A practical guide to improving margins

We recently ran two 30-minute webinars on putting margins at the centre of your business. The first of these outlined the steps businesses must take to improve margins which you can view here, while the second was a more specific look at how to implement these steps in order to improve margins in a sustainable way which you can view here. This week, we’re looking at some of the questions asked during the second webinar.

Our sales leaders are all about closing the deal and trying to increase the size of the deal. But our delivery staff are often challenged to translate that into the expected profits, can you comment on that?

When we look at the root causes of problems with margins, it’s often the lack of collaboration between sales and delivery. We commonly find this lack of collaboration can result in delivery managers discovering deals aren’t scoped properly, or the wrong skillsets were assigned.

It’s therefore important that delivery managers have early visibility of the pipeline to get resources lined up for the right client and at the right rates. That can only happen if there’s collaboration, and with both sales and delivery having access to the same information.

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How focusing on millennials and business culture can drive equity value

By Penny de Valk, Associate Director, Equiteq

It’s now well established that millennials are changing the nature of the workplace and businesses need to respond. However, the extent to which millennials are influencing M&A activity – as well as how creating a culture in which millennials can thrive can drive equity value – is yet to receive the same level of recognition.

The importance of millennial views when it comes to M&A was underlined most recently by research from the consultancy EY. This found that almost three quarters (74%) of senior executives consider millennial attitudes and preferences when making M&A decisions.

With millennials a growing section of the workforce, they could be set to influence M&A activity further still. Those organizations that meet their needs and earn their loyalty will become more attractive to prospective buyers – who will naturally gravitate towards firms with an engaged and loyal workforce. That’s because engagement is a major driver of productivity, encouraging people to perform at their best, as well as central to retaining talent. All of these things are crucial to accelerating growth and driving business success.

Also, because a culture that meets the needs of millennials can also help boost engagement amongst the wider organization, focusing on business culture can be an effective way to drive equity value by motivating and engaging the entire workforce.

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Keeping your service portfolio profitable: how ‘scraping the barnacles’ can make your boat go faster

By Jason Parks, Director, Equiteq and Pat Webb, Director, Equiteq

Clients give knowledge-intensive services firms such as consulting, IT services and media agencies difficult and constantly evolving problems to solve. Markets change, competitors emerge and macroeconomics shift, all of which have an impact on what’s hot and what’s not when it comes to M&A.

That means buyers are attracted to firms with a clear value proposition that transcends service offerings and the capability to respond and deliver a relevant service portfolio in a changing environment. Simply put, a firm is worth more when it is bought for its strategic capability rather than just offering the buyer additional service capacity.

Achieving a relevant and effective service portfolio means more than investing in new service lines, because it’s also important for consulting firms to phase out what is no longer working for the future value of the business.

David Ogilvy explained in his “principles of management” (which took his firm from a start-up to generating billions) that dropping services that have become unprofitable must be driven by management:

“To keep your ship moving through the water at maximum efficiency, you have to keep scraping the barnacles off its bottom. It is rare for a department head to recommend the abolition of a job, or even the elimination of a man; the pressure from below is always adding. If the initiative for barnacle-scraping does not come from management, barnacles will never be scraped.”

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How to put margins at the center of your business

There’s perhaps no topic more important for consulting firms than improving profits. Because of this, we recently ran two 30-minute webinars on improving margins. This week, we’re looking at questions asked during the first of these, which explored how to put margins at the center of your business.

If 20% EBIT is a good target for a consulting firm, would a firm achieving 40% EBIT be viewed as considerably more valuable?

At face value, a 40% margin business might appear more valuable, but it depends on whether the buyer considers this sustainable.

Some will interpret a margin of this size as indication that the firm has under invested in itself and will discount this. Because of this, we typically recommend that 50% of revenue be spent on the delivery of your services and 30% should be allocated for overheads – such as selling or marketing the business, admin costs or recruitment or IT fees – leaving the remaining 20% for EBIT.

Firm owners might be wise to consider investing any EBIT above 20-25% into growing the top-line instead.

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How IP can make your profits fly

By Adam Blatchford, Associate, Equiteq.

Smart Scaling is all about growing revenues and profits while also building your equity value, as opposed to doing one at the expense of the other. Intellectual Property is central to that, it is a ‘win-win’ because buyers want it and it drives profitable growth in your firm.

Whether your firm generates revenues of $20m or $100m, IP differentiates you. It ensures clients buy your services, means you can deliver profitably, and makes investors love you. This blog will focus on how to achieve that in your firm.

What is IP?

In simple terms, intellectual property is any knowledge recorded and maintained as a usable business asset. In most consulting firms, this means ‘trade secrets’, such as process maps, methodologies, training systems and software tools, rather than just copyrights and trademarks.

There are three main types of IP:

  • IP to market the business
  • IP to deliver business
  • IP to run the business

All three are important, but in the context of Smart Scaling we will focus on delivery IP. See here for a deeper discussion of the three types.

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Creating a C-suite to build equity value

If you own a knowledge-led services firm in a sector such as consulting, IT services or media and you want to grow revenues to, say, $30m, it is unlikely that the expertise of the founders will be able to drive this. What you need is a team of specialist C-suite executives on board.

However, at some stage a founders-only team will put a break on growth. Here are three reasons why founders maintain the status quo and fail to see the damage it may be doing to their business:

  1. Growth creeps up on you so you don’t notice the degree to which the requirements have changed

During the start-up phase your main focus will be delivering on your particular domain expertise, but as time goes by you’ll spend more time on anything from finances to dealing with people issues.

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