Anticipating the rollercoaster effect
In our parallel report The Future of UK Environmental Consultancies we assess the current state of the sector, showing key trends and forecasts for the future.
It is a positive assessment. But a glance at the financial results of environmental consultancies (ECs) in the UK shows that profit margins vary widely in any given year. That’s hardly surprising perhaps, given the complexities of running such operations. Overall, however, it’s a rosy picture.
But ultimately every sector relies on the health of the overall economy for it to thrive. So is there anything that can mitigate this effect to some extent? What are the fundamentals of working in the EC sector, and can they shed light on best practices? How can an individual EC capitalise on opportunities in the good times yet prepare for the bad times, reducing risk?
We looked for advice from a UK source that assesses EC profitability from the specialist perspective of valuing such consultancies for mergers and acquisitions purposes. This is because it gives an interesting viewpoint, objectively assessing the effect of actions consultancies take to protect and improve profitability irrespective of market conditions. It translates into ideas for risk reduction and increasing equity value.
With that in mind we contacted Tony Rice, partner of Equiteq, who writes that even when the state of the economy does take a dip, environmental consultancies have some control over their fate and can act to alleviate many of the challenges faced by the sector. As he puts it, it means that at such times you do not need to be ‘in a position of vulnerability, constantly buffeted by events.’
Assessing a company’s robustness is key. Rice believes that many ECs are ‘technically-led consultancies, often dominated by individuals who possess superior technical skills but whose business skills are not sufficiently developed’. He accepts that superior technical advice is what clients want, but more is needed. ‘You want a business that offers the best of both worlds – a reputation for technical excellence and to be better at business development than your competitors.’
Rice talks about the ‘Eight levers’ he uses to benchmark companies against best practice.
To get closer to the front line, we met with senior managers of three UK environmental consultancies and discussed profitability issues with them in some depth.
It turned out to be a subject of particular interest to one of them (ECUS, a five-location multi‑disciplinary environmental consultancy) because over several years…
“…profitability was quite elusive. Everyone was working hard, but profits were hard to materialise.”
It’s a famous refrain. Here was a consultancy that was busy year after year. They had a good reputation, clients valued their expertise, and they had a strong team. So an outsider would assume that business for them was very good. One problem: profits stubbornly did not materialise.
The actions they then took:
Sara’s findings are given below, in her own words.
After the experience, Sara went a step further and came up with Four Fundamentals for Profitability which we also outline below. We use those fundamentals as a framework for showing the findings we received from the other two ECs, who also chose Synergist.
We pass on their comments here verbatim in the belief that others in the sector can benefit from what they found.
The three contributors
We are grateful to them for their time in volunteering these contributions.
Utilisation rates are a cornerstone of project-based businesses in the same way that occupancy rates are a cornerstone of the hotel sector.
Discovering the facts of your utilisation can be a revelation to those running the business. So many insights can flow from it, such as:
Knowing the answers to these – as opposed to having to guess – puts you back in control and prompts the actions you need to take to improve profitability. In the words of the contributors:
“Without a proper system you simply can’t know your true utilisation percentage. When we installed Synergist we were in for a shock: In some cases, our utilisation was more than 10% worse than we had thought. That makes a huge difference.” [ECUS]
“With consultancies like ours you need to be on top of utilisation in order to drive and manage bottom-line profitability. You need to be in control of time and able to manage it. You need to know exactly how busy you are, and that has to be directly linked into the core of the business.” [Large UK environmental consultancy]
“Knowing how many unallocated hours we have in any one month is very powerful and is a great asset when it comes to good staff planning and resourcing.” [ECUS]
“Consultant Utilisation reports have proved particularly useful as a key indicator in monitoring the business performance as a whole and indeed for individual consultants." [UK environmental consultancy]
You obviously need to know what’s happening in your consultancy at all times. That doesn’t seem a lot to ask, does it? But in a busy, complex, multiple-project organisation it’s impossible to know what’s really happening if all you have at your disposal is a non-integrated system such as a mix of spreadsheets and individual apps.
Perhaps the best way to think about it is to consider what it would feel like if you were the client and a consultancy was a service provider to you. If you queried an invoice item, or wanted a project progress update for a meeting right away, you would expect the answer quickly and without fuss. Process efficiency and transparency are the only way.
What sort of visibility should you expect from a system? Here’s an initial checklist to give you an idea.
After implementation, this is what ECUS said:
“Profitability is very clear now, by project, by sector, by client – we can report on a variety of key categories.”
Transparency is a big topic. The consultancies we met mentioned three particular aspects of it in particular:
a) Transparency and hiring decisions
With skills shortages and widely varying workloads being such big issues, there is always the temptation to hire early.
But do the facts always substantiate it? Without a joined-up system it is notoriously difficult to be sure every time.
“Sometimes a team asks us to hire a senior consultant for them. But the Synergist data can show us that we actually need someone in a more junior role. That makes a huge difference to our bottom line.” [Large UK environmental consultancy]
“Synergist shows exactly what the capacity is in each of our teams. It lets us analyse, improve and challenge efficiencies, rather than simply leaping into hiring every time.” [Large UK environmental consultancy]
“We [previously] couldn’t give team managers the information they needed to manage their staff as well as they wanted, or to make well-informed decisions.” [ECUS]
"We have so much more information at our finger tips with Synergist. And without it we would need double the number of people to administer." [UK environmental consultancy]
b) Transparency and speed
Everybody’s working hard, but are they always working on things that deliver results? Or is it possible that your team is using up too much precious time
“A lot of a consultant’s time can be taken up with routine administrative tasks. Synergist removes a great deal of this from them, enabling the teams to focus more of their time on their clients and projects.” [Large UK environmental consultancy]
“Synergist saves us a lot of time. The previous FD had to spend two and a half days just preparing the WIP, for example. That’s all in the past now. The time taken to complete our invoicing has greatly improved, not to mention reducing the time spent validating the data.” [ECUS]
“The drafting of invoices is now quickly produced by the project managers. Invoicing is a lot easier now, such as pulling together all the time that has gone into the projects, doing the calculations, creating the drafts and so on. It’s a great deal faster.” [UK environmental consultancy]
“The integration with Sage accounts has assisted with recording sales, leading to quicker debtor analysis and debt chasing, therefore improving cash flow for the business.” [UK environmental consultancy]
And what of those Board meetings at ECUS? In Sarah's words:
“Solving the profitability problem was key. Now, our Exec team can go to the Board meetings every month and say ‘We’re getting it right!’ The list of things to sort out gets smaller every month. We’re down to finessing things now. There are no more instances of us not understanding profitability issues. That’s all behind us.”
The assumptions we make in business and in life are mostly hidden from us. We are unaware we are making them, which makes them dangerous.
We think we are simply making clear observations and taking obvious decisions, so naturally we believe we are right. We defend those decisions, and if someone else comes to a different viewpoint we try to prove them wrong. But, all along, our assumptions could be entirely wrong.
What can break this cycle? Clear facts. When confronted with the unmistakeable truth we are forced to do a rethink. Doing this can make the difference between a struggling consultancy and a profitable one.
“You can’t run a complex business properly unless your assumptions are being constantly tested. And the most effective challenge to assumptions is with evidence – clean data. So accurate real-time information on projects, clients and profitability is crucial.” [ECUS]
“Transparency exposes wrong assumptions. Synergist delivers information that gives us confidence with which to challenge assumptions, both for management and the teams.” [ECUS]
Gut instinct is one of the most powerful tools you have. It is your intuition, and in so many circumstances in life it serves you brilliantly.
But it sometimes gets it wrong, leading to decisions that threaten hard-won profitability. The co-founder of a successful project-based business once told us:
"Synergist lets us make informed decisions. We are given the facts. Not all facts are enjoyable, but you need them anyway. It's like using bathroom scales. You might not like the reading, but it is objective so it helps you make decisions."
If your consultancy is very busy, your gut instinct tells you that everything is fine.
“You need to accept that being busy isn’t the same as being profitable. People can be busy on the wrong things.” [ECUS]
What impressed us most by what ECUS did was their focus on the big issue and their systematic approach to solving it using the new evidence in front of them. Each action they took improved things a little, which gave them and their Board the encouragement they needed that they were on the right track. This is what turning profitability around looks like.
And what of Tony Rice’s ‘Eight levers?’ Can Synergist help with those? Yes, with seven of them.