Blog

Project margin is an often sensitive, but important topic for business 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 how to calculate project margin as well as key considerations, best practices, and benchmarks. Below, you’ll find 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 companies.

Table of Contents

• What Is Project Margin & Why Does It Matter?
• How to Calculate Project Margin & Use It the Right Way
• Best Practices for Tracking Project Margin

This guide is the second part in a series all about best practices for professional services sales and operations. Our first post, How Digital Services Succeed: The Employee Utilization Rate Fallacy provided recommendations on how to proactively measure and use utilization for strategic growth. Be sure to check out Part One and Part Three.

What Is Project Margin & Why Does It Matter?

We know profit margin to be the difference between revenue and cost for any given business. However, project margin is the difference between revenue and cost for any given project.

This is a metric that every growth-oriented organization should measure. While the objective of most digital agencies isn’t profit alone, it’s important to know when a project is or isn’t 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 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.

Making Informed Business Decisions

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 factor 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 have a clearer view of their margin across all active engagements. This visibility of project margin at a portfolio level allows leaders to think strategically when considering investing in their clients, capabilities, or service 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 project 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 they 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 on 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 Calculate Project Margin & Use It 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 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 margin to anticipate. 
• Planned vs. projected vs. actual-to-date margin: Compare planned, projected, and actual-to-date margins at the project, account, and portfolio levels. This data helps your team assess the overall profit margin health of the business. Owners should share this data with account leads to inform their decision-making.

We adapted these benchmarks from SPI’s PS Maturity Model™, which helps organizations use benchmarking to improve their profitability, performance, and growth. We subscribe to and respect this industry-standard model, and recommend all professional service organizations reference it.

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 margin by following the simple best practices detailed below.

Best Practices for Tracking Project Margin

To effectively track project margin, digital services companies must follow these best practices:

• Weekly project-level resource planning governance: 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. 
• Weekly timesheet governance: Employees must 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. 
• Monthly portfolio and key account review: 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, updating, and tracking project margins, 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 the ongoing strategic process. These habits will propel you to your next level of growth.

If you haven’t already, subscribe to our email newsletter to get more insights like this delivered straight to your inbox.

There are over 60,000 digital services companies in North America. What sets these organizations apart from one another? The caliber of their craft, methods, and people. But when it comes to how they run their businesses, they are more alike than different. For example, many companies use employee utilization rate the wrong way. Here, we dive further into this concern and what you can do to improve.

Table of Contents

• Hitting the Stuck Point as a Professional Services Company
• How to Measure Employee Utilization Rate the Right Way
• Best Practices for Tracking Employee Utilization Rate
• Professional Services Utilization Benchmarks

This guide is the first in a series about best practices for professional services sales and operations. In this series, we share our own experiences running digital services companies as well as the knowledge of leaders from over 90 other digital services across the US. Be sure to check out Part Two: Project Margin and Part Three: Revenue.

Hitting the Stuck Point as a Professional Services Company

One of the most common shared experiences that digital services firms face is hitting a stuck point in growth—when it becomes difficult to scale the magic that made them great when they were small. For many, this happens when they reach about 25-50 employees.

These businesses enjoy early success because of their talented teams, quality of work, and great reputations. As word of their solid reputation spreads, the number of new business opportunities increases. 

These service companies take advantage of these opportunities as they materialize and tend to be reactive when it comes to project planning and resource management. They just figure out how to make it work.

This opportunistic and reactive nature that we refer to as the Heroic phase of growth is exciting. Service companies of this size can typically rely on the chemistry of their team and gut instinct to make business decisions. But, this often leads to less-than-ideal performance related to metrics like utilization, project margin, and year-over-year revenue growth.

To move to the next phase of growth, which we call Operational, these companies need to develop a more measured and consistent approach to selling and delivering their work. To do this well, they need accurate data that is consistent, accessible, and easily shared. The operational improvements they make by using this data will show in their improved KPIs. We illustrate this growth trajectory using the model below.

Our team adapted this model from SPI’s PS Maturity Model™, which helps organizations use benchmarking to improve their profitability, performance, and growth. We subscribe to and respect this industry-standard model, and recommend all professional services organizations reference it. 

We culled down the insights from SPI’s model to create a version that speaks directly to the unique challenges of digital agencies. Only after digital service firms master their operations can they move to the Strategic phase. 

What allows these firms to be strategic, forward-looking, and bet on innovation, is that they have achieved a level of operational excellence that allows for easy collaboration and coordination across teams. 

They have data governance and processes in place that enable their teams to work autonomously while still supporting the overarching goals of the organization. Their excellence shows in their industry-leading KPIs.

Adopting Best Practices to Overcome the Stuck Point

When we present this growth model to business owners and operators, it resonates. They feel less alone. But beyond it being cathartic, they want to know what they can actually do to overcome the stuck point and scale. They know they need to get better at operations. But how?

It starts with knowing where to start and to focus. This can feel daunting, but it doesn’t have to be. You don’t need to boil the ocean. Using research and feedback from our PAC, we developed recommendations on the best practices to focus on first, how to measure key organizational metrics, and how to adopt the behaviors necessary to improve.

The first step? Learning how to measure employee utilization rate the right way.

How to Measure Employee Utilization Rate the Right Way

Utilization is an important metric that many digital shops are already tracking and measuring. It’s important, but it’s a lagging indicator of how good you are at proactive planning and goal setting—not necessarily how good you are at resource management. 

Business leaders often use utilization in the wrong way. Many leaders look at utilization every week. They review utilization, and then they react—asking team leads to push their people or police how they’re spending their time. Or, they lean on account leads to pull additional business out of thin air.

Reacting weekly to utilization is not only ineffective for strategic planning, but it can also hurt morale. Employees can become disengaged, dissatisfied, and resentful if leaders focus on utilization alone. In these cases, the team leads ask employees to focus on hitting billable hours over anything else, when instead, they should encourage employees to focus on how best to deliver value. 

A leader’s job is to ensure that the team has enough work opportunities for employees to stay busy and deliver value. Business leaders also often fall into the trap of trying to maximize utilization as much as possible. In reality, driving utilization too high can lead to even more detrimental effects on employee morale and the business.

Using Employee Utilization Rate as an Indication of Good Planning

To improve utilization, there are leading indications of good planning organizations can track. These indicators include:

• Planned backlog compared to capacity by role: Your planned backlog is how much sold work you have in the queue. Compare your planned backlog to the total capacity for each role. This metric helps you determine how much of each employee’s capacity you can expect to fill based on the work you’ve sold.
• Forecasted pipeline compared to capacity by role: Your forecasted pipeline is how much prospective work you have in sales opportunities. Compare your forecasted pipeline to the total capacity for each role. This metric helps you determine how much of each employee’s capacity you can expect to fill based on the work that might sell.
• Planned utilization compared to quarterly target: Planned utilization combines both the planned backlog and forecasted pipeline. Compare your planned utilization to your quarterly utilization target—ideally for each role in your organization. This metric helps to determine if the sales opportunities in your pipeline are sufficient to meet your quarterly utilization target.

Benchmarks indicate that the highest-performing professional services organizations have an average utilization rate of 75-85%. We’ll review these benchmarks in more detail below.

Best Practices for Tracking Employee Utilization Rate

To track employee utilization rate effectively, organizations must develop the following behaviors.

Project-Level Resource Planning Governance (Weekly)

Updating resource plans every week should be a process that every digital services company adopts. Given how often resource plans change, if they aren’t updated weekly, planned utilization will be incorrect. Project managers need to review and update resource plans every week to ensure they reflect reality.

Timesheet Governance (Weekly)

There’s often a shared distaste for timesheets across organizations. This dislike is often a result of employees not understanding the value of them, especially at the individual employee level. Timesheets are not about keeping tabs on employees. Instead, they help the business identify when it needs to bring on more work to keep people busy, engaged, and employed. 

It’s critical to communicate this value to employees and adopt a weekly process that verifies that all timesheets from the week are complete. Information from timesheets is a crucial input in determining each employee’s utilization, which impacts planned utilization.

Capacity and Capability Review (Monthly)

Delivery leaders should also establish a regular cadence for when they review the metrics detailed above. Most importantly, they should evaluate planned utilization against their targets. If planned utilization is low, delivery leaders should discuss what they can do to impact the sales pipeline to generate new opportunities.

Professional Services Utilization Benchmarks

In addition to tracking and measuring utilization, we also recommend that these companies compare how they’re doing compared to other organizations using professional services utilization benchmarks.

As we mentioned above, industry benchmarks indicate that the highest-performing professional services organizations have an average utilization rate of 75-85%. Comparatively, digital agencies and custom development shops in the Heroic stage of growth often find themselves with utilization rates around 60%, while Operational organizations see closer to 75% and Strategic, 85%.

Adopting the data governance and processes that we outlined above, you can not only work toward improving your utilization metrics but advancing to the next stage of growth.

Getting Started Is the Hardest Part

Utilization is a useful metric for evaluating how well you’re planning, and how well you’re making progress toward those plans. 

To plan well, service organizations must have employee utilization rate targets they measure against. Tracking progress toward these targets isn’t as hard as most business leaders anticipate—it simply requires you to get started with adopting the best practices detailed above.

If the metrics and best practices we shared in this post were helpful and sparked ideas for developing better data governance habits, please subscribe to our email newsletter to get more insights delivered straight to your inbox.