Do you know which projects are most profitable? For professional services firms, this is one of the most important questions you need to answer. If you don’t, you aren’t able to make accurate bids, optimize billable utilization, and make the right long-term investment decisions. This is true for all project-based services firms that deliver IT services and consulting to all aspects of business outsourcing. While they may all seem very different initially, they have one common theme: their survival and growth depend on project profitability.
That project can be a technology implementation, a brand campaign, a marketing event, a research project. Project-based work that has a beginning and an end with staff assigned to deliver the service. Contracts can be short-term or multiyear, and billing terms can vary from time and materials to fixed fees based on milestones. Since every project is slightly different based on the client’s requirements, it’s essential to understand project profitability not only by individual projects but also based on the project types, client types, geography, and industry.
Improving project profitability in 2018 is more important ever for services companies as they face greater pressure on project margins, increased competition, and tighter labor market. The responsibility doesn’t fall on a single individual or a department in a firm. Impacting project profitability touches multiple functions and disciplines across the organization. But as the holder of the financial truth, the finance team has perhaps the greatest influence. They hold the financial data capable of identifying the projects to invest in and processes they can improve.
In speaking with Sage Intacct customers in the professional services industry, I’ve found that smart firms share five best practices for increasing project profitability:
1. Track the right metrics – One of the most important steps to improving project profitability is to determine the metrics that matter most to your company’s profitable 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
These metrics are an ideal starting point for you to develop a set of metrics that is suited to your organization’s profitability goals. Also, consider performance metrics that are unique to your industry.
2. Gain time to analyze – The right metrics are just one part of the equation. To make the right, timely decisions, your finance team needs to increase its efficiency to gain the time required to analyze the data and make recommendations. According to a PWC survey, top-performing finance organizations spend 20 percent more time on analysis versus data gathering. Make sure to free up your teams’ time so they can analyze the data in time to recommend the right actions.
3. Partner with project managers – According to an Ernst & Young survey, 67 percent of 769 CFOs surveyed believe improving cross-functional collaboration is a major priority for finance function. This is especially true for project-based firms where project managers directly influence project delivery and profitability. Finance can improve collaboration with project managers by providing information they need to be more efficient and make better decisions.
4. Know the true cost of your fixed-fee projects – As the trend toward fixed-fee projects and value-based pricing accelerates, services companies that can drill down from P&L reports into costs by projects, employees, and customers will have better insights into project profitability and a greater ability to improve business performance.
5. Implement a data-driven culture – According to a 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. There is a huge opportunity in 2018 for CFOs to be strategic, step in, and play a critical role in fostering data-driven decision processes throughout the firm. It starts by providing the same reliable, trusted data in both financial and operational reporting.
CFOs and controllers are no longer merely tasked with efficiently running the finance and accounting side of the business. They are becoming strategic advisors – especially in project and service-based organizations. By collaborating closely with the operations team, finance leaders can make a big impact to one of the key metrics for success, project profitability. In 2018, I encourage you to start applying these best practices to achieve profitable growth.