“Remind people that profit is the difference between revenue and expense. This makes you look smart.” – Scott Adams
Reducing costs and increasing revenues are the simplest way to increase profitability. There is however a third way of doing so. Every Professional Service Organisation (PSO), in fact every organisation should also strive to improve efficiency.
One way of increasing profit is to increase the revenues from existing customers. Research done by Frederick Reichheld of Bain & Company[i] shows that increasing customer retention rates by 5% can increase profits between 25%-95%. How do organisations find the opportunities to achieve that?
Increasing prices is rarely sustainable and can lead to reduced revenues as contracts are lost. This does not mean it should not be considered because increases in underlying costs, such as staff costs, could mean that prices do need to increase.
However, it is not always easy to identify what the opportunities to increase revenues are. This is not about renewal but finding areas in customer organisations where they will benefit from professional services. Consultants are often able to identify these opportunities when working on customer sites. One way to ensure that consultants identify and pass on opportunities is to ensure that they share in the commission.
If these potential opportunities are captured at the point of identification then the sales team can leverage them. When a PSA solution integrates with, or is on the same platform as the CRM system in use, this becomes a lot simpler to achieve. Where a 360-degree view of the customer is achieved within the ERP the conversion of opportunities will be higher.
It is also important to leverage the information within the CRM and PSA systems. This can deliver a greater understanding of which customer to concentrate on. For example: How long is the sales cycle? What kind of contract is best? Do they pay on time? What is the profitability of projects? Spending time winning business from customers with a low profit margin is unwise. Reporting and analytics will provide the insight around which customers to focus on. Feedback systems can help identify which customers are best approached to help drive sales.
Automating billing increases both cash flow and revenues. As changes are documented and implemented it reduces the delay in invoices being raised to the customer. This improves cash flow and the ability to track and control projects can also increase profitability. If every change that is logged is able to automatically generate a line item of an invoice where appropriate and at the right time, then the full value of the delivered service is charged for. Where systems are disconnected, changes can still happen but the invoicing becomes secondary and charges can be missed.
The second method of increasing revenue is to increase the number of customers. Customer acquisition costs can escalate quickly if organisations are reliant on traditional sales and marketing methods. One way of increasing sales to new customers is through customer advocacy.
As W.E. Deming once said “Profit in business comes from repeat customers, customers that boast about your project or service, and that bring friends with them.” [ii]
Companies that face a downturn in revenues often look to reduce costs as quickly as possible. This is a knee jerk reaction and often leads to further issues. One easy option is to cut staff costs, but this is not always wise. Harrington noted that cuts in staff can have long term effects on performance.[iii]
Peter Cappelli, Wharton Management Professor and Director of the school’s Center for Human Resources commented: “There is no evidence that cutting to improve profitability helps beyond the immediate, short-term accounting bump.”[iv]
This does not mean that cuts in costs and excess staff should not happen. Operational costs including expenses can escalate unseen. As Benjamin Franklin once said: “Beware of little expenses. A small leak will sink a great ship.”
Companies should have the right policies in place to contain expenses. Management should use financial analytics to highlight trends in costs. The insights drawn from those analytics should then be actioned to reduce overheads in a timely fashion. Tight controls should be in place to ensure that rechargeable expenses are actually recharged to the customer.
Billing automation can also assist with this if expenses are integrated. The ability to track and recharge expenses in a timely fashion will have a positive impact on cash flow. Making the submission of expenses easy through the use of mobile apps at the point of purchase can also help.
Efficiency is not always about getting the most out of an employee. The effective analysis of resources, especially current and future requirements, can deliver an increase in profitability for a company. There are additional benefits to that analysis but also shortcomings.
Project overruns can increase actual cost against budgeted cost. A project that overruns not only decreases the profitability of the organisation it also reduces the likelihood of reengagement.
Increasing billable utilisation is also important. If utilisation is too high then it is likely that there are not enough staff to meet the demand. Profitability in the short term will increase but the billable rate per consultant won’t. Staff need time to train and recover from intense projects. Too high a utilisation rate is as bad as too low. High utilisation can lead to burnout and a higher attrition rate.
A higher attrition rate has three direct impacts. It impacts revenue negatively, there is a time cost for selection and recruitment as well as the additional costs for new employee training.
Where data from a human resources solution can be integrated into project requirements additional insights are achievable. Understanding the current resource pool and its limitations against the future project requirements allows an organisation to react ahead of time. This can reduce the necessity for short term outsourcing to contractors. This view of capacity demand is further enhanced by looking at the sales pipeline within CRM.
HR managers can create hiring strategies to ensure that requirements are met for future projects. Alternatively, they can look to create training programs and individual performance goals to ensure that resources are available to meet the longer-term trending demands. This can improve staff morale as they receive training that updates their skill sets relevant to the future sales pipeline. This can become a virtuous circle with employees becoming empowered and feel more valued.
The benefits of profitability
The smart professional services organisation will also look at creating a holistic strategy. To support that, data from CRM, PSA and HRM systems can enable more than just increased profitability. Searching for a quick fix is rarely the best way to increase value. An approach that creates a single system of record for its people, the most valuable asset a PSO has, is fundamental. Analysing the data collected in such a system delivers benefits that include customer satisfaction, improved cashflow, increased staff loyalty as well as greater profitability.
[i] REICHHELD, F (2001). Prescription for cutting costs: Loyal relationships, Bain & Company, Boston, Harvard Business School Publishing
[ii] DEMING, W. E. (1986). Out of the crisis. Cambridge, Mass, Massachusetts Institute of Technology, Center for Advanced Engineering Study.
[iii] Harrington, S., 2016. Job cuts save money but can hurt business in the long-run. The Conversation.
[iv] How Layoffs Hurt companies. http://knowledge.wharton.upenn.edu/article/how-layoffs-cost-companies/ accessed 18 April 2017.
Founded in 2009, FinancialForce is the leading Cloud ERP vendor with apps built entirely on the Salesforce Platform. The company’s Financial Management, Professional Services Automation (PSA), and Human Capital Management (HCM) offerings provide services-centric businesses with a platform that organizes sales, services, finance and HR entirely around their customers. This blog was commissioned by FinancialForce.
Steve Brooks has worked in the IT industry for more than 30 years in several industry verticals. He has worked in a variety of roles throughout his career including development, IT support, training, business analysis and consultancy, he also has more than 20 years in IT management. He was CIO at Savills plc before leaving to complete an MBA at Henley Business School. His dissertation was on the procurement of converged telecommunications solutions. He is the joint editor of Enterprise Times and principal analyst at Creative Intellect Consulting.