by Ray Grainger

4 ways to avoid leaks in project profit margin

Dec 06, 2017
EnterpriseIT LeadershipROI and Metrics

With a deeper level of insight into every single project, your team can make informed decisions and adjustments on the fly that lead to predictable and profitable project delivery—the true foundation of business success and growth.

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You have more work than ever, you are increasing sales at record numbers, and your team is fully utilized. You may point to these facts and believe that you are running a successful services business–and yet, you can’t seem to make any money. In my experience, too many organizations are chasing top line revenue growth at the expense of margins, simply creating an illusion of success.

High-margin businesses are operated from the bottom-up, one project at a time. Any business that’s thriving understands this concept. Think of project work like a leaky bucket. When you start a project, the bucket is full of water. As the project continues, water begins to leak out. Your goal is to plug as many of the holes as early as possible to carry the maximum amount of water over the finish line.

While there are many areas that may be affecting your overall profitability, this article is going to focus on those at project execution level. Here are the four most common places you are losing project margins, and how to fix it.

1. Include business development costs in project margin calculations

In the pursuit of sales, it is common to spend a tremendous amount of effort in the acquisition of a client project to get a deal done. This includes pre-sales consulting, product demonstrations, on site visits involving travel costs, and more. By the time you win any new contract, your organization has already made a significant investment in the client. To effectively determine profitability, customer acquisition costs need to be well understood to determine if the cost of acquisition provides the return you expect. That is why it is necessary to track the time and expenses of new business development costs, and to analyze the relationship between what it costs to win the business versus the margin that the project will contribute to your overall business profitability. A good ratio to consider is 10% of your total contract value in new business development costs.

2. Adequately price projects

Often margin loss starts at the very beginning of a project. The lack of adequate definitions of your services offerings, and to the extent that those offerings are repeatable will yield wide swings in pricing consistency of your contracts. You need to establish rigorous processes to evaluate every project at completion to identify which tasks within the project you lost money on, and then update your services offerings accordingly. Using templates for repeatable offerings should provide a clear indication of what you are going to do, for how long, what resources and at what rates. As it relates to resources, planning the right team structure (think pyramids not diamonds) with the right mix of junior and senior personnel will deliver the margins you desire, build skills in your company, and prove to be the best overall mix for a successful client result. You will meet the budget requirements of clients and make more money doing it.

3. Staff with the right mix of employees versus contractors

Historically, firms have believed that in order to scale they needed to own skilled resources to guarantee availability. This approach has peaked and is no longer optimal. With the hyperspecialization of work today, coupled with the shorter duration of project assignments, the ability to scale up and down on a project-by-project basis is necessary to compete. It is also complex to manage. It is paramount that you establish a trusted network of qualified service partners. While leveraging contractors and sub-providers may yield lower margins on an isolated basis, your business is less likely to carry excess bench costs. It also offers you flexibility to source the most qualified talent at the right cost. Additionally, you are more likely to win work because you have access to the right skills at the right time. To effectively manage a contract network you need robust short and long term resource planning capabilities, as well as the ability to dynamically locate and leverage this talent on-demand.

4. Leverage variable bill rates

It’s common that firms use a single, fixed bill rate for each employee regardless of the activity on which they work. Your services professionals are capable of leveraging their skills of different tasks, and those tasks have different values in the minds of your clients. Understanding the value clients place on different tasks and aligning variable bill rates with personnel delivering the services is necessary in today’s rapidly evolving skills environment. This is how you get an optimal value exchange for the services you provide, and generate maximum project margins. Another hidden issue with flat bill rates is that it incents the service provider to staff junior resources. Junior resources have less experience, and if work is not meeting client expectations, it will cost you more money in the long run trying to fix the problem. This approach also lacks the transparency necessary in today’s service level economy, and can negatively impact your client relationship. To be able to apply multiple bill rates with every person, firms require granular pricing control.

Managing every project as its own P&L

Project margins are the core building block of the profit structure of your business. In order to plan, track, and optimize work to produce desired financial outcomes, the best run organizations today manage every project as a distinct P&L. This approach provides the detail about each project’s revenue and cost, revealing its ability to generate profit for your company and refine your service offerings and template-based approach to repeat success in the future.

With this level of insight into every single project, your team can make informed decisions and adjustments on the fly that lead to predictable and profitable project delivery—the true foundation of business success and growth.