Stop the Bleeding!

Get back to profitability through focus, analysis and action
by Jeanne Urich and Dave Hofferberth, SPI Research

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The past few years have been tough on professional service (PS) providers. A changing economic climate, lost clients, project changes and cancellations have taken their toll on the professional service sector and its clients.

During these turbulent years, many PS firms have taken on greater proposal risk to keep the firms moving along and to generate cash flow. Now that there are signs the economy is moving out of its doldrums, it is time for many of these same firms to take a serious look at their project portfolio and determine where they stand.

The goal of this exercise is to evaluate both projects and clients to determine how to increase profitability by removing risk, eliminating underperforming work and ensuring any new work meets stringent guidelines for strategic organizational alignment, a preferred client base and greater profitability.

Evaluate your portfolio

It sounds easy, but sometime PS executives fail to evaluate their portfolio of ongoing and proposed work on a regular basis. Every current and potential project should be analyzed (using a portfolio management tools and project reviews) to see where potential issues might lie.

With the turbulence of the past few years, executives may be shocked to learn they have imbalance in their project portfolios. While even the best firms have a few dogs and legacy skeletons in the closet, losers might see more than expected — with serious negative consequences for margin and cash flow.

Every dollar lost on a runaway project actually represents at least 1.2 (assuming a 20 percent profit run-rate) times that in future opportunity costs.

The devil is in the details

A high-level evaluation of your portfolio might uncover which projects are out of sync, but it probably won’t provide the necessary (why) detail on how the work moved in a negative direction.

The next exercise should be evaluating the project to determine where it went wrong, and take corrective action if necessary. Sometimes work is proposed to meet longer-term strategic goals — new client acquisition, new market entry, expanded competency or client share of wallet and therefore, profitably might not have been the primary goal when work began.

In many cases, the work initially became unprofitable due to miss-set client expectations or poor estimates with too many hours spent in the early phases, or later on through scope changes, underlying product issues or taking on client tasks with little consideration as to their overall margin impact. In any event, PS executives should immediately embark on a process to “right-size” client expectations and deliverables, perhaps shedding some of the work, or subcontracting to another partner with a lower cost infrastructure.

In other cases, PS executives should conduct a series of meetings with the client to remediate the problems and get more money. Legal action may be the last resort, but legal advice is an important consideration if the project has fallen too far out of scope, time or cost. When projects run amuck, chances are slim client satisfaction will ever improve so it is often best to cut losses by terminating the contract.

Bring in a financial analyst

Many PS executives have turned to financial analysts as their firms have grown and become more complex. Financial analysts are responsible for developing and implementing policies and procedures to help PS organizations more efficiently and profitably operate business. Initially, just one competent financial analyst can bring structure to financial reports, and also bring in the tools to help PS managers at all levels better run their practices.

Once reporting is in place, PS management should continually monitor specific key process indicators (KPIs) for improvement, and take appropriate action when necessary. Obviously when projects go awry, or when the work proposed entails too much uncertainty and risk, management should pay immediate attention to fix the issue and to determine if a systemic issue caused the problem in the first place.

The PS organization should routinely (once a month) evaluate the overall portfolio and specifically focus on the 5 percent of projects that offer the most risk and complexity. Follow-up to these meetings is also critical to ensure corrective action has been taken and remind all management that every project must be profitable. With a serious monitoring, initiative chances are fewer projects will become problematic.

Getting back on track

Getting back to profitability is job number one! Even if your organization is marginally profitable, working to improve profits should be of continual concern to PS executives.

While most PS executives routinely meet with their management team to evaluate overall performance, few get down to the details often enough. These details can take a firm from slightly profitable to very profitable. The key is continual focus and dedicated resources to make it happen.

The Importance of Service Execution

Consistency and control drive performance and profits
by Jeanne Urich and Dave Hofferberth, SPI Research

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From the beginning of the economic downturn, much has been made of the need to improve client relationships and better manage cash flow. But what about improving service execution? This question is on the minds of many professional services (PS) executives as the economy improves, albeit erratically, and many organizations must focus on service performance enhancements.

To better understand how to improve service execution, PS executives must first analyze the relationship between on-time project completion, billable utilization, client satisfaction and employee satisfaction. Intuitively, one would expect on-time project completion to drive up client satisfaction. But are high billable utilization and high employee satisfaction the chicken or the egg?

Also, if engaged, happy employees are the real catalyst for superior project and client outcomes. Then what are the key factors that drive employee satisfaction? Regardless of whether PS executives truly understand all of these relationships, now is the time to evaluate your workforce strategy to assure you have the people to meet the changing needs of your clients, both current and new.

What levers do PS executives pull to improve performance?

Increasing utilization is the first place everyone looks. But this most popular key performance indicator is primarily driven by workforce planning and capacity, and eventually execution. It is easy to temporarily improve billable utilization by cutting the workforce size, but how do you continue to maintain high utilization?

The SPI Research benchmark shows organizations with average billable utilization of 75 percent or higher also produce better client results. However, this situation occurs more from a result of planning, staffing and selling, rather than just “right-sizing.”

Establish best practices

To increase organizational performance, PS executives should implement many improvements that will lead to a more efficient and effective workforce and higher-quality services. SPI Research has found professional service organizations (PSOs) have been able to increase capacity and service quality in many areas through these best practices:

  • Establish a project management office (PMO): Creating the PMO allows your organization to improve both the efficiency and quality of the work through standards, methodologies and tools.
  • Do performance reviews: Conduct periodic performance reviews at least once a year. Spend time with employees on areas where they can expand their skills to remain valued employees. This process provides them with greater long-term job stability, and leads to greater company loyalty.
  • Use professional services automation (PSA): Most firms surveyed by SPI Research use PSA solutions. To improve the benefits of PSA, these organizations integrate it with the core financial solution as well as client relationship management to better plan and execute services.
  • Manage resources: A critical component to any PSA solution is resource management. Given the wide distribution of the workforce and a movement toward increased remote service delivery, resource management will become increasingly important to ensure adequate staffing levels and better cost management related to people.
  • Look forward: Expand the horizon to look out further than you already do. This forward-looking view will improve staffing levels and highlight areas of greatest need. It also helps your organization improve its workforce strategy with a goal of optimizing the balance of internal and external resources.
  • Use external resources where appropriate: Third-party resources are an excellent way to avoid the volatility involved in the hiring and firing of staff. They provide a valuable service because of their rapid deployment when necessary without the long-term costs associated with internal employees.
  • Develop skills internally: While using third-party resources is an effective way to manage the fluctuation in service demand, using too many external resources leads to lower morale and greater turnover. Implementing training programs to improve both the depth and breadth of skills creates a more flexible and adaptable workforce.

Benchmarking many of these initiatives can show you the change in your organization’s performance. With this knowledge, you can further improve or reevaluate your execution strategy to accomplish more.

Watch out for landmines

Inevitably, as the demand for services improves, PSOs relax with a false sense of security. This situation can have negative long-term effects that can lower profitability and create an environment where employees lose confidence in management. This leads to higher turnover, unhappy clients and lower profits.

Issues to consider: Don’t over-staff just because the workload appears to be improving. Revisit your subcontractor strategy as you grow. Eventually, you can reduce it. While every PSO has a different strategy for its external workforce, keep it consistent and communicate well internally. As a result, the workforce gets on board, which improves their morale.

Just because you might see increased profitability and margins, don’t take your “foot off the pedal.” Stability in your financial performance is very important to your growth strategy. It allows you to more accurately plan and implement policies to improve overall organizational financial performance by carefully evaluating everything from pricing and project management to invoicing and collections.

Continually benchmark your organization to find both the hidden gems and under-performing assets. Work to better understand why some of the practices in your organization perform well, and implement policies and procedures that other organizations can use. Also, look at your practices that have not fared so well, and consider implementing changes to bolster performance, or eliminate the practices altogether.

Stay on track

Slowly, but surely, the economy is picking up steam. After all of the downsizing or right-sizing, your employees will appreciate growth. But even with the pickup in demand, growth will remain unsteady for the foreseeable future. And the services in demand just a few years ago might not seem as important as they used to be. Your organization must be prepared for both new clients and the new types of work.

Focus on improving both the quantity and quality of the services you deliver. What changes in your clients’ needs have you seen, and how will you address them? There is little doubt that the past few years have left scars on many, if not most, of your clients. How can you both change and help them going forward?

Set targets for performance improvement and benchmark your organization to assure staff is on the right track. It is also essential that you report these improvements so that the workforce understands your commitment to improve the overall performance of your organization. When the next downturn occurs, this should lead to greater job stability.