Improving Operating Margin In A Consulting Engineering Firm - Where Technology Makes A Real Difference
Operating Margin is an imperative figure to be measured in all Professional Services organisations, but none more so than in Consulting Engineering firms. Consulting Engineering firms work to such small operating margins that it becomes even more important that they have control of this number; otherwise they may find themselves with a negative bottom line.
According to the IDC Predictions 2013 for Professional Services Industry in Western Europe, Architecture and Engineering companies will invest the most in project related solutions in terms of cost and performance. Given the following statistics, this investment is indeed very understandable. The CSIMarket.com Profitability Ratios shows that over the last 5 quarters the Professional Services industry has had an operating margin of approximately 20%. However, The ACE (Association for Consultancy and Engineering) 2013 Benchmarking Report shows that the average operating margin in the Consulting Engineering sector has declined from 7% in 2012 to 6% in 2013. Based on these statistics it is clear that you don’t have a lot of room for project mistakes if you are in the Consulting Engineering business.
A noticeable trend within the Consulting Engineering industry is that projects are getting bigger, are becoming more international and are utilising more resources across more borders. This trend will create a vast amount of project data from numerous geographical resources with different working cultures and highly different educational backgrounds. If we combine these clear project trends with a low margin industry, the conclusion can only be one: The focus on operating margin will be even more important in the future and definitely a key parameter that will decide the chances of surviving in the industry.
Technology has an important role to play in managing a tight operating margin. In some areas technology might be a ‘nice to have’, but if you are in an industry facing the margin challenges described above then it will be of no surprise that 43% of Consulting Engineering companies are looking to improve their project solutions according to the above mentioned IDC prediction.
The challenges associated with achieving full transparency and visibility of your operating margin are plenty and they escalate the more international a company is. But the rewards of improving visibility through technology can be significant. Technology as an enabler can be both in the context of shared services and/or in the area of process optimisation. There is no one ‘right method’ to improve your operating margin by using technology but improving any of the areas on the list below can make a significant difference and technology is the enabler that will allow you to make these improvements:
Top 10 technology enabled project margin impact areas:
Pre project start
1. Pipeline evaluation
2. Maximising potential effect of capacity
3. Bid decision support
4. Contractual Capital employed conditions
5. Internal trade agreements
Within active projects
6. Awareness of budget and scheduling impact
7. Maximising effect of resource pool
8. All billable time, items and supplier invoices are captured
9. Cadence and accountability of project reviews
10. No billable time, items or supplier invoices are missed out at project closure
Amongst analysts, operating margin can provide validation or trigger warning signs. So with that in mind, here is my question for those in the Professional Services industry, and particularly those in the Consulting Engineering sector: ‘How well do you handle your operating margin compared to your peers?’