In the current economic climate, professional service firms are acutely aware of the threat posed by the erosion of profit margins. Without proper planning and monitoring, project margin erosion can sneak up on you gradually. Everything appears to be in order until, suddenly, nothing adds up. And erosion can accelerate quickly.
Margin erosion is a term used to define loss of magin dollars that can occur oncea job has been won. More simply put, it is a gradual reaction in gross profits over time. Margin erosion can be caused by anything from human error to poor quality control or lack of sufficient inventory. For professional service firms, however, issues like excessive overhead costs or capital investments ultimately impact the bottom line, quickly eating into a company's overall profitability.
Many things can erode margins on projects; some are harder to control than others, but by putting a few processes in place, project costs can be controlled more effectively, and organizations can realize greater financial success.
There are 4 primary categories that encompass many of the problems that lead to margin erosion:
Establish repeatable processes for providing accurate cost estimating—In the highly competitive services industry, precise financial information is required for accurate proposals. Knowing and anticipating the project's expenses correctly provides a definitive advantage in the business development proceess and ultimately, the financial success of the project, particularly on lengthy or large jobs where small discrepancies can have domino effect throguhout the project.
Proactively manage the change order process—Out-of-scope requests can kill project profits. Every firm gets out-of-scope requests from clients, yet few have formal processes for dealing with them. How a firm deals with out-of-scope requests can go a long way in determining a firm's profitability.
Provide visibility and effective coordination of resources—Teamwork and personal productivity are critical in the services industry. People are a professional services firm's greatest asset; keeping them busy on the right projects is absolutely critical to your profitability. But beyond that, they are critical to keeping your clients happy and the long-term success of your firm.
Arm yourself with information necessary to proactively respond to cases of margin erosion—Project managers need the tools to budget effectively, closely monitor actual time spent versus budget, and be armed with the information necessary to proactively respond to cases of margin erosion. In order to empower project managers, they must have the appropriate project accounting tools and metrics in their hands and build consistent practices utilizing these tools.
The solutions for avoiding project margin erosion involves a combination of people, processes and tools. When it comes to technology, it is crtiical for professional services firms to have solutions that support the effective collection and analysis of data to provide for better decision making and actionable, strategic reporting and key performance indicators at both the project and firm level.
To learn more tips on how to avoid margin erosion, download our whitepaper, Margin Erosion, or contact SBS Group today at info@sbsgroupusa.com or call us at (888) 725.2555.
This blog was originally published on the SBS Group Blog.