Tighter budgets for 2021 will require all parts of your organization to work harder, and professional services is no exception. Although many organizations chose to run this function at break-even or even a loss, that’s a missed opportunity to improve sorely needed margin. Top-performing SaaS companies can achieve 40-50% contribution margin on their services offerings.
Here are four steps to improve margins:
- Document current booked margins, utilization and contribution margin: Chief customer experience officers (CCEOs) have to gain visibility on contribution margin, the price at which sales teams are selling services and how much that revenue covers the organization’s cost. Booked margins can be estimated relatively quickly by converting your service product line items into hours to deliver and attaching the appropriate resourcing cost rate versus the list price of the product. Utilization requires hours to be tracked to projects on spreadsheets. Finally, quickly pull contribution margin historically from your financial statements or proactively by truing up the total cost (after utilization) versus your booked revenue. Successful CCEOs need to go beyond historical analyses and support the customer acquisition process through active management and forecasting of margins.
- Assess prices on offerings that are valued most: If updates to prices have long been forgotten or there has been a surge of money in your industry (through CARES government funding or industry tailwinds over the course of the pandemic), then conducting a pricing exercise is likely most appropriate. There are three relatively quick solutions, depending on time and budget:
- Draw a box and whisker chart of the prices of won vs. loss deals for your key professional services products to see if your sales teams have had to discount significantly to get wins.
- Conduct customer listening to better understand your customer experience, decide which services your customers value and validate their qualitative comments with how they behaved (attaching of additional SaaS add-ons and CSAT scores).
- If budget and time allow, conduct a conjoint study to deduce willingness to pay and find the optimal point which maximizes long-term margin without sacrificing too many losses.
- Reduce costs by going virtual. COVID-19 made in-person implementation virtual overnight, with customers showing preferences for virtual offerings that they wanted in person before. For a recent client pricing study, we learned that customers preferred three one-hour virtual trainings versus an all-day in-person training program. Assess what has worked well in virtual delivery and what hasn’t and refine your offerings to be delivered at a higher margin. Alternatively, look to implementation partners in the marketplace who might be able to deliver a similar experience for your most expensive delivery projects.
- Work toward 75-85% utilization targets. If your team has experienced layoffs, determine how that will affect the margin of your business. Better use of resources will drive up margins meaningfully. Conduct an assessment of performance by line of business (custom development, implementation, training) to allocate your resources to reduce additional turnover in the long term and help achieve a 75-85% utilization target. This can be supported by time tracking software to ensure projects are running to budget. While time entry is never popular, it's crucial to decision making in a professional services organization.
By following these guidelines, you’ll be well on your way to determining how your business can manage a higher margin performance and run your team more profitably over the next year.