities with clients, and make note of areas where profit margins can be increased through project efficiencies. And, by operating from a single version of the truth the team understands the projects overall performance and how they are contributing to it.
We’ve all heard the phrase knowledge is power, and that is particularly true when it comes to projects. The more the business leader knows, the more positive the changes they can enact.
Further reading: How consultants can deliver successful projects.
Prioritising partnerships KPIs
During market fluctuations, clients may reassess their spending and make decisions to cut costs. That is why with the current state of the market, having a trusted client relationship has never been so important.
Consultants must prioritise transparency and open communication when discussing pricing with clients. Additionally, consultants should be ensuring that clients understand the rationale behind their pricing structure. Through a trusted, transparent, and mutually beneficial partnership, client, and consultant both succeed.
A mutually beneficial partnership between a consultant and a client lays the foundation for long-term growth. As the client achieves success and experiences the value delivered by the consultant, the relationship can evolve into an ongoing collaboration. Continued engagement with a trusted consultant enables the client to navigate future challenges, adapt to market dynamics, and sustain growth over time.
By continually monitoring and refining processes, consultancies can streamline operations, optimise resource allocation, and enhance efficiency. Companies who tie their aspirations to measurable key performance indicators (KPIs) can better influence outcomes, because underperformance triggers action and superior performance shows meaningful achievement for the organisation and client.
Smooth project execution is essential to winning and retaining work, meaning risk management strategies need to be a priority. Digital transformation is one-way firms can enhance the project process, without compromising resource in other areas of the business.
In summary
The consulting industry is experiencing trends and challenges in profitability, yet there are opportunities to further maximise profit potential in 2023. As costs rise, consultancies are proactively enhancing their business strategies to strengthen foundations and drive profitability. A comprehensive approach to profit optimisation, encompassing costs, pricing, people, and products, is essential.
Amidst the challenges of the economic environment, effective digital project management emerges as the key to closely monitor business performance, identify revenue opportunities, and drive operational efficiencies. It provides project- based organisations with the clarity to innovate, create value and meet client's objectives, effectively.
