The biggest threats to profitability in professional services firms
Momentum is increasing in professional services firms, and with it comes a continuously evolving landscape that can be difficult to keep up with. Whether it’s evolving workforce dynamics, an increasingly remote workforce, the changing cost structure of services, or heightened competition between firms, shifting dynamics — both internally and externally — make for a challenging market. Without careful supervision, it’s easy to make mistakes that can impact profit.
Knowing what to look out for can be a game-changer. Here are some of the most common missteps that threaten profitability in your professional services organization:
Neglecting to plan for profitability from the start
If a professional services organization doesn’t plan for profitability from the outset, it won’t be profitable. An exceedingly obvious concept, perhaps — so obvious, that many organizations move full steam ahead without putting profitability first. PSOs can easily fall into this trap when there isn’t an early and deliberate collaboration between the sales and delivery teams. And as we are well-aware, while Sales makes the initial commitment, Project Management actually delivers the results.
Are resources currently tied up in other projects? Is the timeline realistic? A joint effort between these teams involves Delivery’s input every step of the way to confirm the anticipated timeline and availability of resources. Otherwise, Sales risks making empty promises to clients and setting the stage for the entire organization mismanaging profitability from the outset.
Overlooking the broadening role of project manager
Until recently, the role of project managers was fairly clear-cut: they were responsible for completion of the project, ensuring it hit all deadlines, and then passing it along to the client. There was little in the way of tracking financial metrics or costs, or really taking into account the effect on overall company profit — everything started and ended with the project’s delivery.
Now, all that has changed. Project managers are expected to regularly observe financial metrics and collaborate with the finance team on why and how these metrics are defined, working in tandem to avoid going over budget or miscalculating project margins, and simply ensuring they stay on the same page. Wearing all of these hats is now simply expected for project managers, and understanding the added complexities of the role is a must.
Relying too heavily on the billable hour
Once the most common pricing model, use of the billable hour is beginning to dwindle — and for good reason. Without 100 percent visibility into an organization’s project resource time and work, accurately determining the actual number of billable hours is next to impossible. How do professional services firms operating across multiple locations account for bench time, differing holiday calendars or vacation time? Without a standardized definition of the billable hour, it snowballs into confusion fairly quickly.
An increased focus on value-based models demands that services organizations move away from the billable hour so they can more effectively optimize revenue, resource utilization and other metrics necessary for a PSO’s profitability.
Not standardizing processes as contract customization surges
Today’s customers look for progress and deliverables blending in seamlessly with their own existing workflows. This results in a greatly different process for every client that professional services businesses take on. At the same time, businesses juggling these heavily customized contracts look to expand both their workforce and customer base by seeking them out in other locations, but fail to acknowledge the complexity this introduces when contracts are already so diverse.
Despite paving the way for new opportunities, globalization disperses both the workforce and customer base, introducing further complexities. This can get messy very easily. Professional services firms need one reliable platform to help standardize these numerous workflows so it can avoid quickly descending into chaos.
Making it work for you and your organization
Equipped with the knowledge of what pitfalls most commonly threaten an organization’s profitability, you can begin to take measures toward shielding your organization from them. Whether it’s learning from past mistakes or avoiding potentially detrimental decisions in the future, each decision you make plays an important part in shaping your professional services organization. Let these decisions serve as unique opportunities to grow your business and find a solution that supports the process as you develop with the evolving landscape.