There’s a lot of talk right now about the ways companies can save money or simply do more with less.
Everyday, there’s news of cost-cutting events like layoffs or delayed launches, as well as countless posts, articles, and news bites about how companies can prepare for a period of slower (if little at all) growth.
Personally, I’m excited about the opportunity that we’re presented with. As a customer success-driven organization ourselves, we understand that in order to come out of the macroeconomic climate in 2023 on top we need to prioritize our post-sales operations.
Not only does this mean customer satisfaction, and all measures that roll into NRR, but this also means efficiencies that need to be brought back into the business. Efficiencies we may have ignored when all was “gung ho” in the tech boom over the last couple of years.
From months of talking to customers, peers, and leaders in the professional services space, it’s clear our vertical is thinking the same way.
There’s hundreds of different ways a project can be delivered, and we take pride in the fact that we can meet many of the different requirements and methodologies required. Some companies have always cared about running profitable projects – others simply have aimed to get the project finished, no matter the cost, because growth and customer count was more important in the short term.
Tracking margin and utilization
However, it is time to pay attention to some key metrics, no matter the company and its goals. Project profitability is more crucial now than ever, which is why tracking Margin and Utilization needs to be a priority for your business in 2023 if you’re not doing so already.
Software-as-a-Service (SaaS) companies have had a history of ignoring margin on its projects – especially for initial implementation but oftentimes for post-sales engagements as well. This is because, in the long run, the price of the ongoing customer commitment and potential for upsell is worth the short term hit of the services being a net loss. This is the beauty of SaaS economics – the ‘build once, deploy many’ model, paired with renewal-based subscriptions, has allowed companies to feel comfortable giving services away.
However, as resources are constrained and more attention is paid to the financial viability of the organization, sacrificing the present for the future (giving a service away for free in hopes the customer will renew) won’t cut it anymore.
This is where margin comes in. Ensuring each project has a good profit margin gives companies the confidence that projects are not only covering their costs, but also contributing to the overall bottom line. Paying attention to margin will also allow companies to make strategic decisions about their customer base like prioritizing clients and projects that have a higher margin. Once there’s enough of a sample size, then the organization can begin to analyze and refine profit margin by increasing employee utilization, automating part of the engagement, and decreasing scope creep.
If companies continue to ignore margin on projects, the likelihood of this hurting them in the long run has increased, but by measuring profit margin of a services team, even if the customer doesn’t renew or churns early, the organization still would have made money on the initial engagement.
Resources are the largest overhead for a project, thus making them the key to project profitability. If resources are utilized, there’s a good chance the services will be profitable. Expressed as a percentage, resource utilization is the measure of how much of a resource’s time was spent on billable work.
In the past, companies have gotten away with low utilization rates and high bench time (the amount of time a resource is not working on a customer project) since projects didn’t necessarily need to be profitable. Companies were okay with low utilization almost always because there was no way to see what projects were coming soon, so it was better to be overstaffed and underutilized than having to tell customers their projects had to be delayed.
Now, with increasing scrutiny on profitability, utilization will get that same attention. No longer can services teams afford to be overstaffed with utilization rates in the 50%-80% range. These teams will have to decrease their headcount and increase their utilization – ultimately lowering their overhead number and raising their profit margin.
However, simply lowering headcount and thus increasing utilization won’t solve the underlying problem: not knowing when these resources will be needed.
Just lowering headcount might still leave a services team in a situation where too many resources are needed at once and another situation where no resources are needed at all. This is where intelligent resource capacity planning comes into play. Working closely with sales is key to understanding what projects are needing to be kicked off soon – this allows resourcing teams to plan what resources are going to be working on weeks and months down the road.
So, instead of seeing a resource’s utilization in a snapshot of the day or week, we can predict and plan accordingly.
It’s time to think differently
Over the past year, SaaS has changed – and so has the growth-at-all-costs mindset. We used to never question if technology companies would be successful or not – the only question was if it would be in one or five years.
Growth-at-all-costs did have costs, these costs were just frequently ignored. Organizations have to become more strategic and more aware of the profitability metrics. Services teams are no different. Negative margins, high bench time, and lack of positive customer outcomes are no longer viable.
Change will be difficult – whether that’s large scale (becoming more lean through a reduction in force) or small scale (freeing up time of managers by enabling ICs) – but it’ll be worth it. The risks of running a 2023 services organization like its 2019 are evident, the companies that pay attention to them will grow at a reasonable, steady rate. The ones that don’t? Let’s hope that’s not you.
If your organization needs assistance with either margin or utilization – or profitability in general – please let us know.