Among all the diverse projects you run, do you know which projects are most profitable?
For professional services firms, this remains a very important question one needs to find an answer for. If you don’t, you miss on making accurate bids, optimize billable utilization, and make the right long-term investment decisions. This holds true for all project-based services companies that deliver IT services and consulting to all aspects of business outsourcing. Although the processes and direction may seem different initially, their survival and growth depends on this common aspect- Project Profitability
A project could be anything- a technology implementation, a brand campaign, a marketing event, a research project etc. Contracts can be either ongoing for a few years or short-term and billing terms can vary from time. 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.
Prioritizing and improving project profitability in 2018 is more important because they service companies are facing greater pressure on project margins, heightened competition, and astringent 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.
Let’s discuss these 10 ways you can use to improve your project profitability:
1. Tracking the correct metric –This is a very crucial step to improving project profitability. It involves determining and keeping track of the metrics that play the most vital role in your company’s profitable meter. One can consider 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. Investing time in the detailed analysis–Apart from ensuring the right metrics, a detailed analysis is required to be able to take correct and timely decisions. According to a PWC survey, top-performing finance organizations spend 20 percent extra time on analysis versus data gathering. So, take it as an example and invest in more time and funds for the detailed and timely analysis.
3. Determine actual fixed-fee projects costs– 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.
4. Partner with project managers –According to an Ernst & Young survey, focusing on cross-functional collaboration is a major step for the successful finance function. This holds truer for project-based firms because project managers are responsible for influencing the project delivery and profitability directly. Collaborating with project managers can be prioritized to ensure that information sharing is practiced and better efficiency can be brought into the business.
5. DATA is more important than you know –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 the project and service-based organizations. By collaborating closely with the operations team, finance leaders can make a big impact on one of the key metrics for success, project profitability.
6. Keeping a check on Budget and Time
The key is to keep a track on the time spent and the proper utilization of resources so that the profile margin can be well balanced against it. Cost planning and control goes a long way in establishing control over operating costs and improving profit margins for your projects.
7. Tracking committed costs along with Budgeted Costs
The major challenge that project-based companies face is that they understand budgeted costs and actual costs but there is no clear visibility on what the committed costs look like or the purchase orders that have been raised. If this is done manually and through different systems and processes it is often hard to see what the committed costs look like and can quite often be a leading cause in projects running significantly over budget and reducing profitability.
This is a key metric for any project based company – understanding where your key resources are spending their time – particularly the time spent on chargeable activity as opposed to nonchargeable activity such as internal meetings, proposal writing etc. Too often many companies will recruit additional expertise, bringing in more cost to the business, without reviewing utilization and making sure it is hitting key levels.
Automation can not only save time but a lot of additional costs as well. It could be as simple as being notified that a project is about to go over budget or a reminder that a key deadline is nearing; automated notifications can eliminate inefficiencies. Automated contracts and invoices can also save internal time and resources; this could be in the form of a notification or invoice creation if services go over contractual costs.
10. Single source of Data
Best practice for any project based business should be to create a single source of the truth. Whether you are looking in the finance system or your project system, you should be seeing the same data. There must be a single solution that allows us to track time, expenses, procurement and all the key areas that finance and project managers need to keep track of. This information flows through business workflows before posting into the core finance system – so whether you are a project manager of a finance director, whichever system you are working in, the data is the same!