It’s the natural order for any business to want to increase profit margins year-on-year. What not all businesses consider however, is the importance of understanding the profitability of their whole organization, and the impact that each billable and even non-billable project can have on the overall financial picture. Without such an overview or visibility, said businesses will never be able to recognize the actual costs of doing business, or identify any areas that could be improved.
The aim of this article is to show you ways you can improve profitability for your professional services function, with a number of tried and tested methods that, in theory, can see significant returns for your business.
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Ways to improve profitability
Below explores five key areas that can help to drive profitability. We will go into each of these, and show you how to assess profitability, deliver growth, plan and manage major change.
1. Improve Profitability by Managing Costs
Managing costs closely can improve profitability. Most businesses should be able to find some wastage they can reduce in one area or another, but it’s vital that costs are not cut at the expense of the quality of the product or service they offer.
There are a number of key cost areas to consider, highlighted below:
Suppliers - Could you be getting a better deal from your suppliers? Can you negotiate better terms or is it worth changing suppliers? Can you operate on a basis where you buy ‘just in time’ to utilize your working capital? Are you doubling up functionality anywhere?
Production - Have you identified areas where you can reduce waste and bring down the costs of materials? You need to check whether your production processes can be adapted to be more streamlined, which is achieved by using fewer working hours and resources to cut labor costs.
Finance - Are your finance facilities in need of review, and are they at the most competitive terms? If you are using any loans or overdrafts, are you using these effectively?
Premises - Have you assessed whether you are fully utilizing your available space? Could your premises be used any more efficiently? Is there any unused space that could be sublet?
Transitioning from traditional cost management to a more nuanced approach, such as activity-based costing (ABC), offers a strategic bridge to further enhance profitability. While scrutinizing cost reduction in suppliers, production, finance, and premises is pivotal, ABC takes this analysis to a deeper level. Activity-based costing involves assigning costs to specific activities, allowing businesses to pinpoint the true cost drivers within their operations. By associating costs directly with activities, organizations gain a granular understanding of resource allocation, unveiling areas for improvement.
Companies that use activity-based costing will have an easier time finding the actual cost of various business activities. Activity-based costing highlights how much it will cost you to perform a specified business function by assigning proportions of all your costs to specific activities.
The preliminary analysis may not be the quickest, but activity-based costing can often unearth unnecessary costs, and as a result, inefficiencies, that you won’t normally spot using more traditional methods.
2. Improving Utilization
When it comes to assigning teams to projects, it's crucial to consider not only their skill sets but also their availability to deliver their best work. Each team member is unique, with their own strengths and areas for improvement. As a manager, it's imperative to harness these individual strengths (your resources) in the most efficient manner possible.
The challenge lies in strategically aligning your employees with projects that best suit their capabilities. This entails not only understanding the strengths of each individual but also having a comprehensive view of the strengths of every employee across the organization. This knowledge empowers you to effectively allocate resources at any given time.
Project managers play a pivotal role in this process, leveraging their expertise in budgeting, scheduling, and resource management. To achieve accurate results, they require real-time access to project status data. A robust scheduling tool like Precursive can offer visibility into each team member's current and upcoming projects, equipping managers with the insights they need to execute projects with maximum efficiency.
By efficiently forecasting resource capacity and demand in this manner, projects can be completed more swiftly and effectively. This not only saves time and money but also enhances customer satisfaction, ultimately bolstering profit margins. It's important to note that this approach particularly applies to Fixed Price Professional Services. In the case of Time and Materials contracts, speed of delivery doesn't directly impact project margins, though it remains pivotal for packaged services.
Consider too, productive utilization, which encompasses a broader spectrum of activities that contribute to organizational success over billable utilization which specifically focuses on the revenue-generating aspect of an employee's time spent on client-related work. Both metrics are important in evaluating the overall efficiency and effectiveness of resource utilization within a professional services organization. The specific emphasis on one metric over the other may vary based on the organization's goals, industry, and business model.
3. Review Pricing Strategy
If projects are frequently running over budget, it’s likely that you’re either underestimating or undercharging. Either way, it needs changing.
Increasing your prices is a daunting thought, on account of the fear of the potential loss of clients if you’re no longer competitively priced. Many organizations worry that a price increase will impact them negatively, when in actual fact, the opposite is often the case. Research from McKinsey found that an increase in price can generate more profit than the same increase in volume or a similar decrease in variable or fixed costs. Further research even suggests that a price increase of just 1% can increase operating profits by an incredible 11%.
There’s only one way to determine if a price increase is worth it for your organization, and that’s to have visibility on the associated costs with certain projects with the aim of diagnosing the problem. As soon as you have a better understanding on where there is room for improvement, you should be able to raise prices comfortably (and likely see an immediate impact). It’s worth noting that any price increase should be based on historical project information and NOT on assumptions; if that historical project data isn’t accurate or detailed, ensure that this is cleaned first.
Successful organizations will track and manage projects in real-time to measure any deviations from hours and budget and float the idea of a pierce increase straight away to ensure maximum impact.
4. Utilize Professional Service Software
Professional Services software sees many business procedures and tasks automated through an application, and it is one of the key activities in increasing your profitability. With a software platform for professional services, businesses can get real-time information throughout the entire lifecycle of a project, along with the information and insights they need to make informed decisions.
Precursive is the perfect software tool if you want to increase profitability. Take a look below at just some of the things we offer:
Visibility and Resource Capacity - Gain a comprehensive view of resource availability and capacity with Precursive. This centralized platform empowers organizations to plan effectively, ensuring that tasks are completed on time and within budget.
Accurate and Timely Invoicing - Tackle billing challenges effortlessly with our professional service automation software. Precursive can seamlessly generate invoices, allowing customers to effortlessly track rates and expenses at the click of a button, ensuring a steady cash flow.
Project Management Excellence - Careful project oversight is paramount. A PSA solution facilitates real-time collaboration for project managers and teams. Any arising issues can be swiftly identified and addressed. Organizations receive precise updates, all conveniently accessible from any location.
Automated Tracking of Project Financials - Automate time and expense tracking for seamless monitoring across projects, teams, and individual employees. This feature ensures precise financial tracking, allowing for adjustments as needed. Say goodbye to manual spreadsheet entries and simplify reporting. Easily forecast quarter by quarter and compare with actuals to measure against agreed targets.
By leveraging Precursive's suite of capabilities, organizations can streamline operations, enhance financial tracking, and ultimately drive profitability.
How does Precursive Compare?
If you’re searching for an easy-to-use PSA tool to help boost margin and profitability, look no further, because Precursive is the answer.
Take a look below to see how Precursive compares with other PSA solutions.
5. Expand your service offering
If done correctly, moving into a new market area can give an organization a new lease of life and can bring major boosts to your profitability. Expanding into new markets does not come without risks, and mistakes can be costly.
Before you begin, it’s crucial to thoroughly research the potential opportunity. Are you able to tailor your existing service offering for new markets? This method will help to generate new revenue at a much lower cost, and is a great way to boost profit.
Another question you must ask yourself is whether you understand who your new customers could be, what drives them, when and how will they buy your new product or service, and how much will they be willing to pay for it?
If you’re developing a new product or service for a new market, you need to consider its viability very carefully. Here’s some key things to consider:
Do you have the skills in-house or will you have to hire new staff?
Have you got sufficient resources available to make the project work?
Are you able to minimize the risk?
Are you certain there’s a strong demand for the new product or service at a price you can make a decent profit on?
H2: What next?
Understanding where your business makes and loses money could not be more important, and should be one of your highest priorities. With visibility into your project resources, costs, outcomes, and customers, you can implement the necessary changes needed to maximize your project profit margins.
Looking for more information on profitability and revenue, take a look at our guide on the methods of revenue recognition to learn more about how to bolster your organization's financial performance. But wait, there’s more! For those of you looking for a broader look at revenue recognition and what it means, then look no further than our helpful guide here.
If you know how to build and price your service offering it can be much more profitable. If you’re looking for help on how this can be done effectively, then [what are the chances] take a look at our playbook on How to Productize Services Delivery and understand how it can improve your profitability.