Whilst working with a number of firms across the Professional Services landscape, I was struck by how common it is for Services firms to confess that they don’t know before it’s too late whether a job is profitable or not. Which brings up a couple of interesting questions:
- How late is too late?
- What can you do about it?
How late is too late?
Clearly, too late is when you’ve already burned through the margin on the project and there is no way you can possibly make a profit by the time you’ve finished. This may lead to you taking a loss, or trying to pass on some of the expense to your customer. In some instances you may be able to get some more revenue, however, which customer is going to be happy to be charged more than they expected? They’ll be particularly unimpressed if it’s a fixed fee and you need to invoice more than agreed.
Typically, a lack of visibility on the activities and resources being consumed as the project progresses causes this. Time and expense may be being collected, yet if there is no clear way to see how much has been used against a particular job or if it takes time to reconcile this, it is easy to lose track of where you are. Like it or not, we all need to be agile to get the work done to the high standards our clients desire. Our best laid plans change, customers move the goal posts, and we need to be flexible to adapt as projects progress, but being flexible will not ensure the project is financially successful.
What can you do about it?
A combination of well-defined, effective processes and internal systems are the best ways to maintain control and visibility of project profitability.
Your processes need to be aligned all the way across the delivery of your projects, from customer proposals to accounts receivable. So you can take a successful customer quote, accurately budget and plan resources, then record time & expense against the project. Project Managers should be able to raise purchase orders, and also invoice based on the completed work and the payment schedule thereby cutting down on internal processes.
It is important to have regular check points to make sure your project is still on-track even if there have been a number of changes. This can take time if you have several disparate systems supporting the different processes within your business.
A unified ERP system that supports your internal processes from end-to-end will provide the visibility you need to see how profitable your jobs are at all stages. Your business system needs to include time & expense collection, vendor invoicing, managing approvals, resource allocation, budgeting, provide a trail of changes to each project, invoicing, and finally, link directly to the back office accounting and general ledger. Through having a system that will manage all this on one database you can have the reporting capability necessary to provide your project managers with the visibility they need to know when a project is off-track and make the necessary adjustments to keep each project firmly in the black.
So, do you always know how profitable your projects are?