What Profit Margins Say About Your Company’s Biggest Challenges

This is an excerpt from the new whitepaper “How To Tell If Your Professional Services Organization Is Flagging” by Steve Brooks and Roy Edwards from Enterprise Times, in collaboration with Kantata. To learn more about the four major signals that professional services organizations (PSOs) should monitor to understand what factors are limiting performance, check out the full whitepaper here.

What Margin Signals Can Tell You

One of the most common signals PSO leaders can observe is fluctuations in margin. Accurately forecasting margin enables a business leader to understand whether their business is flagging. Tom Schoen, CEO and President of BTM Global says, “If you’re not measuring yourself in the past and giving that as the way to look into the future, it’s going to be hard to run a services company.”
A good margin delivers profits and profits are critical to PSOs, with 85% of respondents in recent research from Kantata that was conducted by Forrester Consulting indicating that maximizing profits related to professional services is a priority for 2023.

However there are different metrics for margins. Uriah Hakala, VP, Global Advisory Services at Kantata noted, “Margin has many different meanings to many companies, whether that’s margin contribution as a total dollar amount, or as a percentage, or profitability of the P&L itself.”

Beyond project margin, one should check two additional signals: client margin (qv) and individual gross margin. Individual gross margin reflects the revenue earned by a consultant, minus the fully weighted cost to the company.

Individual gross margin can often highlight resourcing issues. Perhaps a consultant was promoted, reducing their margin on an assigned project, or the project manager or client wants them on the project despite the lower margin. If they have a higher-than-average margin, have they been assigned to the right project? Are they happy in the role? Is the company taking advantage of their skills without due recompense? If a company has transparency about this signal, individual consultants will be motivated to seek work that can improve margin, or the training to drive their career and profitability.

One final area that many forget is, as Sarah Edwards, Co-Chief Product Officer, Kantata, points out, “Do you look at historic performance against what was originally forecast?” Organizations should look at what they forecast against what they achieved. What do the inaccuracies highlight in the forecast models, and what does one need to change to improve accuracy? Are there any underlying trends that are a concern?

Inefficient processes can also impact margins. There are leading signals that leaders can check and take action to improve. These include such things as the time to invoice for expenses – both the time between employees incurring expenses and the client invoice being raised after work is done. The gap between the employee being paid and the company being paid can also lead to cash flow issues. If expenses are raised late, contracts may not allow for their invoicing.

Measuring and forecasting requires business data collected by a modern professional services tool. This is not just the historic revenue and cost data, it includes data from every aspect of the business from opportunities through the wider business costs.

Start Seeing The Signs And Take Action

Profit margins are just one of the four major signals that can help managers understand when their professional services organization is in trouble. Learn about more, including utilization signals, people signals, and client signals, in the new Enterprise Times and Kantata whitepaper, “How To Tell If Your Professional Services Organization Is Flagging.”