Turnover is one of the easiest measures to discuss when a consultancy is growing because it provides a simple indication of scale. It is often used to describe progress, compare one year with another and set growth ambitions for the future.
From an MD's perspective, however, turnover only becomes really meaningful when you understand the quality of the work sitting underneath it.
A consultancy doesn't make its profit at company level in the abstract. Its financial performance is largely determined by the individual projects being delivered across the organisation. Each project contributes to the eventual result, depending on how well the work was priced, resourced and managed.
That is why project profitability is one of the areas I would want clear visibility of if I were responsible for managing a technical consultancy.
Growing turnover is encouraging but understanding how much profit your projects are generating tells you considerably more about the underlying health of the business.
Two projects, the same fee, but very different outcomes
Imagine two projects with exactly the same fee.
One is delivered broadly in line with the assumptions made at proposal stage, using the expected level and mix of resource. The work progresses reasonably smoothly, the programme remains manageable and the project achieves the margin anticipated when the fee was agreed.
The other requires substantially more staff time, additional senior involvement and several rounds of revisions that weren't anticipated. Perhaps the client's requirements changed, information arrived later than expected or the team encountered technical challenges that hadn't been fully appreciated at the outset.
From a revenue perspective, the projects appear identical. From a commercial perspective, they are very different.
The difficulty for an MD is that these differences can disappear once everything is consolidated into the overall company result.
Strong projects can compensate for weaker ones, which means the business may remain profitable while recurring problems in certain types of work go unnoticed.
A healthy overall profit figure doesn't necessarily mean that every part of the business is performing well.
Good project profitability information allows the leadership team to look underneath that headline number and understand where the business is genuinely making money.
Understanding what you expected to earn
The starting point for understanding project profitability is knowing what was assumed when the original fee was prepared.
How much time did we expect the work to require? What mix of people did we anticipate using? Were there important assumptions about the programme, the availability of information or the responsibilities of the client and other consultants?
Those assumptions effectively form the commercial plan for delivering the project.
The useful management question is then whether delivery is tracking reasonably close to that plan.
In my experience, this is where the relationship between fee proposals, resource planning and project management becomes particularly important. If the assumptions used to price a project aren't clearly understood by the people responsible for delivering it, there is a risk that the commercial expectations become disconnected from the operational decisions being made.
That doesn't mean every hour needs to be rigidly controlled or that project managers should be discouraged from exercising professional judgement. Consultancy projects rarely progress exactly as anticipated, and some flexibility will always be necessary.
However, having a clear understanding of the original commercial expectations makes it much easier to recognise when something is changing and whether action is required.
Understanding why project margins change
Where project performance differs significantly from expectations, the objective shouldn't simply be to identify that a project has gone over budget.
The more valuable question is why.
Perhaps the original fee was too low because the complexity of the work was underestimated. Perhaps the scope changed substantially, or more senior people were required than originally anticipated.
In other cases, the team may have spent considerable time resolving issues outside the original brief, or there may have been inefficiencies in the way the work was managed and delivered.
Each explanation has a different implication for the business.
If fees are routinely too low for a particular type of work, the estimating process may need to change. If projects regularly expand in scope without corresponding fee adjustments, the commercial management process may need greater attention.
Similarly, if certain work consistently requires a different resource mix from the one assumed at proposal stage, future pricing and resource planning should reflect that experience.
The real value of reviewing project profitability isn't simply knowing which projects made money. It's understanding what influenced the outcome and what the business can learn from it.
This is where project profitability moves beyond financial reporting and becomes an important part of improving how the consultancy operates.
What should an MD be looking at?
For a growing consultancy, I would want regular visibility of project performance, but I would also want that information presented in a way that supports useful commercial conversations.
Some of the questions I would expect the leadership team to explore include:
Budget versus actual performance: Are projects being delivered within the resource allowances established when the fees were agreed?
Expected project margins: Are we still forecasting the profit originally anticipated, or has the expected outcome changed as the work has progressed?
Resource mix: Are we using the appropriate balance of senior and junior staff, or are projects requiring more expensive resources than planned?
Scope changes and additional fees: Are we recognising work outside the original appointment and recovering appropriate additional fees?
Recurring commercial issues: Are particular types of projects consistently exceeding their budgets, and do we understand the reasons?
Performance across clients and disciplines: Are certain clients, sectors or service lines generating stronger returns than others?
The purpose isn't to create another layer of reporting for project managers to complete.
It's to provide enough information for the people responsible for delivering the work to understand the commercial position of their projects and identify potential issues while there is still an opportunity to influence the outcome.
There is an important distinction between reviewing profitability after a project has finished and understanding how profitability is developing during delivery.
Both have value, but the second provides considerably more opportunity to take action.
Using project profitability to make better business decisions
There is also considerable value in looking at profitability across groups of projects rather than considering each one individually.
Certain clients, sectors, service lines or project types may consistently generate stronger or weaker returns.
That information can influence business development strategy and provide useful insight into where the consultancy should focus its efforts.
For example, a business may discover that a particular type of project regularly generates a strong fee income but requires disproportionate senior management involvement. Another area of work might generate smaller individual fees but deliver more consistent margins with fewer demands on the wider team.
Understanding those differences allows the leadership team to make more informed decisions about the work it pursues, the fees it proposes and the resources it needs.
It doesn't necessarily mean walking away from every piece of work with a lower margin.
Some projects may provide strategic value, help develop an important client relationship or introduce the consultancy to a new market. There may also be good reasons to accept work that helps maintain continuity of employment or supports the development of less experienced staff.
Those can all be reasonable commercial considerations.
What matters is making those decisions consciously, with an understanding of the likely financial outcome, rather than discovering the implications after the work has been completed.
Making project profitability part of the management conversation
One of the challenges in growing consultancies is ensuring that commercial responsibility develops alongside technical and project management responsibility.
Project managers are often highly capable technical professionals who have progressed into leadership roles because of their expertise and their ability to deliver work successfully.
However, managing the technical delivery of a project and managing its commercial performance are not quite the same thing.
As the business grows, it becomes increasingly important that project managers understand the financial assumptions behind their projects and have access to information that helps them make informed decisions.
That doesn't mean expecting every project manager to become an accountant. It means providing them with the information, support and commercial understanding needed to take ownership of the financial performance of their work.
From an MD's perspective, this is particularly valuable because it allows commercial responsibility to be shared more effectively across the organisation.
Rather than relying on the MD to identify every problem, the people closest to the projects are better equipped to recognise changes, ask questions and take appropriate action.
Over time, that can help develop a stronger commercial culture throughout the consultancy.
Growth should improve profitability, not just increase workload
Turnover still matters, of course. A consultancy needs sufficient revenue to support its people, infrastructure and future ambitions.
However, revenue should always be considered alongside the return generated by the work.
A growing consultancy can find itself taking on more projects, employing more people and managing greater complexity without achieving the improvement in profitability that the additional activity might suggest.
From an MD's perspective, understanding project profitability provides a much clearer picture of whether growth is genuinely strengthening the business.
It helps inform decisions about pricing, recruitment, resource planning, project management and the markets in which the consultancy chooses to operate.
Most importantly, it allows the leadership team to understand not only whether the business is profitable overall, but what is actually creating that profit.
Growth becomes much more meaningful when you understand which projects are strengthening the financial position of the consultancy and which are simply making everybody busier.