Growing a project-based professional services firm requires excellence in two high-level areas. First, projects must be delivered at their target gross margin to ensure that profit is generated for reinvestment into the firm’s growth. Second, there must be enough new projects to keep the delivery team utilized in the future. If projects underperform or there are not enough new projects coming in, growth will stall.

The challenge, of course, is that success in these two macro areas is not trivial. It requires proficiency across multiple distinct disciplines.

To deliver projects at their target gross margin, the firm must:

• Properly estimate the work and needed skills.
• Document and validate the project requirements and specifications.
• Staff the project with personnel that can deliver a high-quality work product.
• Proactively identify potential risks and develop mitigation strategies.
• Continually set and manage expectations with the client and project teams.
• Defend against the dreaded “scope creep”.
• Oversee project delivery and budget attainment.
• Test the work product to ensure it meets the requirements and is free of defects.

When each of the above are done consistently well, projects tend to be delivered on-time and on-budget, and they yield the desired gross margin. But, research shows that over 45% of professional services projects ultimately exceed their original labor cost budget. Nearly half of all projects delivered in the industry cost more than planned and thus result in lower realized gross margin.

45% of professional services projects ultimately exceed their original labor cost budget.

To ensure that there are enough new projects coming in to keep the team utilized, the firm must:

• Generate leads through various channels such as advertising and outbound prospecting.
• Deliver high-quality engagements to existing clients to enable both follow-on projects and referrals to new prospects.
• Properly evaluate prospect needs to determine the optimal delivery approach, timeline, and fees.
• Draft a proposal that outlines the services, approach, deliverables, timeline, and fees.
• Present and articulate the proposed solution to client stakeholders.

Which delivery role has the greatest influence on the combination of margin-related activities and sales-related activities? The project manager. The project manager is uniquely positioned to control a project’s gross margin, as he or she is leading the day-to-day oversight of the engagement. Also, the project manager can be highly-influential in the firm’s ability to generate and close new business. Project-based professional services firms ultimately live or die by the quality of their project managers.

The Project-Based Delivery Organization

Project-based professional services firms typically deliver customized, knowledge-based deliverables tailored to their clients' specific business objectives. Each client contract (often called a “Statement of Work”) includes a scope of work, a timeframe for delivering that work, and either a fixed price or an estimate of hourly fees. The attributes of scope, time, and cost are interrelated in that adjusting one tends to impact the other two.

A project-based delivery organization assigns a team of professionals to each project. The output of the project is usually one or more deliverables that are highly-customized based on the specific client, industry, goals, and related attributes. For example, a software engineering consultancy might develop an e-commerce storefront for a client that sells beauty products in Canada. Those deliverables are tailored to that specific client, industry, and geography.

There are many types of professional services organizations that do not fall under this “project-based” umbrella. For example, a staff augmentation firm that is not held to defined scope and fees would not qualify. That type of firm would typically have lower bill rates, lower planned gross margins, and may not even have project managers assigned to client work.

Project-based delivery organizations have the potential of delivering high gross margins, but the nature of the engagements brings variability and ultimately margin risk.

Understanding Gross Margin

Gross margin is the realized gross profit of the project divided by the total revenue of the project. The gross profit is the revenue minus the cost of delivering that revenue (such as the labor cost and non-billable expenses).

Most professional services firms have planned gross margins within the 40-50% range. Some firms that efficiently deliver in-demand niche services regularly plan for gross margins above 50%. It is important for the firm’s gross margin to be as high as possible because that profit must pay for the business operating costs related to sales, marketing, finance, and administration. The only path to healthy operating margin for the business is through projects that are delivered at their target gross margin.

While professional services firms have planned gross margins that are typically higher than that of physical product businesses, those gross margins are often “at risk” due to the dynamic nature of each engagement. Put another way, the realized gross margin of a professional services project can be significantly lower than the planned gross margin, typically due to labor cost overruns. A project that takes just a few more weeks than planned can move the gross margin well below its original target.

The Project Manager’s Role in Target Gross Margin Attainment

Project managers are responsible for delivering projects on-time, on-budget, and at a high level of quality. That is easier said than done. When a project’s execution is optimal, the result is a happy client and a healthy profit margin.

The tasks executed by the project manager can be categorized into planning, communicating, coordinating, and validating. When the tasks within each category are executed with precision, the likelihood of success is maximized. The most common tasks in each of these categories are listed below.

Plan

• Capture and confirm the client’s business requirements and measurements of success.
• Lead the development of the project estimation, including fees and timeline.
• Identify risks and mitigation strategies.
• Develop the specifications for the work products.
• Identify and secure the resources that will be needed to successfully deliver the scope of work at the desired cost and gross margin.
• Create the project plan and keep it updated on an ongoing basis.

Communicate

• Provide regular project status reports to all team members and senior stakeholders.
• Set and manage expectations with the project team.
• Set and manage expectations with the client team.
• Advise client stakeholders of emerging risks and mitigation plans.
• Escalate concerns to firm leadership as needed.

Coordinate

• Ensure that project tasks are started on time and delivered within their hours budget.
• Update and publish the project plan daily.
• Arrange for resources to ramp on and off the project team at the appropriate times.
• Control the project scope and defend against unplanned increases in scope.
• Work with external vendors and partners as needed.
• Estimate and draft project change orders as needed.

Validate

• Test all work products to ensure that they meet their original specifications.
• Evaluate the original measurements of success.
• Oversee and facilitate client User Acceptance Testing.
• Obtain formal client acceptance of project deliverables.
• Capture client satisfaction scoring and team satisfaction scoring.
• Engage in a project post-mortem with the delivery team to identify areas for future improvement.

When the above tasks are delivered consistently well, it is nearly impossible for the project to fail on any dimension.

The Project Manager’s Role in Generating New Business

While project managers are not technically “in sales”, they are often vital to the business development function in the following ways:

• Setting up for success: Many professional services projects run off the rails before they even start. That typically happens because a strong delivery leader is not involved in the sales process as soon as the lead is qualified. When a capable project manager is attached to the pursuit early, he or she can guide the direction of the engagement, approach, planning, and estimation. That process rigor and attention to detail does not go unnoticed by the client personnel. A strong project manager who is engaged early can meaningfully improve the odds of winning the deal.
• Relationship building: Clients know that sales personnel will ultimately not have a meaningful role in the project's delivery. Thus, they usually want to meet and start to build a relationship with some of the potential project personnel. This gives them a barometer of what it will be like to work with the firm. It is a strategic advantage to get project managers involved early and often in sales pursuits.
• Repeat business: As the saying goes, it is far easier to sell to existing customers than it is to find new customers. In professional services firms, the best project managers somehow never end up on the bench. The primary reason is their existing clients want to continue working with them. Top project managers drive new sales through follow-on engagements.
• Hunting: The best project managers always have their eyes and ears open for future work. They don’t just pursue follow-on projects related to their current engagement. They seek out unrelated opportunities within the account.

Professional services is naturally a “leaky bucket” industry. As projects are completed, they “leak” out of the bucket and new projects must be added to keep the team generating revenue. The sales team clearly plays the dominant role in driving new opportunities. But, a strong project manager can be heavily influential in the company's ability to hit its sales goals.

Retention is Key

Retaining top project management personnel is paramount to the success of project-based professional services firms. Not only will those project leaders positively impact gross margin and sales as outlined above, they will also set the standard for all future project management personnel. They will train the junior-level hires and help evaluate the senior candidates. They will be the keepers of the processes that enable project teams to deliver successfully.

If you've got great project managers, do whatever it takes to keep them. They are worth their weight in gold.

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