A profit growth framework for IT services firms

UB -

IT services growth does not only mean getting more business.  There are other profitability levers that should also be considered in addition to growth in volumes growth in the rate of profitability per resource should also be considered. I am sharing an exhaustive list of tactics that will help IT, executives, to consider alternative and more impactful ways to grow the business and serve clients more efficiently. Even developers who are working in a professional services firm should be aware of this so that they can understand the expectations of the management and know why certain things are being done. If an engineer helps the initiative in any way, this will enable a great career for him or her.

Imagine, for example, that a firm successfully grew its analytics & data science practice area by 25% in a given year. But it is grown in such a way that a). The mix of business and hence the realized fees rates remained the same, and, b). The firm's method of serving that additional business used the same senior to associate ratio currently in play.

In this scenario, the firm will need 25% more resources with the same ratio to handle the new volume, and the net profit per resource will remain the same.

I want to make it clear that growing by 25% and adding 25% more resources is not a bad result but it does not help with the goal of improving profits per resource. To do that we must break one of the two conditions imposed. that is either

a). bring in work that has higher fee levels than the firm's current average, or

b). or find ways to service the firm's work with higher efficiency.

The list of tactics to increase profits can be grouped into five categories. These categories actually represent the basic approach in improving the profitability in any business, not just the IT services.  

1. Raise Fee Levels

  • Earn higher fees through specialization, innovation, and adding more value. Examples: specialization in industry or domain like healthcare or retail,  doing something more innovative like providing strategy or design thinking workshops, etc, and offering another service to provide end-end delivery of the initiative.
  • Use sales and marketing to find better work. Examples: Moving higher up the chain by removing the intermediaries. Closer to the end-user you are the higher the margin and more ambiguity to navigate through.
  • Speed up the skill-building process in staff by designing better training programs. Examples: efficient employee onboarding training, cross-technology training to existing resources to get prepared for any new requirement instead of hiring from an outside firm.
  • Invest in new higher-value services, such as getting different cloud competencies, web3, business strategy, etc.

2. Lower Delivery Costs for Each Engagement

  • Improve engagement management performance by introducing better expectation management, teaching engineers to communication and project management, optimized assignment of staff that has done similar engagement or have worked with the same client before to reduce start-up cost and induct more full-stack employees who can see thorough tasks end-to-end to reduce coordination and dependencies, etc.
  • Increase re-usability in delivery of services and develop methodologies to avoid duplication effort. Example: create process recopies, parameterized code templates, CI/CD, and productized services  
  • Make greater use of associate-level staff by making the process standardized and easy.

3. Fix Under-performers

  • Deal with under-performers
  • Drop unprofitable services
  • Drop unprofitable/difficult clients when you have the option

4. Increase Volume

  • Increase utilization rate(billable hours per resource) for example associate-level utilization rate should be 90% while senior staff utilization rate could be increased to 75%. The exact rate could depend on the practice area and growth stage at which the firm currently is.  

5. Lower Overhead Costs

  • Improve speed of billings and timing of payments
  • Reduce space and equipment costs. This is one of the main driver behind remote 1st culture
  • Reduce support staff costs  
You might have noticed the first 2 categories are the keys to the long-term health of the firm and the last two categories are hygiene areas which are critical for the short term but very limited in their ability to bring about a fundamental transformation in profits.

In the end, I will like to emphasize that the firm's method of measuring & reporting KPIs and the management style are very critical to executing any of the above tactics.