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A Consultants Guide to Profitability Part 1: Understanding Total Project Expenditure


Project Number: na
International Organisation: European Union
Contracting Agency: Navigator Consulting Group
Programme: Navigator Operations
Operation Date: 01/06/2012 — 01/06/2012
Budget:
Lead Contractor: Navigator Consulting Group
Additional Contractors:
Country: Greece, United Kingdom, Cyprus, Ukraine, Russia
Download project report: a_consultant’s_guide_to_profit_part_1.pdf
Website: Visit Website

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Project Description

 

A Consultant's Guide to Profitability Part 1: Understanding Total Project Expenditure

 

One of the greatest challenges for a consultant or consulting firm is keeping track of project profitability. There are so many factors which affect it, starting from poor financial bidding to unexpected expenses due to changing client requirements, that many companies prefer to avoid the issue of bottom-line analysis (or project profitability) in favour of tracking the top-line (or project turnover).

Yet monitoring the real state of project profitability is critical, for the following reasons:

  • It helps a consultancy understand the accuracy of its financial bidding process. Most of the time, the bidding process is dominated by financial competitiveness: therefore, financial proposals are pitched as low as possible. This often leads consultants into a trap: consistently working at prices which are below optimum value for the service generated, or in some cases, below break-even.

  • It helps a consultancy understand which of its clients are truly worth working for. While a lot of consultancy work is relationship management and referral business, if this work isn’t priced correctly, it leads to repetitive losses, or to financial constraints on growth.

  • It helps a consultancy understand which of its staff members are able to perform within the financial constraints of a project, and which analytical or service functions need to be improved to comply with financial parameters.

The following methodology has been developed based on 20 years of international consultancy experience in both the public and private sectors in Europe and further afield. It’s been developed in-house by my company, Navigator Consulting Group, based on our own experience and frankly speaking, our own mistakes in the consulting business.

We all learn from error, and hopefully this experience and the methodologies which have emerged from it will help you in improving or understanding the financial dimension of your own consulting work.

This approach is applicable to individual consultants working on projects, as it is to larger consultancies deploying large project teams.


Specific Project Results or Intellectual Property Created

 

A Consultant's Guide to Profitability Part 1: Understanding Total Project Expenditure

 

In order to arrive a project yield, or project profitability, we need to calculate all income derived from a specific client for a specific project, and from that income subtract all direct and indirect expenditure which is necessary to implement that project.

While simple in definition, this is often difficult in practise, since most consultancies do a bad job of recording project expenditure, while their project income is a result of contracting and invoicing and usually not open to debate.

We have to remember that each consultancy has fixed costs: staff, rent, utilities, telecommunications, training, bidding, etc. These costs have to be accurately modelled and a share thereof deducted from project costs (or assigned to project costs) in order to adequately cover annual operating expenses. This is much more difficult than it sounds, and will be the subject of a separate article.

I will illustrate the project yield approach using an example of a training programme my company, Navigator has contracted to deliver to one of our clients, a Chamber of Commerce & Industry.

This project example is a blended training and consulting project, based on 2 days of training, followed by 1 day of consultancy per corporate participant. The project takes place in two cities, meaning that travel costs are required.


Sectoral Keywords

  • Consulting
  • Professional Services

Functional Keywords

  • Profitability
  • Financial Management
  • Accounting

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