Improve profitability with better client engagements

Boost your firm's profitability by understanding key financial levers and improving client engagement. This guide covers practical tips to help you manage your resources and strengthen client relationships for better results.

Strategy is awesome. Even the word has a certain ring to it. You’ve probably read The Art of War, Blue Ocean Strategy, and have a shelf full of strategy classics that inform the way you’re conquering your niche.

Can you name a single finance book, though? What is informing your financial policy and approach to revenue collection? Understanding financial statements and cash flow is crucial in managing your business effectively.

Knowing what financial levers are available will help you achieve your business goals in all economic climates. This article describes in detail and gives practical demonstrations of what levers can be pulled to improve the profitability of your projects in a professional services business, which ultimately enhances your bottom line.

Introduction

Running a professional services firm will probably be the biggest challenge you’ve ever undertaken. People are challenging. That’s why leaders such as yourself get paid the big bucks. You’re there to make the hard decisions.  

It has to be said though: it’s one thing to lead and manage people and a whole other thing to manage finances.

That’s what accountants do, right?

Yes and no. It’s everyone’s responsibility to understand the numbers so that you can contribute creatively when planning out into the future. A key part of this is measuring customer engagement and analyzing how it impacts your cash flow and overall profitability.

There are many things that you can do to improve the profitability of your business. There are some obvious ways, such as improving utilization or increasing rates, but this article is intended to dive deep beyond that and introduce and discuss 8 levers you can pull that will help in different scenarios.

From our experience, the most successful firms have a playbook that is more nuanced and gives you the tools to steer the ship through economic uncertainty, restructuring events, and the many other scenarios that require quick pivots. Enhancing your customer engagement strategies plays a crucial role in navigating these challenges.

The eight levers

The eight profit levers for Professional Services Firms start with three key pillars. Structure, time management, and client management.

The structure levers relate to the operational model that you’ve chosen to work within. A classic example is the firm that sets up in a small town to avoid paying big city salaries.

Time management levers are literally what they are: the ways that you engage with your clients and what portion of that time is billable.

Client management levers are about making the most of the relationships that you have with your clients and adjusting engagements accordingly, fostering loyal customer relationships, and improving customer retention.

Let’s dig into the details and look at the eight levers and how you can work them to your advantage.

Our fictitious company ‘ACME Engineering Co’ is going to have 50 professionals working 35 hours per week at a collective 50% utilization rate.

Structure

1. Improve ratios of non-billable resource

How many senior staff and partners do you have? And how many of these are assigned to projects together? Have you thought about how many junior staff are on the books? Once you consider the lower salaries of your juniors, these young, ambitious people can generate much better revenue than your seniors. By increasing the ratio of juniors to seniors in your project teams, you’re going to increase your project’s profit margins. If you are using time based engagements, consider what skills your junior staff have and apply them strategically to the project to save on costs.

The obvious risk here is the quality of the work completed. Proper quality assurance, training, and mentoring should mitigate the risk. The key difference with this structure is the senior takes on mentoring and leadership roles rather than being hands-on, which can also enhance customer satisfaction.

2. Reduce costs

It’s easy to spend money when there’s lots of it. In times of prosperity, typically what happens is that overheads start to creep outside of scope.

In good economic times, an assistant, event planner, and all the other unbillable auxiliary staff that you have on board are easily justified. The same goes for the latest and greatest software packages.

It’s a bit different when the work isn’t coming in as quickly.

When the work isn’t coming in as quickly, try centralizing your unbillable staff. For example, instead of personal assistants for your partners, think about centralizing the resource. Also, look hard at the software packages that you’re using. Are they adding value to the work that you’re doing?

The previous two paragraphs are a stripped-down description of what should be a careful analysis of costs and benefits of the auxiliary resources that you have accumulated. It’s worth questioning: is that personal assistant truly adding value? If you took that piece of software away, would it affect the quality of the work that your team outputs, which would have long-term implications for customer relationships?

It’s important that you think about the long-term implications of the changes that you make. Will they affect the reputation of your company because of the effect that they’ve had on the work that you output?

Time management

3. Increase hours worked by professionals

The Professional Services Leadership Handbook states that top professional services firms expect their people to work for at least 1,700 hours a year.

With 4 weeks of annual leave, this works out to about 35 hours a week.

Of those hours worked, only 850 were billable, so the utilization rate was 50%.

Let’s use an example where we increase the expectation to 40 hours a week.

At a consistent utilization rate of 50%, 5 hours a week extra will increase the billable hours per person by 2.5 hours a week. Across an organization of 50 professionals, this is 125 hours. At a billable rate of $150 an hour, this increases revenue by $18,750 a week or $900,000 per year.

Small changes can make big results, impacting both your bottom line and cash flow.

4. Improve utilization

Tweaking the utilization rates by adjusting processes or intelligently managing your professionals can really move the needle without disrupting workflows.

A good time sheeting system and a culture of time keeping is a great place to start. With Projectworks, you can easily submit your timesheet from wherever you are and add comments to enrich your data.

Even a 5% increase in the utilization of your people could result in hundreds of thousands of dollars of extra revenue for your company.

Let’s use the same example above.

With your team of professionals working 35 hours a week, a change from 50% to a 55% utilization rate increases the billable hours by 1.75 per person or 87.5 companywide per week. At $150 an hour that’s $13,125 per week or $630,000 per year.

5. Recoverability rates

It may not be enough to capture time, if your clients are not paying you what they agreed, it can help to communicate the time logs with them. Coupled with a culture of timely and accurate time sheeting, an investment in software will give you the visibility and the control to understand who is doing what, where, and how often, along with the ability to seamlessly communicate that to clients either as a default or on demand.

Low recoverability rates are caused by the difference in the number of hours worked and the number of hours that can be billed to a client, or for which they are willing to pay. Many firms track how much time is written off and then use that as a coaching tool for employees or contractors. Improving customer communication in this area helps to boost customer satisfaction and ensures better recovery of billable hours.

Client management

6. Better pricing

Remember, there is only one winner in a price war - the absolute lowest priced service. So if you are attempting to win business through affordability, be sure you have all of the capabilities and strategic advantages to be able to deliver work at that price and still hit your financial goals. Essentially, know why you are the cheapest and commit to that.

If your competitive advantage lies in the quality of your work or the unique value you bring, you could consider raising your prices. By offering a personalized experience and demonstrating the value of your products or services, you can justify premium pricing and attract loyal customers.

Through applying basic marketing principles and presenting your firm to the world in a way that reflects who you are the quality of your work, you’re more likely to attract clients that will pay a premium.

You could also think about alternative fee structures. Time-based and fixed-price structures can both create highly profitable businesses. To understand what model (and what rates within that model) works best for you, do regular post-mortems on projects to understand how much margin you earned with that pricing model. And then don’t be afraid to experiment based on your findings.

7. Tighten up project management

Project managers LOVE to be busy. They’re usually the busiest people in the firm. Being busy on multiple projects can create problems for project managers and have them focused on everything other than the basics.   

Their focus should be on what delivers great outcomes: good timekeeping, efficient use of professionals’ time, and punctual project delivery. This focus enhances customer satisfaction and customer retention by ensuring timely and quality deliverables.

8. Scoping the project

Another way to improve the accuracy of your project delivery is to lengthen project delivery timelines. Take a look at your own projects and see what ones were delivered on time.

The planning fallacy overestimates the speed at which projects can be delivered, making it difficult for your project managers to deliver the projects on time.

To improve the delivery of your projects, you should analyze how much time was spent on a project and make the appropriate resourcing adjustments for next time. This will help you provide a personalized experience to your clients and improve customer relationships.

9. Pricing

There are ways to protect your margins without outright playing with pricing. These mechanisms lie within the scoping of a project and how you allocate the resourcing.

Client outcomes are important, and they will want the best solution that is available, that’s why they came to you.

If you have a client that is regularly pushing back on price, you can discuss ways of rescoping the project rather than cutting into your own margin.

Things to consider when rescoping could be:

• Asking the client to undertake some tasks

• Cut out optional tasks

• Have juniors complete more work

These types of conversations can happen with the client at the outset of the project to improve and manage client satisfaction.

10. Establishing the team

Being lean is a trendy phrase. There’s merit to that. Essentially, you’re assigning the minimum viable staff to a project or job rather than over-resourcing. Easily said, and in project management, they’re often famous last words.

An easy way to self-assess whether you are using the right team for the job is to draw parallels from your completed job archive. Over time, you will develop teams that have tackled the same or very similar projects before, making them more efficient and faster. These teams will give better outcomes than a new team.   

If it is a new project, think long and hard about who has exactly the skills you need and assign them appropriately. A skills mapping tool in your resource management software will help with this.

11. Project delivery

Can you monitor your project burn in real-time? Do you have one place for all of your information that will clearly show you when you’re going to run over budget for your project?

90% of Projectworks customers were previously using multiple spreadsheets, which were clunky, inaccurate, and prone to break.

A solid professional services automation platform will provide you with a unified source of information that will show you planned, budgeted, resourced, realized, and completed projects all in one place. That’s because it manages your resourcing, time sheeting, and invoicing, all of which inform all levels of the business with their own unique set of information that is relevant to them.  

12. Client communication

As mentioned above, how good is communication between you and your client? Your project manager and sales team’s priorities should be to make the most of the time with the client so that there is zero ambiguity with project scope and, ultimately, financial outcomes.

If in doubt, over-communicate.

This motto extends to the project team. There’s not much point in spending time and energy talking through the project at length with a client if you are not briefing your project team accordingly.

 13. Invoicing

Leaders should encourage their finance teams to provide professionals with real-time data on fees and for professionals to communicate this information regularly to clients.

A breakdown of fees accrued compared with the original estimate and the tasks completed should satisfy your client. In the engineering and architecture industries, it is standard to include metrics like the percentage of the fee that has been invoiced so far on each invoice.

14. Target profitable clients and work types

As much as this seems to be stating the obvious, profiling and then targeting the types of customers that are profitable for you is a surefire way to boost revenues in the long term.

Analyze your existing customers to the micron. Once you know who is profitable and who is not, you can approach them strategically. You should gain other insights, too, like who is not profitable, and then spend time and resources improving relationships with those who are bringing in the dollars.

The result: a significant profit boost from your clients

By pulling a combination of these profit levers, you can deliver a significant return on your projects. Remember the example of ACME Engineering Co. above? The combined impact of trimming overheads, improving utilization, and realization rates significantly increases profits at ACME Engineering Co.

Enhancing profitability through cultural change

Good leadership can act as an amplifier that makes the levers mentioned above more effective. We’re not Steven Covey or Simon Sinek, so we’ll leave the leadership advice to them, but it has to be said that effective leadership inspires your team to achieve higher standards. Higher standards mean better scoping, quality of work, and happier customers.