As the economic news continues to improve, professional services companies are beginning, tentatively, to rebuild. But with prices still depressed and margins significantly smaller, business growth remains risky: any mistakes in resource allocation or project management will drastically reduce profitability.
If companies are to avoid the surge in business failure that often occurs as an economy emerges from recession, there is a clear need to attain a far better handle on costs, resource utilisation and cash flow. As Mike Risley, Commercial Director of Nolan Business Solutions, explains, siloed information resources within finance, resource management and project management may enable effective local management but any professional services organisation that does not have an accurate, consolidated and consistent view of profit, cash or resources is running an untenable business risk.
Professional services organisations who have survived the recession have done so by becoming incredibly lean and often cutting fees. Many of these people-based, project oriented businesses took the decision to cut less experienced staff, and charge out the experienced consultants for lower daily rates in order to retain business.
And the strategy paid off: now that professional services organisations are looking to rebuild as the economic uplift continues, they have the right expertise, the skills, knowledge and networks. But they lack one key ingredient to successfully rebuild a business and mitigate the risk associated with expansion: end-to-end visibility of operational performance.
Traditionally, these businesses have been highly profitable. Good margins have enabled companies to overcome mistakes in project resourcing or overspend. But times have changed, significantly. With clients coming back into the market, new business opportunities are up. But fees remain depressed and short/project based ‘proof’ contracts are proliferating. In a bid to boost turnover, organisations run the very real risk of embarking on new business without any real understanding of the overall corporate impact.
Even if the individual project can be run at an, albeit small, profit what is the impact of using these resources on the rest of the business? Could they be better deployed elsewhere on more profitable business? Can a new project be handled without compromising existing business – perhaps from those clients that have remained loyal during the downturn? What is the overall business cost of recruiting additional resources?
For most professional services organisations it is impossible to answer any of these questions with any degree of accuracy or confidence. Information is owned and managed by a number of disparate groups; resource managers, project managers and finance teams are all fiercely protective of their information. The result is that the same piece of data – such as an employee’s time sheet – will be entered into several separate systems, often spreadsheets, by several people, often over several weeks.
And while each group may be using this data effectively, without a single, consolidated view the business cannot efficiently manage billing, control cash flow or maximise resource utilisation. More critically, an organisation can actually be undertaking work with the perception of overall profitability, because each project is profitable, when due to underutilisation of resource across the entire organisation, the whole company is actually making a loss.
In this low margin economy, a lack of automated tools to integrate all operational, administrative and financial functions is adding significant business risk. Without a single source of information that combines billing, payroll, resource allocation, project management and time and expenses, professional services organisations simply have no way of effectively judging performance.
It is becoming patently clear that not all business is profitable. And to minimise the risk associated with investing in new staff and taking on new, typically lower margin business, professional services organisations need to gain a depth of understanding into corporate profitability. This means not only ensuring individual projects are completed in an efficient manner and billed promptly, but, critically, that the business can roll up projects, resources, funding and invoicing to provide a consolidated management view of an entire organisation.
The benefits are significant and immediate. Using an end to end system avoids multiple entry of the same data and reduces administrative costs as well as removing multiple versions of the truth existing in the business. Indeed, simply streamlining admin can recoup the cost of a consolidated system.
For example, companies can automate the production of invoices direct from employee time and expense sheets; invoices are not only produced far earlier – and hence paid sooner – but are also generally more accurate, reducing the debates that can delay payment. Furthermore, providing project managers with a real time view of spend – and committed spend – can ensure projects remain within budget, further minimising risk.
Even more critical at this time is the ability to understand profitability; to analyse the types of work and/or customers that are most profitable, enabling the business to effectively focus its growth strategy. Furthermore, gaining real insight into overall resource utilisation can enable organisations to adjust the strategy and boost productivity: even a 1% increase in utilisation can have a massive impact on the profit/loss equation.
There are clear opportunities for businesses to begin to consider expansion. But rebuilding after a recession is proven to be a high risk time for any business, typically resulting in a surge of business failure as organisations misjudge the risk/opportunity equation.
And the risks are even higher for professional services companies. These are people-based, project oriented businesses, often run as partnerships without the traditional roles of operations, sales or finance director. The result is that while organisations are packed full of the fabulous market expertise, knowledge and experience that is key to achieving success in a good market – they sometimes lack the management discipline required to retain profitability in an era of tight margins and greater cost control.
These organisations cannot risk rebuilding, adding new staff and new customers, without achieving both excellent project control and visibility of contract, or without the ability to maximise the utilisation of skilled resources and achieve an accurate view of day to day profitability. It is those professional services companies that have immediate, trusted visibility of billing and cash flow, as well as resource utilisation and project costs, that can reduce the risk associated with growth and build a successful, profitable business.