How Should Professional Services Organizations Measure Profitability?
By Raj Narayanaswamy | July 12, 2018
The 5 pillars of success
HR professionals are well aware that resource time accounts for nearly 80% of operating expenses in professional services organizations – so a clear and accurate picture of every hour they spend, and where they spend it, is critical. While every services business operates by their own specific methodology, there appears to be an overarching, near-unanimous philosophy: billable hours equal total resource time.
Unfortunately, this shortcut leaves a fair bit of detail out of the picture. It doesn’t account for under reported time, those working off-the-clock to make deadlines, unbalanced skill sets among team members, or other projects competing for attention. Ultimately, it’s not billable time alone that counts – it’s insight into every minute the employees work. If it isn’t being tracked, it isn’t being measured or managed.
This results in misunderstood revenue leakage, or even profitable organizations overlooking more opportunities for even better results. Without a complete picture of how all time in an organization is used, it is easy to make incorrect conclusions about profitability based on partial data from siloed systems. Failing to account for all time, and consequently all expenses in an organization, creates and perpetuates the Profitability Myth.
To bust this myth once and for all, it’s necessary for HR executives to make sure services leaders have 100% visibility into an organization’s project resources’ time and work. The same way ERP came into existence to unify and automate back-end office functions, professional services automation needs an upgrade to offer the same real-time, integrated, single source of truth across an organization.
These five pillars need to be cultivated on a foundation of resource time for PSOs to be successful:
1. Service Delivery Management
Top-of-the-line project or program managers are able to orchestrate and gain visibility into their unique service delivery workflows and processes by collaborating on a single source of truth for time, instead of focusing on numerous different workgroups. They can then more effectively manage resource allocation, skills, utilization, and more.
2. Revenue Management
When project, billing, and finance managers have real insight into resource time, they can optimize their operations in profitability, progress, billing status, budgets, revenue recognition and maintain compliance with accounting standards.
3. Resource Utilization
The ability to set productivity targets and accurately measure resource utilization is critical to run a profitable service delivery business. Setting these targets at individual resource levels enables PSOs of all sizes to effectively utilize resources by measuring against them. Further financial performance and productivity can be driven by collating individual, project, group, or company level productivity and utilization metrics.
4. Growth Management
To continue managing resource cost, bench capacity, and overhead effectively, don’t stop at current resource utilization – look forward as well. Use historical information from service delivery pipelines to improve your estimates, plan for profitability, and forecast the skill sets and future resource utilization needed for your hiring and training needs.
5. Project Accounting
Project managers and finance teams can gain full visibility into their projects’ financial health by collaborating on these key metrics: budgets, estimates, costs, margins, WIP, billings, bookings etc. Look for a platform that offers real-time data availability.
HR individuals working in a PSO must enable services leaders with a complete view of resource time and availability, based on a configurable framework that supports an organization’s unique business workflows. A sophisticated and comprehensive PSA solution not only automates critical tasks such as resource and project management, but also provides deeper insights into areas such as resource utilization and project profitability. This builds a time-focused system of record based on the way individual organizations work, rather than forcing them to adapt to a solution-dictated process.
No less valuable than money, people, or intellectual property, time must be acknowledged as a vital business asset. When all projects and time can be tracked and tied to outcomes produced, you can get the whole picture on profitability.
Original Source: HR.com
Author: Raj Narayanaswamy