5 Tips to Achieve Professional Services Profitability
For professional services, some firms show results far beyond those of their competition. This is likely due to optimal financial management that monitors more than just a firm’s ‘bottom line.’ By gaining visibility of all aspects of their operations they’re able to deliver greater profitability compared to their peers through proactive action.
However, those firms using legacy systems will struggle to gain the data visibility that is needed to monitor the KPIs that will give them a competitive edge.
When armed with the right tools that prioritize data visibility across your firm, it’s much easier to manage the metrics that affect your profit margins.
While leadership and strategy are fundamental for overall business success, the most successful firms will focus on the key metrics of EBITDA (earnings before interest, taxes, depreciation, and amortization), utilization rates, and time spent on non-chargeable work.
In this blog, we highlight the 5 most important behaviors that are keeping top performers on top, and how digitized processes could help your firm get this visibility of data.
1. Carefully selected new business growth
Top-performing firms set out to grow their client base and revenues year-on-year, but they’re very careful about which projects they take on.
The reason for this is simple: if you take on projects that are not a good fit or require more resources than you can provide, either internally or externally, this can impact not only the profitability of that project but also future projects, especially if client satisfaction levels drop.
If you aspire to become a top performer, you’ll need to win new contracts. However, you’ll need a system to reconcile your resources with the demand you are taking on. These tools aren’t just about accurate tracking of metrics, but control – teams can assess these metrics to ensure not only that resources are available, but that the right resource can be allocated to the right project.
With visibility of your vital KPIs, you can inform your teams accurately about your firm's capacity to take on new business, meaning that projects are never taken on without a comprehensive understanding of how this will affect the firm, and thus affect profitability.
Even when firms need to outsource work, having the ability to monitor KPIs throughout the project can ensure they retain full visibility and protect profit margins.
Monitoring KPIs shouldn’t finish once the project is completed. Understanding how KPIs are affected after the project is closed can help leaders understand how certain clients affect profitability, and help firms set their future business strategies to maximize profitable growth.
2. Closely monitored project profitability
Rather than wait for review season, top performers are constantly observing the actual and expected profit margins of every project, and taking the necessary proactive actions to ensure profitability isn’t affected.
While the actual values for these metrics can vary between sectors, a good rule of thumb would be, approximately: EBITDA above 20%, 85% utilization rates, 15% time spent on non-chargeable work.
Project Managers are given access to near real-time progress indicators that make any potential cost overrun obvious long before it happens, allowing firms to assign resources more accurately at the outset to maximize profitability. Without this near real-time visibility, with integrated data, managers won’t have the time to proactively react.
When profitability drops it’s often because a lack of visibility over KPIs means that the project wasn’t adequately evaluated before taking it on, or that the necessary maneuvering of resources and proactive action wasn’t taken early enough.
3. High invoicing rates
Professional services firms need accurate financial reporting and analysis processes to ensure they know where their money is, and to keep track of outstanding sales that need to be recouped. Firms can streamline the invoicing process with digitized financial operations.
Top performers constantly monitor and forecast their invoicing rates and utilization in the short, medium, and long term. This requires a high degree of integration between operational, financial, and HR data, but is vital for firms to recoup the money they are owed for their services.
One KPI professional services should monitor is Days Sales Outstanding which measures how long it takes for your business to collect payment from a client after a service is provided.
Days Sales Outstanding is a vital measurement of a healthy cash flow, executives need accurate reporting of this measurement to ensure that they have the money they are owed, and accurate methods to track payments, so when a firm chooses to spend, they don’t have to chase down payments.
DSO can also be useful to gauge client satisfaction. After all, a happy client is usually willing to pay on time.
4. Reliable invoicing processes
One of the most common causes of delayed income realization (and subsequently of depressed financial performance) is staff invoicing incorrectly or inaccurately. No matter how proficient your team is, any human employee can easily fatigue under large manual workloads that are repetitive.
Notably, a press release from Gartner® found that “While capacity issues aren’t new to accounting, demands on accounting staff capacity continue to rise. In the past three years, 73% of accountants report that their workload has increased because of new regulations, and 82% say economic volatility has increased demands for their work,” said Mallory Barg Bulman, senior director, research in the Gartner Finance practice.
If these financial and regulatory pressures continue to increase, as history suggests it will, the already-limited capacity accountants will be stretched further and increase error rates.
Mallory Barg Bulman
Senior Director, research in the Gartner Finance practice
Automating your invoicing process – from the collation and validation of information through to issuing to the client – virtually eliminates this problem. Even if your consultants and admin staff always invoice promptly the process is still time-consuming and this time could be given back to staff to use on something potentially more valuable.
Top performers invariably use modern technology to expedite the invoicing process, allowing their people to focus on profitable work. With automation more widely available, firms are able to reduce costs and workload, but also ensure invoicing processes are accurate so profitability can grow.
5. Carefully controlled operating costs
As mentioned above, the most successful firms work hard to keep their non-chargeable time below 15% of overall resources. This means keeping a close eye on operating costs and demands, allowing digitized operations to drive your firm while ensuring your people lead with a data-informed strategy.
A Cloud-based ERP can also help reduce operational. Nucleus recently reported that the benefit-to-cost ratio of Cloud migrations has increased by 12.5% since 2021, adding that “We expect organizations moving their ERP to the Cloud to cut IT costs by 20%, through a combination of administrative time savings and server provisioning costs and increase managerial productivity by 15%”
Beyond the actual cost savings that Cloud tools bring, they also provide the data visibility service-based organizations need to monitor operating costs, and more, to ensure that they don’t affect profitability.
How can Unit4 help you boost profitability?
By integrating your firm's data into the Cloud, your organization can gain unrivaled insight into the vital KPIs that drive profitability in your business. When all teams are empowered with this visibility it’s easier for a firm to create a strategy to increase profitability, by cutting costs, reallocating resources, or focusing on certain operations.
Collaboration is also boosted with this improved data visibility, ensuring that strategies can effectively be rolled out as all teams, from end user to executive, can see how their actions and operations affect profitability.
It goes without saying that those who have the tools to enhance the analysis and planning of financial assets and KPIs can monitor the metrics and take proactive action before it's too late, learn what drives value and profitability, as well as learn how profitability is affected by different factors.
Unit4’s ERPx is our ERP solution that integrates finance, HR, and Projects, to provide a seamless data experience for your teams. You can ensure your teams get visibility of the data that matters to them, automate accurate reports on different KPIs, and optimize your financial management to ensure profitability remains high.
Gartner Press Release, “Gartner Survey Shows That a Third of Accountants Make Several Financial Errors Per Week due to Capacity Constraints,” February 21, 2024.
GARTNER® is a registered trademark and service mark of Gartner, Inc. and/or its affiliates in the U.S. and internationally and is used herein with permission. All rights reserved.
