Workforce Planners: 4 Steps to Improving Profit Margins for Services
Professional services firms face a delicate balancing act in determining how to best staff a client project, and establishing workforce planning scenarios. Assign too many junior people, and client satisfaction may suffer. Assign too many senior people, and the salary spend may be higher than is necessary to deliver project outcomes.
To further complicate things, when dealing with a multi-year project, the workforce will likely become more expensive within the contract’s lifetime. Data from our aggregated database of 3.5 million employee records reveals that the most common time for an employee to receive a promotion is during their second, third and fourth year with a company: Last year, 20.5% of employees received a promotion in their second year of tenure, 21.6% in their third year and 19.8% in their fourth year. Employees aged 25 to 30 received more promotions than employees from other age groups.
The impact on profit can be significant. One of our professional services customers found that, by exploring how salary costs will rise as employees receive pay increases over projects that span multiple years, they can assign the right mix of staff and improve margins by $1 to $3 million per contract.
For professional services firms, keeping a close eye on rising workforce costs is crucial. Time is money and under-estimating workforce costs can seriously hurt profit margins. By comparing different resource cost scenarios over the life of a project, and taking salary increases and turnover into account, firms can determine how best to staff projects that yield solid customer satisfaction at an optimal cost.
To optimize your mix of people to deliver the right kind of service while maintaining profitability, follow these steps:
Step 1: Determine What Kind of People You Need
When your leaders sign a new deal, you not only need to determine how many people you need, but what kind of skills are required to deliver project outcomes. (To learn more about strategic workforce planning, check out this blog post).
Getting that magic ratio of junior to senior staff is a big part of strategic planning for professional services projects. In his classic book, Managing the Professional Service Firm, business management academic David H. Maister identified three types of projects (Brains, Grey Hair, and Procedure) that fall within the spectrum of senior-heavy to junior-heavy teams:
- Brains Projects: For these types of projects, the ratio of junior staff to middle-level and senior staff is typically low because the tasks are harder to delegate. These projects usually involve innovative thinking to solve new, complex problems.
- Grey Hair Projects: These projects incorporate some repeatable tasks that senior staff can assign to junior staff. They require less creativity than “Brains” projects, but also involve some non-repeatable tasks and strategic thinking. The right blend of junior and senior staff is required.
- Procedure Projects: These projects involve the highest proportion of junior people. The problems are familiar and the tasks are repeatable. In these cases, the client may be able to perform the work itself, but hires the firm because it can perform the service more efficiently.
Once you have a general idea of where your projects fall on the above “ratio spectrum,” you can start comparing different scenarios.
Step 2: Create Workforce Planning Scenarios
Let’s say you are looking to staff a “Grey Hair” project for a fixed three-year contract, requiring a mix of senior and junior staff. Your scenarios may look something like this:
- Scenario 1: Assign 90 junior, 10 mid-level, and 10 senior staff
- Scenario 2: Assign 60 junior, 20 mid-level, and 20 senior staff
- Scenario 3: Assign 20 junior, 30 mid-level, and 30 senior staff
The above scenarios reveal different types of distributions for junior, mid-level and senior staff: one leans more heavily towards junior staff, the other leans more heavily towards senior staff, and one falls somewhere in the middle. It’s a good idea to have several scenarios that span the spectrum of what is generally sustainable for your business so that you are exploring all the viable options. Once you have created your scenarios, you can then move on to the next step, which involves gathering the data that will help model future states.
Step 3: Model Potential Changes
An assumption is “a thing that is accepted as true or as certain to happen, without proof.” But with data, our assumptions can be guided by past evidence, turning what would normally be a wild guess into a more educated estimate.
To project how your costs will increase over the life of the contract, you can make an assumption about salary increases. To inform this assumption, you can look at past compensation data and assess compensation changes for junior and senior staff in similar roles in the past.
For example, you can look at past increase percentages for staff based on experience level. Since junior staff often start at the lower end of the compa ratio, their increases are often larger. Generally this is done in spreadsheets and can take weeks. But with a people strategy platform, which unifies data from multiple sources, these insights can be retrieved instantly.
With your assumptions tuned, you can then model out the increase in costs over the course of the project for each scenario. It is important to identify not just salary costs, but the Total Cost of Workforce (TCOW), the full cost for people who work for the organization, including all labor and workforce overhead costs.
Step 4: Review Workforce Planning Scenarios and Make Recommendations
As you review each scenario, different situations may come to light. For example, hiring more junior staff may appear to be more cost effective, but factoring in the higher turnover expected from more junior staff may lead you to add more experienced staff into the mix. You can go back and keep refining the scenarios until you have developed the best plan for a given set of planned projects and services.
Information is often spread across the organization in siloed systems within various departments and is difficult to aggregate and reconcile. This makes it hard to create one plan, let alone multiple plans. To make this process easier, you can use technology solutions that allow you to create and compare different workforce planning scenarios (each with different workforce movement and cost assumptions).
The Power of Precision in Scenario Planning
People who work for professional services firms tend to be very driven individuals who are looking to advance their careers and earn early salary increases. This can make it difficult to determine exactly how much money the firm will spend on people over the life of a contract. Furthermore, incremental increases here and there can quickly become large expenses.
With precise scenario planning, workforce planners can play a central role in determining the right mix of people required to achieve a healthy bottom line — all while having the kind of talent required to deliver excellent customer service and quality.
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