By Brian LaMee
Is my firm profitable? This is a question that is asked over and over again by consulting firms. To find this answer, it is very simple—look at financial statements and see if revenue is higher than expenses and if profit has been generated for the firm. If that number needs to be adjusted, it is easy—just cut cost or generate more revenue, right? Don’t we all wish it was that easy? One might pursue more business, but there are costs of pursuing business and while it might bring in more revenue, it could also increase costs, and profitability could remain flat, or the growth is not as high as expected.
A few months ago, Deltek teamed with Consulting magazine to conduct an Efficiency and Automation Survey to give consulting firms a better understanding of what drives profitable projects. You’d be surprised with what we discovered: 50 percent of firms find at least 1 in10 engagements isn’t as profitable as they’d hoped! And 1 in 5 firms don’t know how often their projects miss expectations! As the old saying goes, the first step is admitting there is a problem, the next step is figuring out how to fix it.
To affect profitability, firms can increase revenue (find more work), or cut costs out of the process. If a manufacturing firm is looking to cut costs out of their product to raise profitability, it looks around to find waste that can be eliminated or reduced from the process. If every 9th widget that gets kicked out of the system is bad, then the manufacturing firm can easily see that waste, and work to make the machine more efficient to result in a decrease of bad widgets. But in a services business it is a lot harder to look around the firm and see the waste, unless it is that brother-in-law you promised to hire that sits there all day surfing the Internet.
So how do Professional Service firms go about it? If you looked at your financial statements and all of a sudden it said you were not profitable, what would you do? You would “peel the onion,” so to speak, and look at the next level down. You look at the profitability of your projects. If you had four projects that were profitable and one that was not, it can offset all of the great work that the firm just did on the other four.
If you have the ability to view profitability the next level down, then you can spot the types of projects that are not as profitable for the firm and maybe, we just stop doing those types of projects or we have to charge more. We start to see the clients or the types of clients that are not as profitable for the firm and maybe, we even fire some clients that are costing the firm money, and are not providing that name recognition benefit we thought it would.
We can see the project managers that lead more profitable projects and those project managers that are not and have those great project managers teach others their tips so that more projects can be profitable. You get the idea. But what happens when you find that offending project or projects? Peel another layer.
Next, you want to go another level down and see why the project was not profitable. Not every firm knows which projects are unprofitable, or how often– but most have ideas about the reasons why. “Scope Creep” is by far the guilty party, according to the survey, but in more than 50 percent of all firms, Inaccurate SOW’s are a partner-in-crime.
Was it a fixed bid project and we spent more hours on it than we should have? Did the client make changes to the project, which raised costs and we did not raise the fee to the client? Did we plan to use a junior resource, but due to the demands of the project, we ended up using one of our more senior resources, which raised the cost of the project? And we can keep peeling that onion until we find the answer to our problem and how to fix the profitability on all of our projects.
Instead of having to cut more costs someplace else, or put more pressure on marketing to find more work, we can try to make sure more of our projects are profitable, and raise firm profitability with the team and projects we already have. Also, now that we know what to look for, we can set early warning systems to watch project profitability and catch problems before the project is over, and at a time when we can still make adjustments and get the project back on track.
See, no tears.
Peeling back the onion is easy if you have the right tools that offer up this information. If the information is not captured, or systems aren’t integrated, you’re not getting the answers you need to make the right decisions.
Brian LaMee is a Senior Director of Product Marketing at Deltek.