How to protect your projects from “margin leakage”
Posted by Henk Onstwedder
In my former role as the managing director of a software firm, I had the pleasure of working with a team of project managers and implementation consultants. Naturally, they would be involved from a services perspective in sales engagements – to lead discussions on project scope, duration, effort and cost.
As the one ultimately responsible for realizing profitability targets, I always insisted on having a healthy planned profit margin on services. Since we had been in business for many years, we had a good understanding of the scope of work and the required effort and cost levels, so we were typically quite comfortable that our estimates were accurate enough to get the job done and deliver the target margin on the project.
When executing the projects, we often found that real-life didn’t always match up to our initial plans. That’s not a surprise of course, but the question for your professional services organization is how to best handle this all-too common challenge. How do you enjoy the benefits of a project that is doing better than planned, while minimizing the impact of deteriorating project margins – or margin leakage – for projects that don’t go so well?
We found that minimizing margin leakage starts with identification of the problem. If you want to have any control over your project profitability, you simply must have an accurate understanding of your planned profitability during the whole of the project life cycle, starting from the moment of building the proposal, through project execution, all the way to project closure.
To get there, the first thing you really want to look for is a software tool that gives support throughout the entire project life cycle.
If you can build your proposal in your PSA solution, then you immediately gain the understanding of your planned profitability from day one. By collecting hours, expenses, third-party fees and information on ETC in the same tool, you have all the ingredients for monitoring the status of your projects on an ongoing basis.
Once the information is available, the PSA solution should then direct your attention to the projects that require attention, either in the form of a margin-leakage dashboard (see Figure 1 below), or via proactive messaging to alert you to the situation.
Figure 1: Project profitability and margin leakage overview. Click here to view full screen
Are you struggling with the challenges of executing projects profitably and minimizing margin leakage? It’s time to take a fresh look at the way your business works, and the ERP/PSA project and accounting tools that support it. The right solutions can help you increase profitability and secure margins. Find out how to execute profitable projects with 360-degree visibility and control of the project plan, budget, schedule, and actuals.