De-coding Poor Margin & Profitability: The Dreaded Ops Black Hole

De-coding Poor Margin & Profitability: The Dreaded Ops Black Hole

The root-cause to declining margins & profitability lies in the deep, dark, spreadsheet-laden abyss of your project financials & resourcing…  “The Operations black hole”. A place where hard-won project dollars shall never, ever, return from… and high-flying consulting space-ships can disappear forever.

Most professional service firms don’t even know the black hole exists. Occasionally they spot it in their rear-view mirror, months after engagements are finished, and in the distance they faintly spot all the $margin they’d expected to make, vaporized by scope-creep, over-delivery & poor pricing.

The gut-reaction is to blame the three main protagonists…

    1. It’s the clients fault – they always push for more, get our team on the back-foot & drag out a project. Problem is – if you’d spotted all of that earlier, you could’ve stopped it… or better still, $charged them!
    2. Or is it the delivery teams fault… I mean, where have all those budgeted hours gone? What side-of-desk extras weren’t subject to a change order? If time was tracked & utilization monitored – you’d have no surprises.
    3. So it must be sales? They over-promise, knock down the price to get the deal… that’s why there’s never any margin left… and they get all the commission & bonuses! Sorry to burst the last bubble, but if you need a standardized offering, based on proven previous project profitability (I wanted to add “productization”, but 4 P’s is enough (just ask E. Jerome. McCarthy)).

So none of them are to blame… and you can’t really point fingers at the resourcing team either, because they’re trying to construct your space-ship, designed to navigate the “operations black hole”, out of plastic, sticky tape & glue… I’m not an intergalactic engineer, but even I know you’ve got to have the right tools, in the hands of the right people, if you want a job done right.

So how do you navigate the Ops black hole?

    1. Get people to accurately track their billable time, at least at client AND project level. Bonus insights coming your way if they track to deliverable & non-billable time too.
    2. Use the time captured data, to start analyzing live projects against their existing budget… and tightly manage any potential scope-creep & over-delivery in real-time. This will surface some scary results. Scary good, scary bad – part of the process!
    3. As you now start to build a bank of delivered projects, start to review which of those generated the highest $gross margin. Look at your charge out & cost rates too.
    4. Analyze the same projects & client work, but with your $cash flow hat on… which enables you to best manage your WIP, speed up billing & cash collection?
    5. Build increasingly repeatable propositions & all new proposals around the best-performing projects. You’ll have solid pricing, billing & resourcing profiles by now. 
    6. When sales say they need prices dropped on future opportunities, get them to evidence from past client work, their proposal delivers the $margin you need.
    7. When delivery say they need more time or people, get them to do similar!
    8. Repeat steps 1-7, improving your process incrementally.

Successfully positioning, incentivizing & motivating people to execute on this plan, will enable you to course-correct from impending ops-black-hole doom, to a spaceship back on-track, with a crew all aligned too. Here’s to killer $margins & profitability for 2024 & beyond. Continued success! 

Interested in exploring these concepts further? I’m just a click away—let’s connect!

The Six Types of Contracts in Professional Service Firms: An Insider’s View

The Six Types of Contracts in Professional Service Firms: An Insider’s View

When I first began my journey as a founder of a boutique professional service firm, I was engrossed in the logistics of setting up, hiring the right talent, and pitching to clients. As many founders do, I overlooked a critical aspect of the business: contracts. Many founders do not realize they are routinely entering into contracts. Neglecting this can lead to misunderstandings, disputes, and potential legal consequences. It’s important to recognize the different types of contracts to prevent future complications.

There are six types of contracts most commonly used in professional service firms:

    1. Bilateral Contract: At its core, a bilateral agreement involves a promise for a promise. Both parties commit to certain obligations. For instance, in a professional service firm, this could manifest as an agreement where the firm promises to deliver specific services, and in return, the client commits to paying a set fee. These contracts are beneficial when both parties have clear obligations to fulfill. However, they can be restrictive if situations change, and flexibility is required.

    2. Unilateral Contract: Unlike bilateral agreements, unilateral contracts involve a promise in exchange for an act. Imagine a situation where a professional service firm offers a bonus to an employee if they bring in a certain number of clients. Here, the firm has made a promise, but the employee is not obligated to perform the action. These contracts can be motivating, but they also risk no action being taken if the recipient doesn’t see value in fulfilling the task.

    3. Explicit Contract: These contracts spell out the terms and conditions in a clear and unequivocal manner. For a professional service firm, an explicit contract might detail the scope of work, timelines, remuneration, and other specifics. While these are advantageous for their clarity, they can also be time-consuming to draft and may be perceived as inflexible.

    4. Implied Contract: These contracts are not written or spoken but are inferred from the behavior of the parties involved. If a client in a professional service firm continually engages a consultant without a written agreement, and pays them after each project, an implied contract might be in place. They can be useful in ongoing, trust-based relationships but are susceptible to misunderstandings since terms aren’t explicitly documented.

    5. Oral Contract: As the name suggests, these are verbally agreed-upon contracts. A client and a professional service firm might agree on the scope of work during a meeting, and while valid, these contracts can be hard to enforce due to lack of tangible evidence. They’re quick and can be suitable for straightforward, short-term engagements. But they’re best avoided for complex projects or long-term collaborations where the risk of misinterpretation or forgetfulness is high.

    6. Written Contract: This is the most formal type of contract. Drafted and documented, it provides a clear record of the agreement between parties. In our firm, for instance, we always have written agreements detailing service deliverables, compensation, confidentiality clauses, and more. While they might seem cumbersome, they offer protection and clarity for all parties involved. They’re ideal for significant projects or collaborations. However, the only drawback is the time and sometimes the cost involved in drafting them, especially if legal consultation is needed.

In conclusion, contracts form the backbone of professional engagements in service firms. As founders, it’s our responsibility to understand these intricacies and ensure we’re using the right contract for the right situation. It’s not just about safeguarding interests but also about building trust and transparency with our clients and employees.

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