10 Ways to Improve Profitability
All companies need a healthy bottom line to maximize their success. This is particularly true for creative companies as profit allows for investment in talent and infrastructure, enables the ability to turn-down unwanted work and generates loyalty through greater rewards for employees. Although pricing strategies can do a lot to enhance profit, there's obviously a limit to what can be charged. Therefore, other actions must be employed to help increase the bottom line.
Here are tips that can help maximize profit.
Profit Saving Actions in Projects
1) Work on a fixed fee or project basis, rather than a reconciled hourly basis. A fixed fee or project price incentivizes your team to generate additional revenue by moving from one project to another more quickly than budgeted. It’s a better deal for your client as they know exactly how much they’re going to spend on your work, and as we all know, agencies always over-service their clients.
2) Budget with contingencies. If you’re in a fixed fee or fixed project price relationship, be sure to have contingency allocations within your budget to cover unanticipated hours or other project costs that are part of the fixed price. These contingent allocations are then available to respond to requests from your client that you can’t charge separately for, or to cover other unanticipated needs. However, if the project goes smoothly, and all of the contingent allocations don’t have to be spent, whatever is left becomes additional profit.
3) Carefully manage out of pocket costs. No matter what your pricing arrangement is, out of pocket costs need to be managed aggressively to maximize your budget and increase the potential for additional profit. These costs can be significant and diverse – from travel and shipping to freelancers and third party vendors. Some of these costs may be reimbursable, some may have to be absorbed, but in all cases, the costs should be scrutinized to ensure they’re necessary and negotiated whenever possible and appropriate. A good purchase order system may be helpful in this regard. In particular, reimbursable costs must be tracked accurately, with documentation collected in a timely way in order to guarantee you can bill your client for these costs. Not billing for reimbursable costs is the easiest way to lose profit on your project.
4) Problem-solve with costs in mind. Sometimes the best solution isn’t the most expensive solution. There may be cheaper alternatives that are even better. The project should team find the correct solution with the goal of answering their client’s needs and exceeding their expectations while also maximizing the profit for the company. In fixed priced projects, any savings found in budgeted costs drop right to the bottom line. Even where third party costs are reconciled, if savings are found against what was budgeted, there may be an opportunity for your company to keep those savings, possibly as compensation for additional work that you performed which was uncompensated (i.e. over-servicing).
5) Scope changes. No one wants to nickel and dime their clients, but our experience has been that teams are hesitant ask for additional money even in the most obvious situations (i.e. when the client changes the scope of work). This is understandable as this conversation can be difficult and may hurt the relationship. However, we've found these discussions are met with understanding if handled appropriately. In fact, discussing a change order with a client prior to the initiation of the change can be a great client management tool as it makes sure they truly need and want that change (and are willing to pay for it) as opposed to a simple “nice to have.” Once agreed upon, these scope changes can be an excellent way to get extra revenue and profit.
Profit Saving Actions Across an Office
6) Reduce office costs. Most labor rates are calculated based upon recovering direct salary costs, overhead costs and generating a reasonable profit. Accordingly, if you can lower your overhead, then you'll gain more profit (assuming your overhead factor isn't scrutinized by your client as part of your pricing contract). To lower your overhead, audit the costs and suppliers for all of your non-reimbursable items – from office paper to coffee supplier. Analyze whether you’re getting the best prices possible. Consider consolidating vendors, committing to longer term contracts, or joining together with others in your office building to build buying volume. If possible, generate RFPs and get competitive bids. You’ll be surprised how much savings you can generate by actively scrutinizing your overhead costs.
7) Identify inefficient processes and correct them. Many organizations develop processes based upon a certain need or a specific moment in time and then never re-evaluate them. Our experience has been that over time those processes can become overly complicated or even unnecessary. Additionally, sometimes new tools have been developed that could greatly diminish the time necessary to fulfill the tasks required. And yet, since it has “always been done that way” no one takes the time to evaluate and change them to be more efficient. Although it’s true that new tools can mean spending money, and that change within an organization is always difficult, it’s also true that by streamlining processes, or eliminating unneeded actions, bottom line growth can occur and eventually deliver significant additional profit.
8) Be green. It's not just important to the environment, it’s also important to your bottom line. Use real cups and plates in the kitchen rather than paper. Make sure your teams don’t use office paper if they don’t need to, particularly in internal meetings. Encourage recycling copy paper and notebooks. Set your copier to automatically print on both sides of the page and in black and white. Makes signs that remind your staff to turn off the lights when they leave a room and make sure their computer is turned off when they leave at night. Encourage them, when appropriate and wise, to use public transportation (or at a minimum, Uber or Lyft) instead of a taxi or car service. We’ve found that an appropriate communication campaign, where you aren’t encouraging the loss of efficiency but are encouraging thought and attention to reducing costs, can result in an increase in employee morale and profit.
9) Carefully monitor variable costs in your overhead. There are three elements in your P&L that are highly variable which can significantly affect your profit: freelancer costs, proposal costs and overtime costs.
Freelancer costs: in many companies, the hiring of freelancers doesn't need authorization by management and is up to the project team to decide and hire. This can result in staff personnel on one team sitting idle, while another team hires freelancers. Clearly, this is ill-advised and should be avoided whenever possible.
Proposal costs: these costs often aren't monitored since winning business is critical and no one wants to cut costs in this area. However, with some scrutiny and careful thought as to what’s truly necessary, these costs can be managed and even reduced.
Finally, as to overtime costs: even when required to be approved by management, this expense is not always strategically analyzed. There may be opportunities to delay work, re-allocate work, or create split shifts, all of which may reduce overtime. Additionally, and somewhat counter-intuitively, the use of freelancers could be less expensive than incurring overtime (plus has the added value of reducing burn-out in staff).
10) Staff efficiently. It’s also true that there are three ways to create efficiency in your staffing structure: keep managers close to the work, encourage delegation and hire junior staff members.
Most organizations grow their staff over time. As they mature, manager roles are created and personnel are promoted into those roles. More personnel are then hired to “do the work.” However, in our experience, an efficiently run organization has managers who are also “doers.” This allows the manager to participate in the workflow processes (and thereby enhance them), and to continue to be in front of the clients (where they’re often most valuable). The result could mean the need for less doers, since the managers are also doers.
Delegation is also an excellent tool for creating organizational efficiency. Proper delegation, where a manager doesn't completely delegate something, but rather strategically delegates, leads to increased employee morale and job satisfaction, as the employee is learning and growing in their role while the manager has more time to take on other responsibilities.
Finally, your most profitable employees are, generally speaking, your most junior employees. They’re the ones who often take on a significant amount of work (if delegation occurs correctly) for the least amount of salary. In most rate cards, your junior roles subsidize your senior roles, as it is often impossible to fully recover higher salaries in an hourly rate. Therefore, the more juniors your organization has, the more profit is created (with the obvious caveat that a proper balance is needed to ensure quality and client satisfaction). Fostering these efficiencies in your organization will reduce your headcount needs, increase your retention, and ultimately, enhance your bottom line.
It’s important to note there isn’t a “one size fits all” solution to increasing profitability. Some of these tips may work for your organization, some may not. It’s important to be strategic and only do those things that make sense to your business. It’s also true that change is hard work, and all of the actions listed above create additional work for a project team or office leadership. However, taking action to increase your profitability is the single most important thing anyone can do to ensure a successful, thriving company.