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