How Digital Agencies Succeed — Part 2: Project Margin
In our three-part series, How digital agencies succeed, we’re sharing key metrics and best practices related to professional service sales and operations. Our first post in the series detailed the business challenges faced by so many professional organizations and provided recommendations on how to proactively measure and use utilization for strategic growth. This post, part 2, focuses on project margin.
Project margin is a sometimes-sensitive, but important topic for shop owners regardless of their size or maturity. Having a clear understanding of the margin per project and total portfolio margin enables informed, strategic decision-making. In this post, we share key considerations, best practices, and benchmarks related to project margin — combining insights from when we ran our own companies and from our Product Advisory Council (PAC) of over 90 leaders from digital agencies, consultancies and software development shops.
Why Project Margin Matters for Strategic Decision-making
Project margin is a metric that every growth-oriented organization should measure. While the objective of most shops isn’t (and shouldn’t be) profit alone, it’s important to know when a project is or isn’t being profitable to ensure healthy business decisions across the entire portfolio. Many owners shy away from building project margin into sales and project management, dismissing it as a metric that’s only useful for big firms. But, forecasting and tracking project margin is easier than most owners anticipate (especially with the right tools 😉) — and critical for strategic growth at any size.
When to Factor in Project Margin
Top-performing organizations in our Product Advisory Council consider margin when pricing projects early in the sales process. Before they even close the deal, they’ve factored in all costs related to delivering the work. Without building a forecasted margin into the project, they risk misunderstanding the actual value the project brings to the business. An organization might see a high revenue project come in, staff it with all of its best — and most expensive talent — and soon run into a net-zero project margin because it didn’t proactively plan costs.
Companies that forecast, track, and continuously update each project’s margin also have a clearer view of their margin across all active engagements. With this visibility of project margin at a portfolio level, it allows leaders to think strategically when considering investing in their clients, capabilities, or services offerings.
For example, let’s say an agency won a project with a new, strategic account. In the long-term, this would be a great client, but it has an initial net zero or negative project margin. If the agency has a clear understanding of its entire portfolio’s margin, it can make an informed decision about whether the margin from its other projects can support taking this one on. Conversely, if they don’t know the portfolio’s margin, it’s a challenging decision that makes strategic growth difficult.
Scaling with a Shared Perspective
Effectively scaling requires owners to give account leads a view into margin data so they can make strategic decisions on behalf of the company. Owners are sometimes nervous about sharing this information with employees, worried that employees might focus on the wrong things like reverse engineering salaries, sacrificing team morale, or, worst of all, delivering poor customer experience to save a few bucks.
But without a shared perspective into margin data, shop owners create a scenario in which they are the only ones who can make informed strategic decisions. Not only does this create a bottleneck for growth because the owner needs to be involved in every strategic decision, but it underutilizes the talented team the owner hired. Asking your account leads to drive their projects through to (profitable) success without margin data is like asking them to play poker without being able to see their full hand of cards.
Empowering talent with visibility into business insights and the autonomy to make decisions not only fosters strategic growth, but it creates a culture that challenges employees to reach their full potential. When companies prioritize professional development, employees feel trusted and motivated to make a real, lasting impact. These companies experience greater employee engagement, which, on its own, will go far in driving growth for the business.
How to Measure and Use Project Margin the Right Way
Project margin, like utilization, is a lagging indicator, but there are certain metrics an organization can track to forecast and use margin effectively.
The leading indicators of project margin that should be tracked, include:
- Planned margin in the sales pipeline: Plan every new sales opportunity with a margin target in mind. This allows you to track how much margin you have planned in your sales pipeline, which you can compare to your company’s target.
- Forecasted margin within active projects: Margins within active projects should be regularly updated in order to keep track of the forecasted margin for sold projects. When project managers update the project data regularly, this gives your business a real-time view of how much project margin to anticipate.
- Planned vs. projected vs. actual-to-date margin: Compare planned, projected, and actual-to-date margin at the project, account, and portfolio level. This data helps your team assess the overall profit margin health for the business. Owners should share this data with account leads to inform their decision-making.
Benchmarks indicate that the highest performing professional service organizations have an average margin across projects of 50%, while less mature organizations have an average project margin of about 24%. Companies can improve their average project margin by following the simple best practices detailed below.
Best Practices for Tracking Project Margin
The best practices required for effectively tracking project margin include:
- Project-level resource planning governance (weekly): When project-level resource plans change (and they do often), so do project margins. Project managers should review and update resource plans every week to ensure that project margins reflect reality.
- Timesheet governance (weekly): It’s critical that employees complete timesheets every week, and adopt a weekly process that verifies that all timesheets from the week are complete. Keeping projects up-to-date with the time billed to each one keeps project margin data accurate and reliable.
- Portfolio and key account review (monthly): Leaders should also get together regularly to review these leading indicators of project margin on an account and portfolio basis. If projected project margins are low, this can inform strategic changes to sales, project pricing, or resourcing.
In addition to measuring, tracking, and routinely updating project margin, we also recommend comparing how you’re doing against other professional service organizations using the benchmarks provided above.
Start Building the Habits for Change
Organizations that have a grasp on their project and portfolio margin are better-positioned to meet annual targets and make informed decisions that help the business grow. Small, incremental steps can make a big difference and can help your team develop the habits necessary to make forecasting and tracking project margin part of its ongoing strategic process. These habits will propel you to your next level of growth.
If this post offered you practical advice, we encourage you to read the first post in this series, The Utilization Fallacy— How to improve utilization before it becomes a problem.
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