Operate Your Firm Like Your Life Depends On It: Because It Does

The smell hits you before you walk into the room.

It’s the quarterly financial review where leaders take turns presenting a sea of green dashboard metrics.

Project completion rates, check.

Projected timeframes, spot-on.

Budget, wow, room to spare!

But the smell persists. It’s the underlying odor of rotten fruit, specifically watermelon metrics.

You may have heard the term. Watermelon metrics are false-positive indicators that distract from the actual goals of the firm. And while the numbers initially appear green, once sliced open, they bleed red all over.

You didn’t set out for this to happen, but once a firm tilts towards valuing optics over the truth, it’s no wonder that the same old problems persist.

Stop Lying to Yourself

The golden metric for professional services firms is profitability—end of story. Every new client you take on, every employee you hire, and every overhead cost should, directly or indirectly, tend to the bottom line. No exceptions.

But consistent profit growth is not easy. Our advice: run your business every day as though it’s for sale.

Implement systems that gather crystal clear metrics into your firm’s inner workings. Identify any hidden costs and operational mishaps so you can shore up revenue leaks. And finally, do everything it takes to optimize profitability. This way, you’ll gain tighter control over any unwelcome volatility.

This mindset will not only make your firm easier to run, but will also allow you to future-proof your exit strategy. Whether you leave the firm tomorrow or twenty years from now, you’re going to want to have choices in how that transition plays out. Now is the time to start protecting your interests.

ID Your Profit Killers

KPIs should be a window into profitability, not just revenue.

When your firm is being scrutinized by a prospective buyer, there’s no hiding from the truth. If profit margins remain low, even after careful planning and analysis, your firm isn’t properly converting revenue into profit. You need to root out the causes before an outsider does.

Hidden Costs:

• Unaccounted for Executive Time - Executive time is the most expensive time. And ironically, they are the worst at accounting for their hours (you know who you are). If every member of the firm is diligently logging their billable hours in real-time, executives should be no exception. Walk the walk.
• Client Correspondence - Small, one-offs add up. Perhaps every Monday, one of your teams hosts a 10-minute check-in with a needy client, but since it’s such a small increment of time, they don’t log the time as billable. Over a year, these meetings add up to an extra day of billable time per person who attends that check-in. Without charging for those extra hours, the team inadvertently works at a discount—one that stealthily destroys profitability.

Operations Mishaps:

• Incorrect Billing Rates - Depending on where they fall in the hierarchy, most employees have unique billing rates, and it’s essential that they are applied correctly. If a simple clerical error is made and a billing rate is logged incorrectly in your system, it can wreak havoc on the entire financial model. Billing rates tend to increase annually at agencies and professional services firms, from the managing partner all the way down to the account coordinator. If those changes are not continuously updated in your systems, it will quickly equate to lost money.
• Poor Realization Rates - A firm’s realization rate is the proportion of billable hours at standard billing rates to the amount that is actually billed to clients. Low realization rates decimate your profit margins and they occur more than you think. If client expectations are misaligned, work is shoddy, or timelines are incorrectly forecasted, it all translates to lost revenue.
• Scope Creep - Scope creep occurs when project work increases but the budget and timeframe stay the same. When this happens, make sure your team communicates the issue to your clients early. They must be crystal clear—the choice is to scale back the work or increase the budget. Once that discussion is had, add additional phases to the project, so there is a dedicated paper trail of the extra work. Because, as you know, overservicing is a death of a thousand cuts.

The Unforeseeable Future:

• Workforce Turnover - Retaining top talent in PR has never been harder. But you can’t service clients well without your top performers. In today’s market, do whatever it takes to keep your most effective people happy and retain them for the long haul.
• Lack of Real-Time Data - Real-time data helps your account leaders catch overages before the budget is blown entirely. When your leaders can track budgets in real-time, they can monitor burn rates and ensure project projections match the actual work.

Build Your Firm’s Profitability Today

Now that you’ve identified the culprits that are eating into your firm’s margins, it’s time to take action. 

1. Control Volatile Profit Margins

To retain control of your firm’s profitability, your team needs to be able to predict profit margins on every account accurately. Again, not easy to do. Before staff begin any new initiative, ensure they refer back to historical project data so they can see what past projects of similar scope cost. By gathering a baseline of project costs, they’ll be able to better budget forecasts. Moreover, use systems that show a holistic view of all project expenditures in one spot. That way, the team can diligently monitor burn rates. When project costs are meticulously controlled along the way, there tends to be much fewer ugly surprises at the end.

2. Negotiate Favorable Contracts

Negotiations should cover the scope of work in the retainer, how much it will cost, and the anticipated value for the client. But remember, negotiating is the one chance you have to control hidden costs. Don’t be scared to examine every line item with a magnifying glass. Not only should billing rates, timelines, and project budgets be estimated, but this is your one opportunity to be sure you’re not handing out any unintended freebies.

For example, payment towards activities like travel, dining, and vendor costs should all be plainly stipulated in the contract. In addition, if the contract is for a lengthy stretch of time, consider inflation’s impact. What services cost today could possibly look different down the road. Account for that variable in the contract.

While your primary goal here is to make the most money possible for the firm, that’s not the only advantage. Transparent negotiations also help both sides align on expectations. Reaching a mutual consensus on the path forward will only facilitate the work ahead.

3. Cut Dead Weight Clients

Every client you carry has a purpose, and some are more profitable than others by design. For example, perhaps you work with a marquee client that gives prestige to the firm and attracts new business. They aren't the most profitable, but they drive growth. That’s strategic.

But if you’re carrying legacy clients whose profit margins are shrinking, you have a problem. To remain profitable, you have three options: scale back the scope of the work, increase service pricing, or wave goodbye.

If you decide it's in the firm’s best interest to sever the relationship, have the guts not to renew the contract. It won’t necessarily be easy, but do your best to exit gracefully. Create a final task list that includes all open items and offer to help with a transition plan before officially terminating the relationship. And if it makes sense, recommend another firm that could potentially be a better fit. That way, clients can leave without feeling like you left them high and dry.

4. Grow the Firm Based on Material Evidence

Before you get the itch to sell, grow your firm sustainably. In the long run, evidence of strategic and sustainable growth is vital - meticulously add new clients to your portfolio and even more prudently add headcount. Firms that grow too fast suffer project quality issues, high attrition rates, and overworked systems that can’t support rapid expansion. All of which tarnish a prospective buyer’s vision of the firm.

Whether your firm has a prospective buyer or not, you should always be working toward maximizing profitability. Yes, it takes careful planning and financial discipline to get there. Take control of your own destiny today—before someone else makes that choice for you.