We Are Busy, but Are We Actually Performing Well?
One of the easiest assumptions to make in a consultancy is that a busy business must be a healthy business.
When the pipeline is strong, the team is fully occupied and new enquiries continue to arrive, it is natural to feel that the organisation is performing well.
From an MD's perspective, however, there comes a point where being busy is no longer enough information. The question becomes whether all of that activity is producing the financial performance the business needs.
This matters because consultancy businesses can generate substantial levels of activity without necessarily generating the margins owners expect. Revenue may increase, the team may expand and the business may appear successful from the outside, while profitability remains relatively static underneath.
A growing workload is encouraging, but it doesn't necessarily mean the business is becoming more profitable.
There are several reasons why this can happen, and understanding them is an important part of managing a successful consultancy.
Winning work is important, but so is the quality of that work
The first consideration is project pricing.
Winning a project creates work and revenue, but the quality of that revenue depends on whether the fee reflects the resources required to deliver it.
A large order book made up of poorly priced work can create enormous pressure on a consultancy without producing a particularly strong financial result.
This is why I believe the value of the pipeline should never be considered entirely separately from the commercial assumptions behind it.
When reviewing prospective work, an MD should be interested not only in the value of the opportunities but also in the margins they are expected to generate, the resources needed to deliver them and how they fit with the existing workload.
There will, of course, be occasions when a business deliberately accepts a lower-margin project for strategic reasons. It might provide access to a new client, help establish a presence in a particular market or create opportunities for future work.
Those can be perfectly reasonable commercial decisions, provided they are made consciously and with an understanding of the financial implications.
The important distinction is between accepting a lower margin deliberately and discovering that you have delivered one unintentionally.
Being occupied isn't the same as being productive
Another important factor is staff utilisation.
A consultancy employs people in anticipation that an appropriate proportion of their available time will contribute towards revenue-generating work.
If utilisation falls materially below the level assumed when the business established its charge rates and budgets, the economics can change quite quickly.
At the same time, utilisation needs to be interpreted sensibly. Nobody wants a business in which every employee is expected to be chargeable for every available hour.
People need time for training, management, business development, mentoring and the wider responsibilities required to build a sustainable organisation.
As a consultancy grows, senior people will often spend more time supporting others, managing client relationships and developing the business. That can be entirely appropriate, even if their individual chargeable utilisation reduces.
The important question for an MD is therefore not whether everybody appears occupied. It is whether the balance of activity across the team supports the commercial model of the business.
A full timesheet tells you that someone's time has been used. It doesn't necessarily tell you whether that time has generated the commercial value you expected.
Are your charge rates keeping pace with your costs?
Charge rates also have a significant influence on financial performance, particularly in people-based consultancy businesses.
Over time, salaries, employment costs and overheads increase. The rates that once produced a healthy return can gradually become less effective if they do not move accordingly.
This can be particularly challenging where long-term framework agreements, competitive market conditions or established client relationships limit the speed at which rates can change.
A consultancy might therefore find itself delivering a similar volume of work, with broadly similar levels of utilisation, but generating a lower margin because the cost of delivering that work has increased.
The same can happen during periods of growth. Recruitment may be necessary to support a stronger workload, but the additional employment costs, management responsibilities and overheads can absorb more of the increased revenue than originally anticipated.
This is why reviewing charge rates and the assumptions behind them should be a regular part of financial management rather than something considered only when preparing a particularly significant fee proposal.
Where does project profitability begin to disappear?
Even when a project has been priced correctly, there is no guarantee that it will deliver the margin originally anticipated.
Additional meetings, design changes, client requests, delayed information and other changes can gradually consume the time allowed within the original fee.
Individually, these may appear relatively insignificant. A few additional hours here, another meeting there or some additional design work to maintain a good client relationship might not seem particularly concerning.
However, across a large number of projects, the cumulative effect can be substantial.
This is where an MD needs to see the connection between operational activity and financial performance.
It is useful to understand not only whether projects are profitable at completion, but also whether their expected margins are changing during delivery.
If a project is consuming more resource than anticipated, identifying that early creates an opportunity to understand the cause, manage the remaining work and, where appropriate, discuss additional fees with the client.
Discovering the problem after the project has finished provides considerably fewer options.
Project profitability is not simply determined when the fee is agreed. It is influenced by the commercial decisions made throughout delivery.
What should an MD be looking at?
If turnover is increasing but profit is not moving in the same direction, there is usually a reason.
It may be pricing, project overruns, utilisation, overhead growth or a combination of several factors.
Without good management information, the business can continue working harder without identifying exactly where the commercial leakage is occurring.
This is why I think the most useful financial conversations in a consultancy tend to begin with trends rather than isolated numbers.
Some of the questions I would want to explore regularly include:
Revenue and profitability: Is revenue growing faster than our costs, and is that growth translating into improved profit?
Project margins: Are projects delivering the margins we anticipated, and are particular types of work consistently performing better or worse?
Staff utilisation: Are we achieving the levels of chargeable activity assumed in our budgets, and are there meaningful differences between teams?
Charge rates: Are our rates keeping pace with employment costs and overheads, and are we recovering the value of the work being delivered?
Overheads: Is the cost base increasing in proportion to the business, or are additional costs absorbing the benefits of growth?
Cash and debtors: Is the increased activity translating into cash, or are we carrying more work in progress and outstanding invoices?
None of these measures should be considered entirely in isolation.
For example, increasing utilisation might improve profitability in the short term, but if it leaves insufficient time for mentoring, business development or management, it could create problems elsewhere.
Similarly, a reduction in project margin might be disappointing, but the explanation could be a deliberate investment in developing a strategically important client relationship.
The value comes from understanding the trends, discussing the reasons behind them and deciding whether anything needs to change.
Why busyness can create a false sense of confidence
There is also an important psychological aspect to busyness that I think is worth recognising.
A full office, a heavily committed team and a strong pipeline can all feel reassuring because activity is visible.
You can see people working, projects progressing and clients engaging with the business. Those are all positive things, and they naturally contribute to a sense that the organisation is doing well.
Financial performance is less immediately visible unless the business makes a deliberate effort to measure and understand it.
That can lead management teams to focus heavily on winning more work when the more valuable opportunity may be improving the commercial quality of the work they already have.
For example, a consultancy might achieve a greater improvement in profitability by recovering additional fees for changes in scope, improving project delivery or addressing underperforming charge rates than it would by simply adding more projects to an already busy team.
Of course, winning new work remains essential. But it is worth recognising that increasing revenue and improving profitability are not always the same challenge.
The real measure is whether growth is making the business stronger
For a consultancy MD, the goal should be to understand whether growth is improving the underlying business rather than simply increasing its scale.
That requires looking beyond turnover, workload and the number of people employed to understand how effectively the business converts its activity into sustainable financial performance.
A busy organisation can be a very successful organisation, but the two are not automatically the same.
The stronger position is knowing why the business is performing well, where the profit is being created and what needs attention before the numbers begin to move in the wrong direction.
Ultimately, the question isn't simply whether your consultancy has enough work. It's whether the work you are delivering is producing the financial performance needed to build the business you want.