If your client accounts are set up correctly, 100% of any increase in gross margin will drop directly to the bottom line. Yet all too many founder-led consultancy firms are not tracking gross margin sufficiently. Nor are they putting improvement plans in place to drive the number in the right direction.
Here are some ideas that I hope will stimulate you to initiate a project to improve gross margin within your business and at best make it a way of life!
Let’s start with a few obvious but important and too infrequently actioned opportunities.
1. Increase what you charge
Any price increase goes straight to the bottom line, so when did you last increase your prices?
Other questions to ask yourself include:
- Do you know how your prices compare to your competition?
- Does your pricing match your brand aspirations?
- Which quartile do you think your pricing should be in?
- What price increases will you implement in the next 3 years?
And what about ROI? Can you demonstrate significant ROI and therefore justify price increases in line with the value you create?
If you can’t, then what do you need to do to start being able to demonstrate quantifiable value as a result of your consulting interventions?
Once you have this in place then you should be asking yourself: what more could we be doing to create even more value for our clients (because that inevitably leads to the option to increase your prices)?
Have you increased your prices for existing clients as well as new ones? There is an art to this but it is achievable.
And one final question: do you have regular price increases linked to inflation in your terms and conditions? If you do, are you acting on them?
2. Stop or reduce discounting
Again, any change you make here will flow through directly to your operating profit. If you are discounting, start by asking yourself why? Do you not believe your services are worth your full ‘rack rate’? If you don’t, then nor will your clients and nor will your team.
If this is a challenge, then what can you do to engender greater belief?
For example, by looking at the difference you make to your clients and making sure both your clients and your team are fully aware of the value you create.
If discounting is an embedded sales technique to get deals over the line then I would recommend you come with alternative ways to create urgency such as expert resource availability.
If you are discounting as a strategic play to increase the volume of work clients place with you, then that is different. It then becomes about the extent of discounting. One simple change is to discount in 2.5% increments instead of 5% increments – this will immediately half the amount of margin you are giving away.
3. Reduce what you pay your associates
In the early years of a founder-led consultancy, it is common for there to be some dependence on trusted associates. However, you need to reduce this dependency over time to maximise your gross margin. Associate relationships can result in ‘the tail wagging the dog’ and leave you destined to achieved mediocre gross margin levels.
The key is to ‘own the market’ – have enough associates so that you dictate what you pay rather than the other way around. Consider committing to a certain number of days per annum and negotiate a lower daily rate in return for giving the associate more certainty.
Avoid paying 50% of the day rate you charge your client and pay a fixed fee so that if you are able to negotiate better rates the associate does not benefit – assuming they had no involvement in striking a deal at a higher price.
Finally, if you are in the business of linking your fees to outcomes, then see if you can do this with your associates. It will reduce your risk and reward them for maximising the impact they have – win/win.
4. Increase utilisation of staff
What is the optimal way you want your staff to spend their valuable time? In my consultancy, we called it the ‘perfect pie’. We were referring to the % breakdown of how staff contribute to the business by supporting the development of internal processes, contributing to the sales effort and of course delivering chargeable work.
As your team grows, however, monitoring utilisation becomes more and more important. Check out our Utilisation-to-Profit calculator to establish the profit value of a 1% increase in utilisation of your team. I think you will be surprised.
Rewards can of course pay a part here but make sure your scheme does not reward over-utilisation – there is a limit to how hard you want your team to work! It is a sensitive topic and needs to be handled with care in respect of issues such as mental health and general well-being.
5. Increase leverage in your team
It will typically follow that the more work that gets done by junior members of your team, the higher your gross margin. The key is to systemise and codify your secret sauce so you can maximise the leverage in your organisation without compromising the client experience or the results achieved.
Have you got a deliberate strategy to increase the capabilities of your team to achieve this? Could you be increasing spans of control to get more leverage from your senior people or are they getting sucked in to doing work with clients that others could do? If so, why is this happening? Are they doing it because that is where they are most comfortable? Do they struggle to coach and develop others? Do they enjoy the ego trip of being in demand and being the busiest person in the office?
6. Reduce shrinkage
Shrinkage is the difference between the time sold on a project and the time spent. Most consultancies struggle to measure shrinkage and as a result are missing out on an important feedback loop that can have a massive impact on improving your margin. There are a number of challenges in this space including:
- consultants spending longer on a project but not putting it on their time sheet as they don’t want to appear ineffective
- consultants using whatever time is allocated to a task even if it could be done quicker
- poor time recording and so no one can really be held accountable
- over zealous sales people selling work that is not realistically deliverable in the time budgeted for.
Tracking gross margin for every project and reviewing the gross margin position through out the project will ensure these learnings come to light quickly and processes can be adapted to ensure negative impacts on margin are minimised.
To compare your gross margin with your peers, get access to the Consultancy BenchPress report which includes:
- the average gross margin of founder-led consultancies in UK&I
- how often you should measure your gross margin for the best results
- the average operating profit % of consultancies and the best % to aim for
- and lots more data including what consulting owners earn, their biggest new business challenges and what the top 10% of consultancies charge.
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