Case Study

Improved profitability in the service business sector

To illustrate how we apply our approach, here is a real-life case study, specifically carried out for a client in the service industry.

Service business sector: case study

In this particular case, the client in question, despite acceptable profitability, had the impression that the gross margins in their financial statements were always lower than they estimated. Despite several internal trials, the company was unable to find the key elements to understand the situation.

A diagram of our approach

Our approach is unique due to the scope of its field of action, enabling us to study all key points that are characteristic of service companies. When tackling an issue, we ensure that nothing is overlooked and weaknesses are identified so that more efficient processes can then be implemented collaboratively. When you opt for IDEA Strategies, our team effectively focuses on your most glaring issues, whatever they may be. With a comprehensive vision, our team has the ability to highlight your strengths and weaknesses in order to concentrate our efforts on them.

The final diagram will have to present the critical points worked by Michel for this case

Company analysis and evaluation

Of course, before taking any action, the shortcomings within your service delivery processes must be determined. Various tools and analyses help identify weaknesses. Such a strategy makes it possible to draw informed conclusions that facilitate the prioritization and implementation of actions that will optimize service delivery and work management.

Study of a revealing indicator: profitability by project

In this case, our analysis began with a study of the different variables that can influence the real profitability of each project. Here are the questions we asked ourselves relevant to four factors that can influence profits.

  • Is the project estimation accurate?
  • Was the project implementation in line with the estimate and carried out effectively?
  • Was the project profit margin enough to cover its share of fixed costs?
  • Have the contract extras and deviations been identified and billed accordingly?

To present the results visually, we then developed a table grouping profitability by project type, profitability by customer, profitability by valuation and profitability by project manager.

 Analysis of actual profitability by project: revealing data

The management team’s analysis of this table led to the following conclusions:

  • Projects with AAA valuation were not profitable enough. They did not cover their share of fixed costs. This client is very demanding. They offer big contracts, but add tasks along the way without paying for the extra costs incurred.
  • The company was very efficient at completing type A projects. In this case, how could sales of this service be increased to further benefit from these contracts?
  • The ongoing CCC valuated project seemed to be moving in the wrong direction. In effect, the billing was lower than the work done up until that point.
    • In discussions with the accounting department, management realized that several project managers were not submitting their worksheets on time. This oversight delayed billing and prevented management from understanding what was happening and asking the right questions in a timely manner.
    • As no procedures were in place to enter invoices into the accounting system, the value of work in progress was inaccurate and caused significant variations in the profitability of the business according to their monthly financial statements. This uncertainty in company figures delayed management decision-making and action-taking. It was also the cause of unpleasant surprises when the company’s annual financial statements were published.

Service company: responding to the issues

Equipped with this information, the management team could identify weak links in its value chain and improve its team performance.

The actions taken:

  • Company realignment towards high-margin clients and projects.  
    1. Identification of clients with high demands and low profitability.
    2. Identification profitable clients and project types.
    3. Goal setting by client and project type in terms of percentage of sales. Meeting with the business development department to ensure its implementation (repositioning of website keywords, participation in trade shows related to profitable projects and clients).
  • Establishment of a monthly procedure for the work in progress:
    1. Establishment of a simple and standardized form for all project managers.
      1. The percentage of work remaining to be done (labor and material).
      2. Billing of all work done according to the reference date (for example at the end of each month).
    2. Insertion of data into the profitability analysis chart on the 4th of each month.
    3. Monthly meeting (the first Friday of the month) between project managers and upper management to discuss projects that are going very poorly and projects that are going very well.

IDEA Strategies for your service business: a step in the right direction

These concrete measures enabled the company to review its way of doing things, leading it to realize that maximum diligence when evaluating project status could increase its profitability. The company has also been able to remark its effectiveness on certain projects, encouraging it to focus on certain contracts in order to increase its profits.

The IDEA Strategies team was able to breathe new life into this business by capitalizing on its strengths and offsetting its weaknesses to then take action focused on these specific aspects. When doing business with us, you too can benefit from a personalized service tailored to the specific needs of your service company.