Time Tracking for Professional Services Firms: The Key to Successful Cost Optimization
Profit margins and revenue are under increasing pressure due to lower billable utilization rates, rising acquisition costs of highly-skilled knowledge workers, and last-minute client requests. In addition, inefficient project and service delivery are causing frequent overruns, squeezing profit margins, and keeping Professional Services Organizations (PSOs) on tenterhooks.
There are outliers, however.
A recently released SPI Professional Services 2023 PS Maturity™ Benchmark report has revealed that:
PSOs that have measured and optimized performance using technology, and continue improving collaboration among their internal and external stakeholders, outperform those that don’t on most counts.
So, what differentiates these “high-performing” PSOs from their counterparts?
Their ability to support multiple projects simultaneously and virtually, and deliver projects within budget and on time.
Their success lies in leveraging real-time project and time data and insights using technologies like artificial intelligence (AI) and Machine Learning (ML) to fast-track their decision-making processes and lower non-billable expenses.
As a result, they have been able to clock almost 50% higher EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), 39% higher annual revenue per employee, and 20% lower revenue leakage compared to PSOs yet to attain collaborative excellence, the report reveals.
These findings underline that AI-powered cloud-based time-tracking solutions are emerging as critical catalysts in the organizational pursuit for profitability amid increasing project costs. And PSOs eyeing operational agility and high performance must incorporate cloud-based time intelligence platforms to turbocharge their growth prospects.
Emerging Choices: Cloud-based Solutions and Automation
Digital transformation is evidently a key enabler for PSOs to boost cost competitiveness. Successful and profitable PSOs are increasingly opting for cloud-based Enterprise Resource Planning (ERP) solutions, and automating processes like manual time tracking using cloud-based time-tracking systems.
Cloud-based time-tracking solutions are helping PSOs accurately capture data related to project time and costs, and significantly reduce the total cost of ownership (TCO), thereby increasing profit margins considerably.
Additionally, cloud-based time-tracking solutions are easy-to-deploy, come with vast integration capabilities, and do not require substantial upfront investments as they are pay-per-use services. Plus, maintenance and upgrades are the sole purviews of the service providers.
This way, PSOs are able to focus on delivering services and managing client expectations rather than spending considerable time and financial resources on building solutions and technology platforms in house, and continuously upgrading them. Such wide-ranging benefits explain the recent surge in demand for cloud-based services.
What’s Putting Pressure on Project Costs?
Project margins, a key performance metric, contracted by 1.5% in 2022 compared to 2021, and remained 0.4% lower than the five-year average of 35.4%, the 2023 SPI Maturity Benchmark Index report indicates.
Project margins can be used to determine whether or not a project is priced correctly. If the project margin is lower than expected, then it may indicate that the project was priced too low, or the cost of delivery was higher than anticipated.
By analyzing the project margin and adjusting project pricing accordingly, PSOs can ensure they are charging appropriately for their services and maximizing profitability.
Mentioned below are some factors that have put pressure on project costs, while reducing margins:
1. Data Silos and Missed Opportunities
PSOs are facing multi-pronged challenges in delivering projects on time and within budget. First, they are undergoing a fast-paced shift to digital tools and processes to sustain hybrid and remote workplace models. This quick pivot toward digital transformation has resulted in a massive proliferation of work applications, which means time data is now spread across multiple time-tracking systems.
Such a highly siloed setup reduces real-time visibility as such data is difficult to track, manage, and interpret, which leads to missed billable hours and business opportunities.
2. Inefficient Resource Utilization and Management
Organizational maturity and employee billable utilization are interlinked. This is why the maturity of PSO’s technology landscape greatly determines their ability to better utilize the billable hours of their employees, the 2023 SPI Maturity Benchmark Index report reveals.
For instance, PSOs with maturity levels of 4-5 on a scale of 5 enjoy 2.9% higher employee billable utilization than PSOs with maturity levels of 3 or less. What’s more, the gap between “high-performing” organizations and PSOs with lower maturity levels of 1-2 (that follow ad-hoc processes) widens to 8.6%. A 2-3% increase in employee utilization can massively impact a large enterprise’s net revenue.
Lesser-mature PSOs can attribute lower employee billable utilization to disparate systems that have created data silos and reduced visibility into resource allocation and management. This way, decision-makers don’t have real-time visibility into whether or not their resources are under or over-utilized.
Business leaders can use such information and insights to optimize resource allocation and reduce resource costs, and enjoy higher profitability.
Most PSOs are facing a plethora of challenges that limit their project revenue-generating capabilities, as mentioned below:
1. Data silos
2. Clunky employee experience
3. Lack of operational efficiency
4. Revenue leakages
5. Interoperability between systems
7. Lack of global compliance
8. Lack of real-time visibility
On the contrary, PSOs that optimize “portfolio and collaborative excellence” using cloud-based unified solutions and insights can better tide over the challenges that continue to mar lesser-mature PSOs. And this can hamstring their ability to generate more project revenue and profits.
According to the 2023 SPI Benchmark Index report, PSOs with maturity levels 4-5 have 4.6% higher EBITDA than PSOs with maturity level 3, and 11.7% higher EBITDA than organizations with maturity levels 1-2.
Plus, more mature firms (maturity levels 4-5) have a US$ 50,000 higher annual revenue per employee compared to PSOs with maturity level 3, and US$ 122,000 more than PSOs with maturity levels 1-2, respectively.
3. Inefficient Time-tracking Processes
Time-tracking inefficiencies are one of the key reasons why PSOs may find managing project costs difficult. Manual or siloed time data management reduces visibility into the time spent across projects.
A Microsoft report reveals that more than 85% of managers are unsure whether or not their employees are productive while working in hybrid setups. Without real-time insights into time data, managers are likely to allocate resources inefficiently, leading to lower employee productivity and under-utilized billable work hours. These inefficiencies result in revenue leakage.
According to an SPI study, in 2022, most organizations experienced a higher revenue leakage of 5.17% compared to “high-performing” organizations that registered only 4.16% revenue leakage. Even a 1% saving in revenue leakages can drive higher project profitability, especially for enterprises.
Switching to AI-powered and cloud-based time-tracking solutions has deeper implications than merely helping businesses track employee billable hours. PSOs can experience heightened employee productivity through the optimal use of billable work hours and plug-in revenue leakages.
Plus, decision-makers gain profound insights that can help improve enterprise-wide productivity and resource utilization, resulting in greater customer satisfaction. This way, automating the time-tracking process plays a key role in preparing a business to respond nimbly to evolving market conditions.
4. Build or Buy, or Both?
A large-scale pivot toward digital transformation means PSOs must choose between building a solution from scratch or buying a readily available solution, or a mix of the two, while automating their time-tracking processes. Doing so would require them to thoroughly assess the impact of their choice and compare the costs, benefits, and business implications.
They can design and build a system in-house. Such an approach, however, requires vast technical expertise, time, and money in designing, developing, and testing the system. Then there’s no guarantee that it’ll work as intended or serve the needs of a growing organization. In fact, the total cost of ownership of a built time-tracking solution can often be two to three times the initial estimate.
Mentioned below is a broader checklist to evaluate a more cost-effective buy vs. build decision:
- What does it cost to maintain and administer the current system?
- How much time and money does it cost to fix time capture re-entry errors?
- How much revenue is lost because projects can’t be estimated accurately?
- How much billable time is lost because the time spent on client projects is not recorded accurately?
- How is cash flow impacted because the billing process is slow?
- How’s the relationship with the client where projects haven’t been delivered on time or within budget?
Without subject matter experience in timesheet systems, PSOs also run the risk of missing out on critical requirements and underestimating their impact on the entire organization. Time-tracking systems built in-house are usually more expensive, take far longer to implement, are often more difficult to use, lack the full functionality of commercially available systems, and offer no guarantee of success.
Time and expense tracking is a necessary business process but never a core organizational competency. Therefore, developing and maintaining an in-house solution can take a PSO’s focus away from its business priorities.
On the flip side, buying a readily available time-tracking system allows organizations to leverage existing expertise in multiple use cases without needing to delve into the intricacies of building features for each use case.
Plus, a cloud-based time-tracking solution allows organizations to rapidly integrate it into operational workflows and cover multiple use cases such as billing, costing, payroll, labor compliance, and data security from day one.
As organizational requirements grow, the system will already have technologies in place to meet those requirements without any additional investment or waiting period. Functionalities and benefits like these tilt the scales in favor of buying from reputed vendors like Replicon than investing in developing in-house capabilities to build from scratch.
5. Rising Compliance and Labor Costs
The shift to remote and hybrid workplaces has opened a new Pandora’s box for global PSOs. They must comply with often fast-changing and diverse national & regional legislations, such as adhering to the Working Time Directive (WTD).
The law requires employers to adhere to directives like a minimum daily rest period, a minimum uninterrupted rest period, total working hours, and paid annual leaves, as laid down by national or regional legislation or practice.
They may be blindsided because of the lack of visibility into unified time data, especially when they rely on emails, spreadsheets or other such means of recordkeeping to manage their global workforce’s time off and attendance.
Siloed systems, coupled with a larger number of employee types – full-time, gig-based, shift workers, and part-time employees – working across timezones and work shifts, can create a potential minefield of compliance-related challenges. Plus, issues like back wages payments, litigation costs and a loss of reputation.
PSOs need cloud-based, unified time-tracking solutions with built-in compliance to adhere to new and emerging local, regional, and national mandates, while managing global teams working across timezones and work shifts.
How PSOs Can Address These Challenges
PSOs should continuously identify and fix the gaps that cause the loss of revenue, lower efficiencies and productivity.
Automating admin tasks like filling timesheets is one way businesses can become more competitive and optimize their employee productivity and efficiency. This way, employees can engage in higher-purpose tasks and use their billable hours more efficiently, directly reducing project costs.
Mentioned below are some points that PSOs can consider.
1. Consider the Total Cost of Ownership of Cloud-based Time-tracking Solutions
It makes financial sense to assess the total cost of ownership when identifying the need for a new solution. For instance, many enterprises with multiple departments and presence across multiple locations traditionally use multiple time-tracking systems.
However, such a setup can be cost-prohibitive, at least in the longer term.
Such businesses actually need a unified solution that centralizes time tracking across locations and departments, thereby reducing the need for many systems that cost so much more.
Another crucial factor to consider is whether or not the systems can help manage a plethora of regulatory compliances.
For example, interpreting complex federal, state, and local laws, inadequate processes to get real-time updates, and managing the complexities of multi-jurisdictional requirements, can strain even the most well-staffed enterprise.
Cloud-based time-tracking solutions with built-in compliance can significantly reduce the total cost of ownership and protect enterprises from unwanted and often inadvertent compliance errors.
2. Reduce the Time-to-bill
The absence of a centralized time-tracking and billing solution can make it difficult for enterprises to align employee time to projects and make detailed project plans. Most enterprises use disparate time-tracking solutions to manage time-tracking and client billing processes. Such inefficiencies can delay invoicing and increase the time to bill clients, creating additional and avoidable pressures on project costs.
A cloud-based centralized time-tracking and billing solution can expedite the time-to-bill process by reducing payroll processing time. It can offer deeper analytics and reporting capabilities and provide accurate data of employee time spent on projects – cumulatively helping reduce the time taken to share invoices for payments.
3. Improve the Time-to-revenue Process
PSOs can also look at improving their time-to-revenue process. Here, using a solution that offers end-to-end integration with cloud-based time-tracking systems and cloud-based ERPs can help. Such solutions are user-friendly and highly flexible, and can be integrated with the organization’s existing backend billing and invoicing systems.
Enterprises can consider using them to reduce billing cycles and better manage their time capture process by gaining real-time access to billing rates based on the project, or job role.
For example: Replicon has recently integrated with SAP S/4HANA Cloud and SAP SuccessFactors. This integration package helps organizations capture, validate, and transform project time data with Replicon’s Time Tracking App, which is endorsed by SAP. Project, customer, worker, and time data is synced easily between SAP S/4HANA Cloud, SAP SuccessFactors, and Replicon.
In one of the recent successes, the integration between SAP and Replicon helped a US-based Fortune 500 IT services company move from over 20 different time systems to one. This setup enabled the company to optimize its timesheet handling process.
Ultimately, PSOs will need to revisit their legacy systems and processes to address the evident and hidden gaps. They should consider replacing their legacy time data systems with unified time intelligence solutions that align the key organizational pillars and enable business leaders to make informed decisions.
How Replicon Can Help PSOs
Enterprises can benefit from Replicon’s Project Time Tracking Product Suite, powered by ZeroTime™. It enables organizations to modernize their time-tracking process using AI/ML technologies with a single source of truth for time with global governance. It liberates employees from manual timesheets by automatically capturing their work and time data across more than 100 work applications, thus maximizing employee productivity and customer engagement.
The product suite helps organizations manage all their project time tracking needs, such as project costing or client billing. Organizations no longer need to track time manually, thanks to AI-powered ZeroTime™.
Replicon’s Project Time Tracking Product Suite consists of ProjectTime, and TimeBill, among others, which offer comprehensive capabilities like project hours, deliver real-time visibility into project time data for billing across all groups, and a multilingual, multicurrency-supported platform.
Volatile times are often the harbingers of progress and innovations. Uncertainty and market disruptions may continue unabated and further squeeze profit margins. That’s why, PSOs would do well to onboard a unified, scalable, and robust time-tracking ecosystem to remain competitive amid disruptions.
And Replicon’s time intelligence solutions fit the bill!