Growing faster and more profitably is what owners, boards, CEOs and CFOs of every professional services firm want. However, in private moments, many leaders admit to being frustrated and disappointed that they are not achieving these goals.
As the client and competitive landscapes change every year, is it possible to grow faster and profitably?
The answer is yes – if you address the biggest forces that impact profit and growth. This article will guide you to understand those forces. By doing so, you can uncover a profit growth formula that works for your business and your bottom line.
What is the difference between profitability and profitable growth?
First, we must understand the relationship and the differences between profitability and profitable growth.
- Profitability is a firm’s ability to profit from its current operations and assets. It measures an organisation’s revenue relative to its expenses and appears as the profit and loss statement.
- Profitable growth is about increasing profits over longer periods than a year. This will grow revenue and improve profit margins (the amount by which revenue exceeds expenses). Profitable growth is a more desirable outcome than growth for growth’s sake.
Profitable growth is about increasing profits over longer periods than a year. This will grow revenue and improve profit margins. Profitable growth is a more desirable outcome than growth for growth's sake.
10 things that affect growth and profitability
Businesses that grow profitably tend to focus on 10 forces that can drive positive change. The chart below summarises these as a force field analysis. It shows the forces driving change (above the status-quo mid-line) and those blocking change (below the line).
In the chart, the five forces driving change (green arrows) balance those forces blocking change (red arrows). This results in a steady state or equilibrium in any given period (grey horizontal line).
When the forces driving change exceed the blocking forces, an organisation can grow and become more profitable.
How to increase profitability and growth
1. Focusing on target market and profit levers
Focusing refers to maximising returns from a firm’s best prospects (i.e. its target market). It means pulling all profit levers (i.e. sales volume, price, fixed and variable costs) that impact clients in the target market.
2. Maximising the lifetime value of the ‘right’ customers
Retaining the “right” customer base for as a long as possible increases the profit per customer. This is because it reduces the cost of acquiring of new customers. It helps your business win new work, which existing customers refer, and you may be able to raise price as regular customers recognise your value. The “right” customers are those for whom your products and services are particularly well-suited.
3. Measuring customer satisfaction via market benchmarks
Benchmarking customer satisfaction is the surest way to know in what aspects of your service to invest. It takes the guesswork out of product improvement and training initiatives.
4. Tracking growth and profitability KPIs
Graphically tracking and sharing growth and profitability KPIs encourages your team to focus on these outcomes.
5. Reviewing your business model, including how to become more efficient via tools like artificial intelligence (AI)
A business model is the method by which a firm makes profit. This is in contrast with a competitive strategy which refers to how to beat the competition. Avoid the trap of “profitless prosperity” by ensuring you adapt your business model, especially by adopting AI tools.
Obstacles that block profitability and growth
6. Porter’s five forces of competition
According to Michael Porter, a renowned business strategy academic at Harvard, there are five forces impacting competition in business. We list these all together as contributing to the force of competition. These are:
(a) supplier power
(b) buyer power
(c) competitive rivalry
(d) the threat of new entrants to the market
(e) the threat of substitution (the extent to which different products or services can be used in place of your own).
Research gives leaders the data and mandate they need to effect material change in their firms.
7. Insufficient buy-in to profit as purpose
In a professional services firm, everyone must align with the business’ goals. If your people are not aligned with or supporting profit maximisation and growth, they will be like a sea anchor, dragging back progress while above water the ship looks fine.
8. Too many of the ‘wrong’ customers
These people are the opposite of the “right” customers as described in force 2, above. They are not well-suited to or served by your products and services. Some of them do not align with your business’ culture, goals and values.
9. Commoditised service mix
Professional services market is a competitive space. Many other professional services firms can offer most, if not all, of your services these days. In this environment, price will inevitably be a dominant driver of clients’ decisions on which firm to use. Discounting wars are certain and all firms are destined to be sucked in by the “commodity magnet”.
10. Too many wrong people on the bus
“Too many wrong people on the bus” refers to the now famous saying of Jim Collins, author of Good to Great. Collins used the metaphor to show that those not culturally aligned with the firm’s vision and growth strategy hold it back.
Beaton works with all sizes of professional services firms to generate profitable growth for their business.
We can help benchmark your services and identify advantage areas compared to competitors. We can also help you track the progress or success of your business strategy with sophisticated client feedback tools.
Contact us to discuss your options with a Beaton partner.