Profitability in Service Companies

Digital Management

At Modelical we have invested a lot of effort in establishing a digital process to manage our company. We have not reinvented the wheel, however, with time and care, we have managed to improve and grow the business year on year.

In Professional Service Firms the main product that is sold is the time spent applying knowledge and experience in solving customer problems. Measuring cost and value based on time and man hours involved is not ideal, as not every hour counts or delivers the same result, however, it is the lesser evil when it comes to tracking profitability and progress.

Each employee incurs a cost that goes beyond just their salary: it must include direct and indirect expenses, overhead to support employee salaries who are not fee-earning, leases, software licences, computers, marketing, downtime, among others.

Once the unit cost per hour of each employee has been calculated, specialists, technicians and managers can be assigned to the project depending on the task at hand, team availability, curriculum, dates and the customer’s budget.

Estimating the time a services project will take is often difficult, we will likely find deviations between the forecasted and the real hours spent on each task, however, having both a history and a log of previous project time estimates with the corresponding results will enable us to become better estimators and team managers. In addition, knowing the real cost and team availability from the outset will help us choose or bid for a project that best suits the structure of our company, which will indicate when we should grow, or god forbid, downsize as a team.

Spreadsheets have traditionally been used to conduct project management, register timesheets and tasks, but today there are advanced and easy-to-use tools that allow a real understanding of relevant KPIs.

However, the amount of data that a company is forced to deal with suggests a change away from the burden and inconsistency of spreadsheets. Let me be clear: Excel or G Sheet are wonderful apps, but they are not the robust choice when managing the resources and the financials of an entire business.

The alternative has an awful name: ERP, but is very powerful. An Enterprise Resource Planning solution allows mirroring and managing all the company processes, including not only the administrative and accounting stuff but also the view before, during and after each project.

Twenty years ago, it was difficult for a SME to implement a Digital Management System or ERP due to its cost and the required customization. Today, however, there is a wide variety of softwares that meet all budgets, companies and uses.

Any ERP system will inevitably add value to the company if, and only if used correctly.

In Modelical we use Odoo given its many advantages: As it is constantly developing , affordable, easy to use, scalable and customizable. Thanks to the latter we have been able to adapt our ERP to meet our needs, providing real – time project economic control.

¿How do we do it?

Once the project tasks have been established each one is assigned a specific time. Given that we know the hourly cost and consequently a task cost, this enables us to provide more accurate quotations.

We Plan the resources throughout the life of a project, our Odoo customizations allow us to get a planned cost (according to the quotation), a future cost (according to the planning) and a real cost (according to our employees timesheets) at any given time.

Managing the deviations between planned and real cost, we are able to see if our project is taking longer than planned, therefore establishing if it’s profitable or not, and finally to establish if we are budgeting competitively.

To budget our projects we estimate the cost and apply our margin. We plan the desired team according to its curriculum, which gives us the planned cost. Timesheets give us the real cost. Deviations between the offer and initial planning are taken into account for future quotations. Deviation between real cost and planned cost helps us to make right decisions and corrective actions.