How to Improve Operational Efficiency: A Start-to-Finish Guide
It isn’t just headcount or revenue that separates winners from losers in the professional services game. The real indicators of enhanced operational efficiency are intelligent resource allocation, higher billable utilization rates, a culture of psychological safety, and a myriad of other factors.
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At the same time, it’s no secret that all businesses, big and small, want to clamp down on costs. According to McKinsey, 79% of all companies have cut costs in response to the global economic crisis, but only 53% of executives think that doing so has helped their companies weather it. Even though there's a commonsense ring to trimming costs, research demonstrates that approaching operational efficiency with the aim to reduce expenses is not nearly enough. Data from PwC also suggests that less than 30% of cost-cutting programs achieve their goals, and less than a fifth of these are able to harvest consistent rewards over the following three years. So what is operational efficiency and an optimal operational strategy to improve it, then?
Improving operations is not a one-and-done initiative. It is a combined effort that calls on Directors of Operations to optimize processes, people, financials, and technology. There’s no universal remedy that can make up for a scalable business model and turn the company into a well-oiled machine overnight. Eventually, the financial viability of projects and services depends on the balance of all elements and is the result of continuous improvement. In this guide, we’ve collected the best tips to help you strike this balance and embrace change at all levels. So let’s dive in, shall we?
- What is operational efficiency?
- Refining processes
- Supporting people
- Developing financial strategy
- Leveraging technology
What is operational efficiency?
First things first, what is operational efficiency? Operational efficiency broadly refers to the ability of an organization to deliver quality services with fewer resources. The more output an organization can produce from a given amount of input, the more efficient those operations likely are. This is primarily a function of two variables, namely the quality of an entity’s operations and its operating expenses.
If an organization can maintain high levels of operating efficiency, then it should be able to generate greater profit per project with the same resources. This way, operationally efficient businesses are often compared to well-oiled machines that can operate in new markets while still being profitable.
Operational efficiency goes beyond cost management. It draws a strategy that looks both internally and externally at an organization’s process for how they work. By understanding this strategy, you can identify areas where inefficiencies exist and determine how to improve them. This creates a win-win scenario: optimal output for the company and an exemplary product for the customer.
Increasing operational efficiency requires consistent effort and a strong commitment to continuous learning, but it all starts with processes.
Refining processes to improve operational efficiency
Enhancing operational efficiency starts with process refinement. Processes are at the core of operations. Without diving deep into how work is organized and understanding what’s driving day-to-day operations, any improvements to the operational strategy will be pulled out of thin air and turn out ineffective shortly. As numerous studies show, the real culprit to operational efficiency in a services business is repeated non-billable work and lack of structure. Not only do they consume too much time that can’t be recovered, but they also stand in the way of successful project delivery. Here’s what can be done to tame both, respectively:
Automating repeatable work
Besides being highly work-intensive, the professional services industry is bogged down by administrative duties that are repeated ad nauseum without producing any real value. This might come as a surprise, but in professional services, almost every core business process that’s repeatable can be automated, from quote to invoice, starting from project planning and proposal development to knowledge sharing and financial reporting, you name it.
Forecast's Auto Schedule automating project scheduling and building an intelligent project plan in seconds, cutting administrative work for project managers in half.
Take a consulting firm as an example. A lot of time goes to waste simply because too much of the administrative clerical work is sitting on your employees’ desks. Steve Glaveski, former EY consultant recalls “countless six-figure earning colleagues painstakingly laboring over perfecting Powerpoint proposals for days, if not weeks, only for the prospective engagement to go to a competitor” and “auditors carrying folders of client receipts and bank statements everywhere; automation tools not so much.”
At best, too much administrative hassle just kills time. At worst, it can immobilize your teams, introducing human error and preventing them from succeeding with work they’re masters at. However, there are certain practices you can apply to turn this ship around. For starters, ask yourself what steps your business takes to deliver the finished product. Think both big and small. Seeing the big picture and being in the know of the smallest detail will help you come up with the final checklist of ‘process offenders’ that need to be automated or entirely cut out. You’ll get better results revisiting processes along the entire value chain going through marketing, product, sales, customer service, delivery, finance, and operations.
When you’ve figured out the administrative net drains, it’s time to think about how you can leverage modern technologies to automate what’s cutting directly into your budget (tips on that in the last section). Increasing employee billibility by only 2% via process automation could become a great starting accomplishment.
Weeding out work-intensive processes and reducing unnecessary data entry means your teams can get more work done. But when it comes to managing work, there are other processes that can be established to speed up the delivery process and have less friction with clients.
Establishing methodologies that work for your case and eliminating administrative load will prevent you from losing out on valuable time. However, those processes will never work without supporting people – the biggest asset of professional services organizations. Managing your employee time wisely and transparently, together with facilitating cross-departmental collaboration will do wonders for improving your operational efficiency and company culture in general. Let’s take a closer look at what could be done to get this ball rolling.
Managing employee time wisely & transparently
When it comes to perfecting processes and procedures, it’s important that you get into the trenches with the team and understand the ins and outs of service or product delivery in your company. Being on the front and keeping communication lines open, you’ll get a better, granular understanding of what’s affecting your operations. Sometimes it would mean shadowing your employees as they work to discern what’s sapping value from your company and can be optimized. We’ve prepared a list of questions that you can ask yourself anytime to make sure things don’t go sideways.
Are you 100% sure that nobody is overbooked with work?
Healthy company culture starts with healthy employees. We won’t reinvent the wheel saying that overwork is closely linked to employee burnout. However, it’s good to remind yourself and your employees from time to time that longer hours don’t result in better output or more work done. On the contrary, research shows that regardless of our reasons for working long hours, excessive workloads work against us without helping us a bit to improve the results.
A study of consultants by Erin Reid, carried out at Boston University’s Questrom School of Business, showed that the output of employees working more hours wasn’t any more than the output of workers who didn't work overtime. As a matter of fact, when asked to tell the difference between employees who worked 80 hours a week and people who just pretended to, managers couldn’t spot any difference.
Forecast's Schedule providing a holistic view of resource allocations.
This is not to say that overwork has neutral effects on employee productivity and overall company success. Quite the opposite, actually. According to research carried out by Marianna Virtanen of the Finnish Institute of Occupational Health, there’s a strong link between overwork and various health problems, including impaired sleep, depression, heavy drinking, diabetes, bad memory, and heart disease. Being unpleasant consequences of overwork for individuals, they immediately reflect on a company’s bottom line too, turning up in the form of unstable attendance, income, and rising health insurance costs. Needless to say, when employees register more hours, balance-sheet costs are incurred as well.
Do some of your employees sit on the bench?
83% of executives name resource allocation as the most critical management lever for spurring growth, according to McKinsey. Sadly, not all companies get the hang of how to do it right. Project and operation managers still fail to use resource allocation to their advantage. Poor resource management has seen the largest increase since 2018 and is now ranked as the 2nd top challenge to companies across different industry sectors in the United Kingdom and internationally, remarks Vince Hines, a Managing Director at Wellingtone.
While overload can lead to employee burnout, boredom is eating your project’s budget every single day and disrupting your productivity. A silent killer for your operating margin, underload can stay unnoticed for a long time, and adds up to significant costs. When some employees don’t have enough to do, even to fill in their timesheets, their boredom can turn into a destructive force and become toxic to the extent that it will demotivate other co-workers. To avoid micromanagement, but be in the know of your team’s productivity levels, there are specific targets you can set in your company.
One of the main KPIs to track in a services business is utilization levels. Through this measure, you’re able to track ‘time spent productively’ and compare and identify potential problems along the way. There are various ways to track this time and different methods and definitions of utilized time. It varies from business to business, but what is most important is that you keep a consistent process of tracking utilization. Overall, there are a few methods of measuring utilization levels. The method of choice depends on your business and preferences.
Do you have the right KPIs set for each team member?
Another thing essential to support people from day one, regardless of their role, is teaching them data literacy in the workplace. More specifically, setting KPIs for everyone. Determining the most valuable KPIs for each function across the company will not only be beneficial for tracking performance, but will also empower people and help them realize their part in the company’s goals and objectives.
Individual KPIs will help you maximize operational efficiency, but will also be beneficial for people’s success in the long run. There are many reasons why KPIs are essential for employee engagement. KPIs strengthen morale at the workplace by acknowledging employees' hard work and contribute to the development of accountability. Having KPIs specified, employees will cultivate a sense of ownership, feel responsible for their work, and be more willing to push the envelope. Hitting their numbers, people will be able to recognize their strengths and personal contributions to the team. In growing companies, the distance between an organization's accomplishments and the individual's efforts toward them might increase.
Additionally, KPIs are the best tool to communicate business objectives across the organization, put them high on everyone’s list, and keep them top of mind. It means that every piece of work assigned should be purposeful and relate to overarching business goals. Employees’ contributions can then be tracked against larger objectives. If you want more self-organizing and agile teams in your company, provide them with the opportunity to see how they’re performing and you’ll see a boost in engagement, performance, and personal growth, driven by the desire to increase the numbers on their dashboards.
When setting KPIs, remember that they should align with an individual’s interests, strengths, or career aspirations. This will not only make your company a great place to work, but will have a positive impact on your operating margin. When work is personally important to team members, it will be done with more precision and thought into quality.
Do you know when to hire new people?
The challenge most professional services companies face today is the lack of data determining whether a project team truly needs to hire new people. Having an overview of the entire portfolio of resources could not only inform hiring decisions but also give you a snapshot of who’s fully booked with work or not having enough on their plates. If you’re missing it at the moment, here’s a list of signs and wake-up calls implying it’s time to expand your workforce:
- Teams constantly overshoot deadlines, having more critical tasks than their capacity can handle
- Customer complaints increase, as the quality of work suffers
- You notice colleagues working longer hours one too many times
- People ignore new ideas and initiatives, putting them on the backburner
- Your revenue growth slows down as measured by opportunities that are turned down
- Experienced team members are assigned basic tasks way too often as you’re not crystal clear on their roles
When hiring new employees, it’s important to get the timing right. If you’re too soon to hire, it can drain the project’s profit. But if employers are late to bring on new workers, their overall capacity may suffer. It’s smart to hire new employees when you anticipate critical work in excess, but your financial situation is solid enough to add the additional cost of a new team member. Remember that the usual hiring process takes eight to ten weeks and don’t forget about the hidden costs associated with new hires, such as health insurance coverage or various training programs. Thinking in advance will help you get new employees on board just before reaching a workforce crisis.
Facilitating cross-departmental collaboration
It’s no secret that departmental in-fighting drains morale. Unfortunately, there’s no solution that can change it overnight. Removing obstacles on your team’s way to flawless collaboration is an ongoing process. It starts with promoting a culture of accountability and honest communication at the top and extends all the way down to defining a healthy understanding of each team’s role in the organization. Success in today’s marketplace will eventually be a reflection of the culture you promote, so it’s really important to square the strategy here. Here are some practical tips that facilitate collaboration across all departments:
1. Keep everyone on the same page. True collaboration is almost impossible without a shared vision and everyone being on the same wavelength. It may sound trivial, but keeping all departments in the loop and tearing down silos is a significant part of building an open communication culture. It can be achieved through specific steps and initiatives, like sharing the timelines and goals for each department and having a system that unites teams. An emphasis here should be put on how departments can’t exist without one another, as eventually, they all work on the same goal together.
2. Create a culture of psychological safety. Google’s massive two-year study on team performance revealed that the underpinning of the highest-performing teams is psychological safety, the belief that you won’t be punished when you make a mistake and you can always count on your team members’ understanding and honest feedback. Psychologically safe workplace culture not only encourages mutual respect and synergistic relationships but is critical for achieving excellent business outcomes, as the mastery of everyone’s area of responsibility increases. Here are signs you’ve achieved psychological safety:
- Leadership admits their mistakes
- Everyone recognizes gaps in their knowledge and feels comfortable asking about things they don’t know
- Candid feedback becomes a routine
- All employee voices are equally respected and encouraged
3. Lead by example. People need a good example they can follow, so starting with leadership to demonstrate the behavior could be a great start to creating a culture of psychological safety. Employees need to see that it’s OK to be human and slip from time to time. Leadership buy-in will nudge them to become less defensive, and the process will naturally turn into a more cooperative one.
Developing financial strategy
In operations, numbers are everything. Good financial strategy is key to improving operations and scaling the company. Chances are you’re always on the lookout for best practices in maintaining a consistent healthy margin. In the current service economy, with competition being on its rise, it’s getting more and more difficult to decide on how best to finance the company and provide means for future growth. However, there are tried-and-true methods that could benefit professional service business.
Saying no to tiny margins
Too many consulting companies find it difficult to avoid low margin work. The reason being the belief that it will help build the relationships with the client. However, it doesn’t take long to backfire by hurting workplace morale, punching your margins, and negatively affecting the financial viability of your company. Before entering the vicious circle of low margin service providers, let’s lay a few facts out.
According to Inc.com: “Most professional service firms have operating profit margins from 25-40 percent. This means that out of every dollar of revenue, 25-40 cents drops to their bottom line as pre-tax profits.” In fact, less than one quarter of professional services organizations consistently achieve project margins greater than 40%. Clearly, there’s no one-size-fits-all margin and every company’s situation is unique. But how can one get into the quarter of successful businesses mentioned above, you might wonder?
You must have heard about the Pareto principle more than once. Figuring out which 20% of your time produces 80% of your business’ results, you could spend more time on activities that provide value and less time on net drainers. However, according to Steve Glaveski, an entrepreneur and thought leader, the Pareto, or 80/20 principle implies not just that 80% of your revenue comes from 20% of your clients, but that 64% of your revenue comes from 4% of your clients (and 50% of your revenue can come from just 1% of your clients). “By focusing on this principle and creating offerings that the 20% or 4% would be willing to pay much more for than the rest of your customers,” points out Steve, “you can become more efficient and spare your workforce the pain of dealing with difficult customers in exchange for tiny margins.”
Carrying out a basic project financial analysis, you’ll be able to identify projects and clients that are improving your operational efficiency or vice versa, slimming it.
Investing in shorter-term gigs
It is more common for larger services businesses to engage in long-term projects. However, the daily rate of work on those projects has a higher chance to decrease significantly than on short-term gigs. Usually, longer-term projects require more documentation and infrastructure. Creating more administrative work, they can turn out to be less value-adding to your operating margin. In turn, short-term projects may have only one phase and require less planning, limited financial commitment, and minor administrative drains.
Additionally, daily hourly rate on shorter and more urgent projects is naturally higher and more expensive. In the end, you might be able to charge more money per consultant/hour at a 1-day workshop than at a yearly consulting engagement. Following this less-is-more principle, services businesses can deliver the most amount of value in the least amount of time when there’s a pressing need to increase cash flow.
A short-term project model can also be used to pay higher wages to employees whose skills are highly in demand and help them to understand which skills are most valued in their field. This is not to say that you should refuse to take on long-term projects. On the contrary, if managed properly – with perfect workload balance, ongoing long-term projects can be great for creating a stable income and taking the pain out of constant racing for smaller projects. There’s room for both, but it all comes down to how much risk your business can bear right now. The longer the project will take, the higher the likelihood of cost overrun is.
To make sure you’re paid in the best possible way for your services, a choice is to be made in terms of the revenue models you’d like to adopt for different projects or business in general.
Today, in the professional services business, technology is king. It not only helps to measure operational efficiency, but also offloads tons of administrative work from your team’s shoulders and adds brains to your operations.
Challenges in measuring operational efficiency
You can’t fix what you can’t measure. Operational efficiency is a vague concept until it’s translated into numbers. Nonetheless, professional services companies often come to a point where they are overflowing with data scattered all over the place, not aligned, just to realize that it’s not reliable because of a missing connection to how things progress in real time. In this data sprawl, even the most stolid and watchful operation manager may get lost.
Real-time visibility, however, is closely linked with higher bid-to-win ratio, client reference, billable utilization, on-time project delivery, and project margin. Sadly, only 15,7% of respondents have comprehensive real-time information visibility, according to the latest SPI research carried out in 2020.
Lacking visibility and transparency into how processes evolve, operations managers end up down the rabbit hole gathering bits and pieces of data and looking where to optimize. They can’t discern how it relates to roles or specific milestones. For all their trouble, they rarely emerge with numbers they can trust and their decision-making can hurt business performance by being too reactive and subjective.
At the same time, the future belongs to companies that lead the competition and champion in operational excellence and innovation as they go. How do they actually know if their projects are financially viable, operations cost-effective, and businesses profitable right now, at this point? How do they measure that?
Removing barriers in the data flow & analysis
Dodgy data across project management, operations, and finance will only grow if you continue using color-coded antiquated spreadsheets as a single source of truth. It’s often a hassle that slows teams down in a way that requires unnecessary administrative work of filling in a spreadsheet that is only used for payroll. Using a spreadsheet or disparate systems for resource management or time registrations, for example, won’t get your company very far, simply because it isn’t cut out for setting this data in motion.
Think for a moment, can spreadsheets answer questions like ‘what’s the current status of the project?’ ‘what’s the operating margin?’ or ‘how profitable are the projects? They can’t, because there are only a few things a spreadsheet can automate. Thus, when a spreadsheet becomes your barrier to getting things done or moving to the heart of the problem quickly, you should think of another way to do work through which your personal KPIs could be improved.
Even when you’ve managed to gather the numbers, tracking how they relate to the actual operation is tough. That is, each operation turns up to be a black box: inputs go in, outputs come out, and little analytical attention is paid to the inner workings of the transformation process. That’s an obvious downside of point solutions across different vendors you’re using, or, more importantly, the lack of connection between these. To avoid this outcome, services businesses have started to implement centralized software, more about it in the following section.
Another difficult aspect of using spreadsheets to solve management problems is that separate spreadsheets are not always kept up to date. Not on purpose, but because people forget about them, or simply just don’t have the time to fill them in. Often you don’t realize that the changes you make might influence the work of a handful of others.
Think for a moment, can spreadsheets answer questions like ‘what’s the current status of the project?’ ‘what’s the operating margin?’ or ‘how profitable are the projects? They can’t because there are only a few things a spreadsheet can automate. Thus, when a spreadsheet becomes your barrier to getting things done or moving to the heart of the problem quickly, you should think of another way to do work through which your personal KPIs as an operations director could be improved.
Leveraging PSA Software to Increase Operational Efficiency
A recent end-user survey carried out by SPI Research in 2017, proved significant improvements for firms that moved to Professional Services Automation Software, with specific returns including lower project cancellation rates, improved on-time and on-budget project delivery, lower budget leaks, higher resource utilization, and increased project margins. The study concluded that for an average 172-person professional services firm the return on investment (ROI) is significantly high. According to researchers, by investing around $200,000 in implementation and PSA software license costs, in five years, professional service firms can expect an estimate of nearly $23 million in increased revenue and reduced costs.
Professional Services Automation (PSA) software is a full-suite platform that serves as the main hub for all business activities in project- or service-oriented industries. It’s an overarching alternative to all of your point solutions spread across various vendors that gives you extended real-time visibility. “Extended” implies that information flows across departments and functions, enabling employees to have a comprehensive picture of operations for faster and properly informed decisions.
The primary purpose of PSA software is to get data into perspective and provide executives with one real-time truth of the whole business, so they can scale and reach a higher level of sustainability. This is achieved by developing a variety of useful operational efficiency metrics across the entire business to evaluate basic business processes.
Here’s why businesses choose Forecast PSA
We’re no old ERP system doing everything halfway; we strive to bring you the meaningful platform that actually works and gets stuff done for you with minimal effort from your side. Deals are connected to projects, and projects are connected to resources. Time is being tracked, budgets are created automatically, and time entries are prepopulated to your accounting and billing software. Insights and reports are generated in real-time in Forecast, available at any time and shareable with your stakeholders, or kept internally.
PSA software can become a game-changer for businesses that strive to scale sustainably by fine-tuning their operations and finances. The sooner you digitize your work environment, the earlier you’ll start getting higher returns from your operations.
The future of operations in the professional services business is less about cost-cutting or headcount, and more about the optimal and smart allocation of resources. In this ebook, we’ve gathered the key tips that could help enterprises move in the right direction, right into the future of sustainability and intelligence. Work automation, the culture of accountability, well-thought financial strategy, and technology – all play a significant role in fine-tuning your operations. Operational efficiency is a synergy of all processes and can be improved on condition that no stone is left unturned.
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