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Why maximizing net margins matters more now than ever for IT services companies?

Updated: Jan 24, 2023

This article is the 1st among the series of 4 articles aimed at helping IT services companies increase their profitability.

Remaining profitable is critical for any business. For IT services companies, the profitability is linked to optimum project net margins. Profitability is not just a concept. It reveals a lot about various facets - efficiency of internal processes, harmony within the different teams, alignment of every individual with the short and long term goals of the organization etc. Profitability of a company allows you to look through it and plays a big role in the valuation of any organization.

Maximizing net margins should be the topmost priority of any IT services company in present times. Increasing volatility, increasing competition, complex cashflows are a few from the long list of parameters that pose existential threat to IT services companies. The bigger an organization grows, more susceptible it is to these threats.

Every organization has some mechanism to keep a track of its net margins. When the organization is small, a frugal solution like Excel is enough to keep the check on the things and course-correct. As the organization grows, so does the complexity of business. Instazen’s study of IT services companies at various scales shows that as companies scale up, they find it difficult to reach their true profit potential. The number of parameters affecting the profitability increases exponentially and that’s when organizations start looking beyond Excel to monitor and improve their profitability.

In this series of four emailers, sent over next couple of weeks, we will be sharing information, tips and best practices which IT services companies can follow to improve their financial performance. The series with conclude with a webinar with Rahul Chaudhuri, co-founder of Instazen.

Here is the first article in this series where we talk about why maximizing profit potential should be the topmost priority of IT services companies.

Challenges faced by IT services companies today :

Before we talk about the importance of net margins, it is important to understand challenges of the present and the near future. As our study indicates, when an IT services company achieves its full profit potential, it can tackle these challenges in a far better way.

Increasing cost to hire: Finding and retaining talent is becoming challenging. Even growing, well known and highly recognized companies are finding it hard to get the talent that they need.

Securing and retaining talent is one of the biggest challenges that IT services companies face today

Increasing competition: What was once a ‘deep blue sea’ has now started becoming a red sea. Increasing competition might not be sensed as a challenge today but in a few years, it will definitely be a point of concern.

Barriers to scale up: Unknowingly, what gets company till point A becomes a hindrance which prevents them from moving to point B. Systems, processes, tools which helped you get where you are will not necessarily take you to your next milestone; on other hand, they might prevent you from scaling up further. Getting rid of these barriers and finding the mechanisms that will help grow further is a big challenge that IT services companies face today.

Volatility: No one wants to see their pipeline dry suddenly due to volatility in the market. We are going through uncertain times and seems like this uncertainty is the only certain thing only for next few years. Withstanding a few cycles of rough weather can be a big challenge for IT services companies who are not well prepared.

The list can grow much longer but that’s not the point. The point is to sail ahead of these challenges.

Why net margins are very crucial for IT services companies?

As we discussed earlier in this article, profitability is not just a number. It is the biggest advantage any company could have over its competition. Consider following pointers as against the challenges we discussed earlier :

  • Being profitable allows you to attract the best talent by paying them well and creating better work culture.

  • Having more profits enables you to get equipped with better tools and processes which can help the organization deliver on time and win trust of its customers. Happy customers are very unlikely to leave; rather they might be wiling to pay a premium to stay.

  • Higher profitability over years means that the organization is weather proof and can sail through rough weather comfortably.

  • Increased profitability is an indicator of harmony within the organization. As the organization moves towards profitability, the processes become leaner and firefighting is eliminated. This dress up the time of leadership to focus on growth.

We hope you find this article helpful. Instazen believes that at the heart of a harmonious society is a successful enterprise. Please feel free to get in touch with me at abhijit[dot]rao[at]instazen[dot]com to know more about increasing the profitability of your IT services company. I hope you will stay tuned for our next story!

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