Project margin is a key metric to manage in a services business. Nothing gets to the issue of services profitability as quickly as project margin. Often, project margin is measured and analyzed at Director levels and above. Typically project margin information is not drilled down to the project team and more rarely, project program managers are not empowered to run their projects like a business and held accountable to margin.
As you begin to study margin, what are the departmental goals for profitability? How profitable do your projects need to be to reach the departmental goal? What level of risk are you assuming? Do you have a complex implementation that requires some free efforts along the way? If so, how do you build that into your model? Understand these higher level goals and questions as a first step.
In understanding project margins, the most key driver of profitability is the initial resource rate as it is the lowest common denominator in the build-up of services revenue. In setting professional services rates, typically a cost-plus structure is used. This may be fine for smaller services organizations, but as the team grows, other factors beyond cost need to be considered. These include competitive rates, value-pricing for high value resources (for example, you may charge a 5% premium for localized language skills or increase rates for specialized database tuning resources), project location (hardship issues in remote or foreign places), availability, and more. In addition, you have some goal of profitability and you need to build that into your rate model. A good way to do this is to set three project margin targets at list, target, and floor levels that let you more than achieve your profitability goal at each level. Importantly, do not set floor at profitability targets, otherwise you will have no room for project error (and in enterprise software there is frequent project variance).
Once you have published a rate card with list, target, and floor tiers, the next step in ensuring a well-run services organization is to develop and enforce a rigid services quoting process. Quoting enterprise software implementations is not an easy thing. A good approach follows.
- Engage deeply in the license sales process from a services perspective by hosting discovery sessions that ferret out customer requirements.
- Develop a scoping matrix tool that addresses many tens of questions about a typical project so that you can gain the most insight as early as possible (business scope, product scope, process scope, # of users, IT environment, integration variables, etc.).
- Ensure that each quote marries the discovery and scoping matrix with a detailed project plan preferably in a project planning tool like Microsoft project (as opposed to Excel). When you have thought deeply about a project plan template, then a quote, GANTT chart, vendor resource matrix, customer resource matrix, resource availability plan, and assumptions can all be generated very easily. This level of detail impresses customers.
- Importantly, when a quote is prepared, analyze the total and the resource totals compared to cost and then calculate margin. Doing so at the time of sale helps you make an informed decision in case a discount needs to be offered and also sets a preliminary project margin target. This is easily done in a variety of tools. It is also best not to share margin information - certainly not with customers, and also not with your sales organization or the pressure to decrease rates will be compounded.
Now the basics are in place, and you are selling lots of services projects, which your program management organization is running. How do you plan to monitor project margin? Following is a recommended approach, assuming that your ERP or internal finance system cannot readily report on specific project margin (in many organizations, project margin is often calculated manually because the Finance system was not properly set up with resource costs).
First, manage and motivate your project Program Managers to run their projects as a business where their funding is the services amount and their costs are the project team. Managing a program manager on margin adds a new dynamic to the team and uplifts the role for the individual. Simply changing the notion from “I manage a project” to “I manage a project business that delivers bottom-line profits to my company” has a direct impact on project, department, and company results.
Second, set a billable target for each project every quarter. You know what you need to run the business profitably, therefore set billable targets to communicate to Program Management what their projects need to earn to sustain the business. Related to this, it is a good idea to close billable time weekly and compare to target so that you can course correct early by farming a large project’s billable potential by delivering value earlier, as an example.
Third, build a tool to allow Program Managers to measure margin. Generalize your cost structure by resource to provide an average cost table which can be applied to the project’s billable model. In the tool, include calculations for margin, spend against budget, and billed against budget. Following is a sample summary table.
Fourth, measure project margin weekly. If you do so monthly or quarterly, it will be too late for course correction given a downward trend. It is akin to managing your personal finances well. Ideally, your checkbook (online or manual) is constantly balanced; the same needs done with a project. How much is being earned and how much is spent by the project on a weekly basis? Over time, how is the trend? How does the margin compare to goal? What corrective actions, if any need taken?
Finally, on a monthly basis, meet with Finance to present the total margin portfolio, where the Program Manager for each project presents the margin state of the project among peers and with the senior Finance team. It will take the team to a new level, share project margin information among the program management team to create a healthy competitive environment, and also communicate project financial health to Finance. This is also a good time to discuss reasons for margin downfalls which can generate broader corporate discussions which Finance can help sell and fund. For example, program management may recommend a core product change to make the system easier to implement, which can change the project resource mix to lower-cost resources, decrease project time, etc. Maximizing margin from an enterprise software implementation is tough and there are many opportunities where Engineering, Sales, and Product Management can be instrumental. This meeting up--evels the notion of project profitability across the organization and helps everyone understand its importance - it is a key driver of profitability beyond license and maintenance revenue and sound fiscal practices.
Much goes into running a services business profitably. It presents a unique opportunity to challenge your Program Managers to measure and manage project margin, drilling down the responsibility to key stakeholders in your organization. Managing margin and being responsible for profitability is very, very different than simply managing a project budget. Empowering these key individuals with your business will foster a fiscally-minded attitude, at the point in the organization where it is most important - right on the project’s front line.