Following a strong year for most consulting firms in 2022, the focus in 2023 will be much more on managing profitability amid more volatile market conditions and rising costs (mainly staff).
In the pursuit of growth, consulting firms often see growth in revenue and headcount as the main goals. However, growth alone is never an assurance of greater profitability, and especially in 2023 this rule of thumb is set to become more relevant than ever with overall industry market growth expected to slow down in most major markets and costs levels at a high on the back of recruitment drives and salary hikes.
Achieving better profit in consulting can stem from many different routes, with improved efficiency in execution one key route to consider in 2023, according to research by Deltek, a global systems provider to consultancies around the world.
The upcoming SPI Professional Services Maturity Benchmark Report found that increasing profits is a key 2023 priority for leaders in professional services, including firms in the management consulting and IT consulting segments. Alongside ramping up top-line growth, enhancing internal operations and visibility are key levers of lifting profitability, with significant differences in performance between ‘leaders’ and ‘laggards’.
So how can consultancies improve their profitability through improved internal efficiency? In ‘How Consulting Firms Can Win’ (a playbook for best practice strategies in consulting), experts from Deltek outline several best practices. A round-up of three key areas of focus:
Focus on consultant utilisation
The most profitable consulting businesses set and consistently exceed aggressive targets for utilisation.
This means that they have higher utilisation targets across ranks than their peers (which drives revenue growth), and have strong processes to track how and where people are deployed.
Leaders in utilisation also are better in managing project staffing, ensuring that hours consumed align with the project plan and budget. They also have good historic data about utilisation rates needed to execute a project profitably, which leads to more accurate forecasting and pricing, and hence higher profitability down the line.
This process is supported by systems that can create easy to use and informative utilisation reports, showing actual utilisation versus targets across a range of cross sections at project and portfolio level.
Equipped for project success
Consultancies that lead in profitability through efficiency have leading insight in project portfolios and in the details of single projects. With a full overview of project performance at all levels, it’s easier to manage projects, streamline resources, and spot new opportunities to drive revenue.
Meanwhile, consulting firms with state-of-the-art ERP systems can integrate project management with finance, providing more insight. Previous research from Deltek shows that gross profit margins above 60% are possible when consulting firms have visibility and the proper project management tools in place.
Having one source of truth allows consulting firms to deliver higher quality projects and more satisfied clients while better supporting strategic and revenue goals.
Strong financial management
The most profitable consultancies are according to the SPI Professional Services Maturity Benchmark Report those with a high level of visibility into project and company performance. Firms with upper quartile levels of visibility can be more than 10% more profitable than less mature counterparts.
A best practice financial management function makes sustained profitability manageable, and places the information partners and project managers need at their fingertips to understand profit margins – forecast and actual, by project or company-wide. This information is essential to steer current projects, and price future projects for greater profitability.
Best-in-class systems play a large role in strong financial management. They automate project and company financials, centralise budgets, and streamline operational processes such as invoicing, reporting and compliance, enabling decision-makers to make sound decisions based on facts.
On the up side, confidence in the quality of a firm’s financial position helps leaders make more assured decisions about investments and growth.
About ‘How Consulting Firms Can Win’
Deltek’s annual ‘How Consulting Firms Can Win’ playbook provides an overview of how large and small consulting firms can win the game in a competitive environment, through the adoption of best practices across topics such as growth, marketing & sales, project delivery, internal efficiency, talent & recruitment, and technology.