The Four Biggest Threats to Profit in Services
The phenomenon of chasing growth at the expense of margin is nowhere more visible than in the services industry. Winning a new piece of business, no matter how much money it contributes to the firm, may actually be detrimental to success.
Never assume that growth is automatically coupled with profits—this is merely an illusion of success. As a result, four of the most common project management mistakes are those that eat away critical profit margins.
The Four Most Common Profit Mistakes
1. Taking on Projects That Are Not Profitable
In client-facing businesses, there can be so much focus on closing deals that the team doesn’t consider whether the new project actually helps the bottom line. This is especially true early in a firm’s life, when revenue is king. Projects, even those worth the same amount of money, can have very different outcomes for a business’ bottom line. For example, a services firm may reap great margins from their consulting services, but technical projects rarely make it out of the red. These two $100k projects result in very different financial outcomes. There comes a point when firm’s need to start taking on work for profitability, not just revenue.
2. Failing to Give Financial Control to the Project Team
Most resources in a services organization only think about their contribution in terms of hours. They are assigned hours, they do the work, enter time, and at the end of the month the accounting team delivers a report on profitability. While it may be easy to plan a project with great margins, it’s very difficult to execute one. There is so much change that happens in project execution. While it’s possible to make decisions midstream that can maintain margins, when team members have no visibility into the financial impact of their work, they are flying blind. This disconnect between the day-to-day team and the project accounting is a huge missed opportunity.
3. Signing Onto One-Off Projects
Service organizations have recently started to cover multiple lanes of business. Not long ago, it was considered more strategic to focus on a core set of offerings. Today, competition amongst service organizations is so intense, that firms are veering from these swim lanes. While expansion of services can be a good thing for a firm, it’s important that these are approached strategically and not as a “one-off” assignment. It’s very difficult to make money on new endeavors, there are steep learning curves and they usually require an investment.
4. Agreeing to Projects You Can’t Deliver On
Every professional services organization, despite how broad of a skill set their individuals have, has a core competency. As a firm delivers great work, they build trust with their clients, and clients increase spending and project scopes. This is great, organic growth. However, firms often eagerly accept new projects without considering their ability to deliver on these projects. They don’t have the right people, or they don’t have enough capacity within their team to meet the deadlines. When a project does not meet client expectations, project managers spend a lot of time—and money—trying to make things right.
The Solution: Manage Each Project as a P&L
The question, then, is how can project managers take on work profitably? Here’s the answer: Start managing each individual project as a P&L (profit and loss statement).
P&Ls provide details about a project’s revenues, costs and expenses, revealing the ability of each project to generate profit for the company. With this level of insight into every single project, the team can predict outcomes that will positively impact the business. For example, it becomes clear what projects regularly meet or exceed margin targets, as well as which ones are routinely unprofitable.
So, while it is common to get into the habit of saying yes to projects, it’s also important to remember that a firm’s clients and projects should evolve and mature. Having insight into the profitability of each piece of work delivered will provide clarity on the best opportunities for growth.
To learn more about common profit pitfalls, download our most recent ebook,
“The 10 Most Common Project Management Mistakes”