Ask any business leader what is the ultimate expectation that they have from their business. Undoubtedly, all of them expect their business to be profitable. Getting new business and catering to it makes sense only when it is profitable. For the IT services industry, profitability is something more than just an outcome. It is like their breath. You can survive only if you are profitable. That being said, often in the firefighting and the daily rush of the things, profitability goes to the backseat. Individual tasks and deliverables become more important and profitability goes out of sight. In this article, I will be answering some key questions about profitability: Why do companies lose track of their profitability, why remaining profitable is important, and finally, how they can be a profit driven organization.
Why do companies lose track of their profitability?
They don’t see it all the time
What we don’t see, we cannot move. If people are not reminded of the goal constantly, they tend to forget it. In IT services companies, everyone knows that profitability is important but they don’t get to see how much profitable they are at any instant.
This leads to actions and decisions that keep hampering profitability finally leading to what I call the death by a thousand cuts.
They don’t fully understand all the factors that affect profitability
Profitability is like a feather floating in the sky. There are so many factors that can drift it away one way or the other. Your terms of delivery, leave management, efficiency of hiring process, attrition, incomplete timesheets, unlogged expenses… the list actually is quite big. When the individual decision makers in the company take a decision, they do not know how it affects the profitability of the project. This lack of full understanding blurs the line between actions and their impact on profitability.
Lack of leading indicators
When do we generally come to know that a project was delivered at profit margins much below the expected number? Most of the times, it will be weeks or months after the project has been completed. This happens because we depend on lag indicators like post project reviews etc. for measuring profitability. A lead indicator gives you real-time figures. Most of the IT services companies do not have such a lead indictor to monitor and highlight profitability as the project progresses. This leads to profitability getting literally forgotten by the teams.
Why remaining profitable is important?
Profitability helps a company in many ways; more ways than we can imagine. Here are some key benefits of remaining profitable:
Securing best talent: Talent costs are increasing. The acute attrition rates that IT industry is witnessing is a testimony to ample of opportunities out in the market. Only profitable companies can attract and retain the best talent.
Resilience during tough times: Being profit rich brings with it resilience. Is your company prepared to digest a quarter of low business? Or what if your major client shuts their business down due to some unavoidable circumstances? Being profitable gives you the required cushion to sustain such months of winter.
Budgets for expanding operations: The present market volatility is forcing companies to expand their operations to avoid dependency on a single client or market. This kind of expansion is possible only when companies have profits to fund it.
Budgets for research and new product development: Technological disruptions have made lifecycles of products short and unpredictable. Companies need to investing in research to come up with new solutions. Needless to say, unless a company is profitable, such resource heavy projects are like a dream for it.
Increasing the valuation: Many times, the goal of the founders is to achieve a lucrative valuation and looking for getting acquired. Interestingly, your profitability greatly impacts your valuation.
Especially post the pandemic, companies looking to acquire are very much concerned about the profitability as against the valuation. Even a small change in EBITDA has huge impact on the valuation.
How to monitor the profitability?
The earlier part of my article highlights how profitability actually equals the very survival and growth of a company. The more important question is, how to monitor profitability? Here are some factors to consider while monitoring the profitability:
Monitor real-time: As we discussed before, lag indicators do no good. Profitability has to be monitored real-time and for that, you need lead indicators. To be even more precise, lead indicators will tell you how an action will affect the profitability even before you act!
Multiple factors affecting profitability need to be brought together: As we saw earlier, actions from various persons from seemingly unconnected departments affect the project profitability. Once has to bring together all these factors to create an all-encompassing dashboard.
Profitability has to be linked with decisions and actions: If a hiring manager can see that hiring a particular candidate at a particular salary can make a dent in the profitability, she will think for minute and at least try to find some other way out. But what if she cannot see this impact in the first place? This disconnect between actions and profitability should be addressed.
What to do?
Instazen solves this exact problem. It brings together all the factors that affect profitability. It enables team leaders to act based on full visibility and information about how their decisions are going to affect the overall profitability of the project. Drop me a one liner and we can discuss more!