The Operations Black Hole: how professional services firms can find their way back to higher profits

This free guide is packed with actionable insights, strategies, case studies, and more to help professional services firms stop losing profits to the 'Operations Black Hole'!

Ben Edwards

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Decoding the Operations Black Hole

Every professional services firm fears the same thing: declining EBITDA and profitability. Achieving and maintaining high margins can be a difficult and complex task, a bit like trying to navigate an unpredictable galaxy. Firms struggle to find their way forward, often finding themselves lost inside…

…”The Operations Black Hole”: a hidden abyss where hard-won project dollars never return from, and high-flying firms can disappear forever. And it’s all due to poor operational practices.

That’s why we’ve created this eBook to bring this phenomenon to light and give firms the tools and roadmap they need to increase EBITDA, gross margins, utilization rates, and EV (Enterprise value). You'll also see how leveraging CMap PSA (Professional Services Automation) software can transform your firm quicker, easier, and more profitably.

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Wait, what's PSA software?

PSA software integrates project management, timesheets, resourcing, and pricing/proposals into a cohesive system.

Industry benchmarks reveal that firms using PSA outperform those relying on spreadsheets and disconnected tools. PSA can help you navigate the operations black hole, with top-performing firms hitting 40%+ EBITDA and 70%+ gross margin.

Average firms are often at half of those profit levels...

Chapters

The Operations Black Hole, explained
Objectives and benchmarks
The root cause of margin decline
Billable time
Maximizing non-billable time
Struggles & opportunities for three types of firms
Implementing change successfully
Recommended cadence of internal meetings

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1) The Operations Black Hole, explained

The "Operations Black Hole" refers to the inefficiencies and financial leakages that occur when professional services firms rely on outdated methods to manage project financials and resourcing. It’s where they lose their hard-earned profits to a black hole of scope creep, over-delivery, and poor pricing practices.

Now, the gut reaction is often to blame the three main antagonists:

The clients – “They always push for more, get our team on the back-foot, and drag out a project!” The thing is, if you’d spotted all of that earlier, you could’ve stopped it… or better still, charged them!

The delivery team – “I mean, where have all those budgeted hours gone? What side-of-desk extras weren’t subject to a change order?” Well, if time was tracked and utilization was monitored, you’d have no surprises.

The sales team – “They over-promise and knock down the price to get the deal, that’s why there’s never any margin left… and they get all the commission and bonuses!” Then it sounds like what you really need is a standardized offering, based on previous project profitability.

So, in reality, none of them are to blame—it’s rather a case of getting the right tools in the hand of the right people to get the job done right.

Traditional tools, such as spreadsheets and separate systems for project management, timesheets, resourcing, and pricing/proposals, create silos of data that hinder real-time visibility and decision-making.

Firms often only realize the extent of their margin erosion after projects have concluded, spotting the vaporized margins in their rear-view mirrors. This lack of foresight leads to missed opportunities for course correction, ultimately dragging the firm deeper into the black hole.

Let’s imagine a boutique consulting firm that’s embarked on a series of projects with promising profitability. As the projects progressed, the firm faced scope creep and over-delivery. Relying on spreadsheets, they failed to track these issues in real-time. By the end of the projects, the expected margins had vanished, swallowed by the operations black hole.

This scenario is all too common in firms that lack integrated systems for project and financial management.

Now we know what the Black Hole is and who (or, rather, what) is causing it, let’s move on to setting some goals to help your firm out of the abyss.

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2) Objectives and benchmarks

Here are three main goals that professional services firms should be working towards to improve operations.

Goal 1: Higher project margins

To achieve higher project margins, the key is to:

Capture accurate time data
Manage scope creep
Optimize resource allocation

Firms actively managing time spent and resourcing against budget, on live projects, grow faster and have higher project and gross margins.

They can use historical insights to better price and plan future engagements and win client work, which is your highest margin and most lucrative services / offering.

Industry benchmarks indicate project margin should be at least 50%.

Top performing firms’ gross margin on projects are 70%+.

Goal 2: Improve profitability and cash flow management

Firms need to connect time-tracking directly to financial insights to improve billing accuracy, speed, and cash flow management. Real-time data on work-in-progress (WIP) and project milestones accelerates invoicing and reduces aged debt.

Firms who master project financial management are in a high-growth cohort & more likely to have higher operating profit margins.

Industry benchmarks indicate operating profit should be at least 20%. Top performing firms operating profit is 40%+.

Goal 3: Enhanced scalability and operational efficiency

Moving from growth to scale mode is focused on leveraging resources in an ever-increasingly efficient manner.

A big component of this is providing standardized processes for project delivery, resource allocation, and financial management. This standardization enables firms to grow without the operational bottlenecks often associated with manual processes.

According to The Consultancy Growth Network’s benchmarks, firms using PSA software experience significant improvements in profitability and growth compared to those relying on traditional methods. These firms report higher gross margins, faster project delivery, and better resource utilization.

Keeping these goals in mind, let’s look at the root causes of margin decline.

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3) The root cause of margin decline

To navigate out of the operations black hole, firms must address the root causes of margin decline:

Scope creep

Over-delivery

Poor pricing practices

Scope creep and over-delivery

Scope creep happens when project requirements expand beyond the original agreement, often without corresponding increases in budget or timeline. Over-delivery happens when teams go beyond what was contracted, delivering additional value without capturing the additional revenue.

So, how do you manage scope creep and delivery?

1) Define clear project boundaries: Establish clear project scopes and communicate them effectively to clients.

2) Monitor scope changes: Track scope changes in real-time and implement change orders when necessary.

3) Enforce change orders: Ensure all additional work is documented and billed appropriately.

But how do you achieve real-time project management?

PSA software allows firms to monitor projects against budgets in real-time, providing immediate alerts for potential scope creep.

This proactive management helps prevent margin erosion and keeps projects on track by:

Alerting project managers when delivery teams are committing too much time vs. budget on engagements

Highlighting out-of-scope work– so new SOWs can be priced and signed off by clients, and you’re recognized and paid for additional work

Pricing and proposal challenges

Under-pricing and poorly structured proposals can lead to projects that fail to cover costs, let alone generate profit. Accurate historical data on project costs and margins is crucial for creating proposals that reflect true project value.

Here’s how:

1) Analyze past projects: Use PSA software to analyze previous projects and determine which generated the highest margins.

2) Develop pricing models: Create pricing models based on historical cost and charge rates to ensure future proposals are profitable.

3) Incorporate lessons learned: Continuously refine pricing strategies based on insights from completed projects.

Case study: Successful pricing strategies

A consulting firm implemented PSA software and began using historical data to build proposals.

By basing proposals on accurate cost and charge rates, they increased their project margin by 15%, transforming their EBITDA & Enterprise Value.

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4) Billable time

Accurate time tracking is a cornerstone of effective project and financial management. It provides the data needed to analyze project performance, manage scope, and optimize resource utilization.

Accurate time tracking at client and project level

Firms must capture billable time at both the client and project levels to ensure accurate billing and project management. Tracking time at a more granular level, such as phases of work or deliverables, provides additional insights into project efficiency.

The benefits of precise time tracking

1) Enhanced project visibility: Real-time tracking enables firms to monitor project progress against budgets and timelines.

2) Accurate billing: Precise time tracking ensures clients are billed correctly for the work performed, reducing disputes and improving cash flow.

3) Better resource allocation: Insights from time data help optimize resource allocation, improving utilization rates and reducing bench time.

4) Optimized utilization rates: Accurate timesheet data helps firms better understand how their workforce is being utilized and make the most of billable hours.

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A firm struggling with declining margins implemented PSA software to improve time tracking. By capturing detailed time data, they identified inefficiencies and managed scope more effectively.

Case study: Transformation through time tracking

A firm struggling with declining margins implemented PSA software to improve time tracking. By capturing detailed time data, they identified inefficiencies and managed scope more effectively.

This led to a 20% increase in project margins, 5% uplift in average billable utilization, and a seven-figure rise in operating profit within six months.

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5) Maximizing non-billable time

Non-billable time, if not managed properly, can become a significant drain on resources and profitability. However, when tracked and analyzed, it can provide valuable insights into cost management and efficiency.

Understanding non-billable time

Non-billable time includes activities that are not directly chargeable to clients, such as internal meetings, training, business development, and administrative tasks. Many firms struggle with untracked non-billable time, leading to a hidden drain on profitability.

Common pitfalls in non-billable time management

1) Dumping hours into “admin”: Employees often record excess hours as "admin," masking their true activities.

2) Lack of visibility: Without detailed tracking, firms can’t identify or address inefficiencies in non-billable time usage.

Strategies for managing non-billable time

1) Categorize non-billable activities: Break down non-billable time into meaningful categories such as sales, learning, intellectual capital, marketing, and admin.

2) Analyze non-billable time: Tracking and analyze both non-billable & billable time, enables you to conduct meaningful internal benchmarking exercises to identifying areas for individual improvement or stellar performance.

3) Optimize non-billable activities: Reduce non-essential admin tasks, streamline processes, and invest in activities that add value.

Two case studies: Uncovering hidden costs

A 75 person boutique consultancy growing at 25% YoY discovered that 10%+ of their most senior billable people’s time was unproductive or labelled "admin"—and the billable value of those days equalled millions of dollars.

A 35 person professional services firm at 22% EBITDA of their delivery team's time was spent on personal learning and development... but had never been recognized. The founder now puts a dollar on her investment in people.

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6) Struggles & opportunities for three types of firms

Using everything we’ve learned so far, we’re going to take a look at three professional services firms—all fictious, but all reflect the most common objections and perceived problems with building a time-management strategy:

The Sales Machine Firm – competitive, determined, and ambitious

The Big Brother Firm – fearful of monitoring and change, with executives beating their people over the head with KPIs

The Transparent Firm – flat, non-hierarchal, and open with data-sharing

… and, crucially, we’ll outline some solutions. You may recognize traits in some or all of these firms and need ideas on a path forward.

The Sales Machine Firm

Case study: 20 person consultancy who doubled EBITDA in 1 year

This firm first looked at historical project data, enabling them to build a methodology around their most profitable offering. They also implemented margin-based bonuses to foster a competitive yet profitable sales and delivery motion.

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The Big Brother Firm

Case study: 115 person firm where mistrust was rife

One US-UK firm had implemented time-tracking poorly prior to CMap, focusing on the wrong KPI’s, driving poor behaviors and imbalanced workloads. By identifying and communicating employee benefits (primarily less choppy work-patterns & reducing burn-out) over time, this Founder was able to reduce staff churn, better resource projects, ultimately improving profitability and Enterprise Value pre-exit with attractive EBIDTA multiples.

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The Transparent Firm

Case study: 55 person firm pre-investment

A firm planning on seeking investment implemented PSA to provide higher levels of insight and transparency—revealing issues with project margin, utilization, and pipeline growth. This enabled them to course-correct and build a sales & delivery machine, before embarking on their next phase of growth and investment.

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7) Implementing change successfully

Successfully implementing PSA software requires overcoming resistance to change and selecting the right PSA partner.

Overcoming resistance to change

Employees often fear new tools will increase workload or lead to micromanagement. Effective change management can mitigate these fears—here’s how to do it:

1) Communicate benefits: Clearly articulate how PSA software will improve day-to-day work and overall firm success.

2) Involve stakeholders: Engage employees in the implementation process to gain their buy-in.

3) Provide training: Offer comprehensive training to ensure employees are comfortable with the new system.

Working with PSA partners

Partnering with experienced PSA providers can ensure a smooth onboarding process. They offer expertise in best practices, integration, and user adoption, often tailored to your industry or niche.

When selecting a PSA partner, consider the following criteria:

1) Integration capabilities: Ensure the PSA software can integrate with existing systems.

2) Support services: Look for providers offering robust support and training services.

3) Customization options: Choose software that can be tailored to your firm’s specific needs.

8) Recommended cadence of internal meetings

Regular internal meetings, structured around the insights provided by PSA software, are essential for effective operational management. We’ve broken them down into weekly, bi-weekly, monthly, and quarterly activities.

Weekly activities

Timesheets and expense reports - Regular review ensures accuracy and timeliness, providing the data needed for billing and project management.

Invoice and cashflow forecast - Monitor changes in invoicing and cashflow to maintain a healthy financial position.

WIP and project margin meetings - Review engagements to avoid scope creep, over-delivery, and invoicing issues, ensuring projects stay within budget.

Resource planning meetings - Identify bench time, prevent burnout, and schedule pipeline opportunities to optimize resource utilization.

Bi-weekly activities

Sales and pipeline review - Focus on committed, best-case, and most likely opportunities. Review the overall shape and size of the pipeline.

Utilization tracking and forecasting - Monitor utilization rates to balance workloads and optimize resources, adjusting as necessary.

Monthly activities

Account margins and planning - Analyze account profitability and plan for future engagements based on insights from PSA software.

Revenue re-forecasting - Adjust revenue forecasts based on real-time data and insights from ongoing projects.

P&L / management accounts review - Conduct a comprehensive review of financial performance, identifying areas for improvement.

Resource planning & hiring discussions - Identify hiring needs based on project demand and resource availability, ensuring the firm can meet future challenges.

Quarterly activities

Portfolio views - Analyze performance by sector, geography, unit/team, service line, and partner, using PSA data to inform strategic decisions.

Cross and upsell opportunity review - Identify opportunities to expand client relationships and services, leveraging insights from PSA software.

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Final thoughts

Successfully positioning, incentivizing, and motivating people to execute these actions will enable you to course-correct your firm from impending ops-black-hole doom and get you back on track to killer margins and profitability!

CMap is a PSA that's purpose-built consulting firms, packed with a powerful suite of tools, automations, and reports. We help consulting firms of all sizes to analyze business performance, drive higher levels of profitability, save valuable billable hours—and escape the Operations Black Hole once and for all!

Click here to find out more.

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