Financial management is key in every for-profit business regardless of size, structure, or industry. However, communicating aspects of the organization’s financials and instilling the attitude that Financial Management is everybody’s responsibility can pose unique challenges for Professional Services businesses. In this blog, we are going to walk through what those challenges are and how to overcome them as well as some of the benefits of team financial literacy.
Challenges of Professional Services Financial Management
The largest financial lever for PS firms is the individual. Each employee is a direct cost for the business that can be managed to financial metrics such as utilization and project profitability. This reality of PS businesses, that financial management is tied to people and their salaries, can create the feeling that financial management is a sensitive topic.
Let’s compare this model to a traditional product company. Direct costs for a product company would typically be production costs. The people of the company (sales, marketing, finance, etc.) are viewed as indirect costs – rather than driving gross or project margin. This allows for financial discussions to be impersonal. Production costs can be treated as numbers on a spreadsheet, but for Professional Services companies, the numbers on a spreadsheet are team members.
This creates a challenge for PS businesses. How do we communicate financial management without making employees feel like numbers on a spreadsheet?
Tips for Financial Discussions
1. Emphasize to the team the fully loaded costs of positions and levels rather than individuals. Costs and bill rates are derived by the net margin needs of the organization by position level (consultant, manager, etc.). This helps decouple business costs from employee salaries and focus discussions on business needs.
2. Avoid setting strict rules for project profitability. Consider the following drivers of project profitability that are out of the control of team members staffed on a project:
- Sale Price
- Level of Project/Client Difficulty, Effort Required
- Training and Development of Team Members
While it may be tempting to set rules such as “each project must return at least a 10% margin” these rules place an unnecessary strain on team members and encourage bad habits such as ghosting hours. Encourage the team to track actual hours and manage to an average project margin and/or budgeted costs.
3. Communicate the positive outcomes of financial management. In some cases, financial management can feel like metrics used to punish employees for underperforming. However, in many cases the positives will outweigh the negatives. Accurate time tracking and utilization rates help the firm avoid employee burnout by staffing projects appropriately and ensuring team members have the support they need.
4. Remind the team that Financial Management is not the only part of the business that matters. Businesses cannot be managed on a spreadsheet alone. Accounting for opportunities that employees want to be involved in, development opportunities, and team chemistry all affect employee experiences and firm productivity. Financial management is important and it must be understood, but it is not the only part of the business.
Benefits of Communicating Financial Performance and Detail
Reiterating these messages with team members takes time and energy, but the value is well worth the effort. PS team members and firms achieve the following benefits when firm and project financials are better understood through clear and effective communication:
- Increased Accuracy of Financial Metrics: Team members who feel that financial metrics are there to support them and the firm are less likely to ghost hours to increase project profitability. This helps the firm plan for resources needed on future projects more accurately and make informed decisions to avoid employee burnout.
- Additional Firm and Employee Alignment: When employees understand the downstream impacts of their everyday decisions, the firm’s financial performance improves. Helping employees understand what decisions positively and negatively impact the themselves, their team members, and the firm creates an environment of working together to achieve the firm’s financial goals.
- Improved Employee Experience and Development: PS financial management highlights the relationship of the firm and the employee. The firm succeeds when employees succeed and vice versa. This relationship can encourage employees to seek to improve their skills and advance their career.
In our next blog, we will explore some key financial metrics that Professional Services businesses should manage to using this framework.
Written by: Anthony Paluska
About the Author: Anthony Paluska is a Partner at McMann & Ransford with experience helping organizations overcome commoditization by developing stronger, more intimate, relationships with their customers. He has leveraged his management consulting, problem-solving, and change management skills to support 15+ Fortune 1000 organizations, across a multitude of industries.