One of the most important questions – Which projects are most profitable – is one that professional services firms need the answer to. Not having this information can affect a firms’ ability to make accurate bids, improve their billable utilization or make the right long-term investment decisions. While the industry may vary, this holds true for all project-based firms…survival and growth depends on a project’s profitability.
A project can deliver a myriad of services, but they generally all include:
- A beginning and end with a team assigned to deliver a service
- Short or long-term contract periods
- Billing terms ranging from time and materials to fixed fees
Since every project is different, it’s important to know project profitability, not only by individual projects but also by project types, client types, industry, and geography.
Many of our client’s goal for 2018 is improving project profitability. Many organizations are facing greater pressure on project margins, tougher competition, and a tighter labor market. Facing this challenge doesn’t fall on a particular individual or department within an organization, it touches virtually everyone. But the finance team possibly has the greatest impact, as they hold the data capable of identifying the projects worth investing in and the processes that can be improved.
After helping hundreds of clients in the professional services industry, there are a few observed best practices for increasing project profitability:
Best Practice Number #1 – Track the right metrics
The first and most important step to improving project profitability is to determine the metrics that matter most to your company’s growth. Services Performance Insight recommends these five KPIs for services companies:
- Billable utilization
- Project overrun
- Project margin
- Annual revenue per billable consultant
- Annual revenue per employee
While these metrics are an ideal starting point for you to develop a set of metrics that is suited to your organization’s profitability goals, you may also want to consider performance metrics that are unique to your industry.
Best Practice Number #2 – Gain time to analyze
Once the appropriate metrics are in place, it’s time to look at your finance team and increasing efficiencies through automation. This will help gain the time required to dedicate to analyzing data, helping your organization make the right (and timely) decisions.
Best Practice Number #3 – Partner with project managers
67 percent of CFOs surveyed in a recent Ernst & Young report was said to believe that improving cross-functional collaboration is a major priority for the finance department functionality. For project-based firms, this rings especially true, where project managers can directly affect project delivery and profitability. It is important for the finance team to collaborate with project managers by providing data they need to increase efficiency and improve decision making.
Best Practice Number #4 – Know the true cost of your fixed-fee projects
Fixed fee projects are a trend that is quickly accelerating, and it is important for companies to drill down from P&L reports into costs on the granular level – by projects, employees, and customers, to gain better insights to the project’s profitability to boost business performance.
Best Practice Number #5 – Implement a data-driven culture
According to Brian Hopkins of Forrester Research, 74 percent of firms say they want to be data-driven, but only 29 percent say they are good at connecting analytics to action. The opportunity for CFOs to be strategic and play a critical role in nurturing a data-driven process is huge. This begins by gaining access to reliable data in both financial and operational reporting within the organization.
In short, CFOs and controllers are no longer simply tasked with efficiently running the finance and accounting side of the business. They are expected to be strategic advisors and go beyond the tried-and-true metrics and use technology to create a customer-centric business model while increasing the organization’s profitability. By collaborating internally, finance leaders can create value-based change in project profitability.
Translation? It is important to be a Tech Savvy CFO.
Contact LBMC Technology Solutions today to find out how you can up your technology game to increase project profitability.