Principles of Maximizing Profitability

There may not be a more fundamentally important topic for consulting firms than improving profits.

Shareholders ultimately want a return on their investment and buyers are looking for evidence of healthy growth, while strong profitability is required to sustain growth and equity realization.

The levers that need to be pulled to improve margin – revenue and cost – might be well understood, but the combination of activities required are often more nuanced.

We’ve identified the top strategies firms can use to start improving profits now:

  1. The leadership team must make profitability an ongoing focus

Profitability has to become embedded in the leadership team’s mindset for sustainable margin improvement to be successful.

Achieving this requires strong communication around accountabilities, clear success measures being established and tactical activities – such as margin exception reporting, resource management, and utilization forecasting – becoming integrated into regular business updates.

Once a shared understanding of what success looks like is established within this team, firms can create strategic work streams – such as market expansion or IP development – and make people accountable.

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How best to manage utilization in a professional services business

Utilization - clock cropped

Paul Collins, Managing Partner at Equiteq, shares some advice

Utilization within a professional services firm is an important issue to address and measuring it should be a priority for all professional services firms. It may sound trivial but, in our experience, firms that measure utilization regularly end up outperforming those who do not.

If you take any spreadsheet model and observe the impact that a one or two per cent increase in utilization can have, then its importance becomes apparent. Without having high rates of utilization the bottom line profits will typically not be at healthy levels for business growth.

Before founding Equiteq, my previous company had a break even point at around 50 per cent utilization. If this then increased to 65 per cent we would make 20 per cent EBIT. This demonstrates just how sensitive business performance is to utilization.

We gave one director absolute responsibility for managing utilization at the firm. We believed that the key to successful utilization was correctly balancing permanent and contractor staff. As a result we sought to ensure that the bench of permanent consultants were placed on projects before contractor support was hired.

This is where the real skill of utilization planning comes into play. It may be the case that an external contractor is a better fit for a job compared to available permanently employed staff. A skilled organiser can keep consultants off the bench while placing the best people on each job.

Without someone driving utilization in the firm, our performance could easily have declined by 15 per cent. Such a drop should be avoided, as it will severely dent profit margins over the subsequent months.

Blend for best practice

For any firm reviewing its utilization, it is important to understand that utilization cannot be the same for all levels of the organisation, which means there is best practice to consider. A good target for most firms would be to aim for a blended rate across all levels of the organisation of around 65-70 per cent. This incorporates every consultant from the directors down to the most junior level.

At the junior level, utilization would be expected to be high at around 80 per cent of maximum availability. Maximum availability is the absolute most number of days that a consultant is available minus their holiday, training and potential sick days.

For project managers utilization will drop slightly, ideally to around 65 per cent as these staff will have further obligations in their project management role that contribute to building the firm. Finally at the client management level this would drop again to about 30 per cent as they would be expected to service clients, handle internal management demands and also drive or contribute to business development.

When it comes to utilization a firm shouldn’t resist opportunities to gain absolute control. Having a senior leader in the business managing this process will keep utilization rates efficient and boost business performance. Get this right and the firm will have a platform for long term success.

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