Whether or not you are yielding a net profit determines your viability in your market and whether you can stay ahead of the competition — in many ways, whether you can continue to exist at all.
“In most B2B and B2C companies, we’ve found that 10–15% of customers contribute virtually all reported profits, and one-quarter of this group produces the lion’s share of that amount,” Jonathan Byrnes and John Wass write in the Harvard Business Review.
At the same time, while major clients should certainly factor into your project profitability analysis and contribute in a large way to your overall business strategy, there are many components that lead to project success — or failure.
Profitability is critical
Unless you operate a nonprofit, profitability plays a crucial role in your organization’s ability to thrive and prosper. Whether or not you are yielding a net profit determines your viability in your market and whether you can stay ahead of the competition — in many ways, whether you can continue to exist at all.
Many people depend on project profitability: your clients, your employees, and your stakeholders. So, for every project you undertake, it’s absolutely essential to be able to estimate and measure this value in order to determine what it will contribute.
How to increase and measure profitability
1. Use tools and software.
No longer are the days when you have to write out a profit and loss report (P&L report or P&L statement — calculating your expenditures, cataloging your business’ financial statements, predicting your gross and net profits, and so on. This and other key tools can exist and be generated automatically in business intelligence software, an umbrella term describing a range of technologies to help you manage your data and important information.
Using this software, you can automatically project profitability, costs, expenditures, and other values. Many tools come equipped with dashboards and reporting features, which will allow you to more accurately project and evaluate profitability — no spreadsheets needed.
2. Look at the big picture.
Rather than focusing on the small details, look at the big picture. In this case, that means considering how each project, initiative, and undertaking contributes to your overall business profitability.
The details do matter, of course, as does each individual player. But as a project manager and/or business leader, you must not think in terms of small steps but larger, overarching decisions and how they impact your organization in the long term.
3. Look for “showcase project” opportunities.
Byrnes and Wass point to showcase projects as the ones that will yield you the greatest profit and contribute the most to your bottom line. These, they write, are “arrangements in which a supplier fields a dedicated, multi-capability team to partner with these customers’ counterpart teams to uncover new opportunities and respond to emerging opportunities and risks.”
Such projects are opportunities for both partners to increase profit and solidify their reputations — they’re mutually beneficial. They will help you sustain smaller, less profitable projects, adding overall value to your organization and vision. They will also enable you to transform and scale your business.
Undertaking too many showcase projects will overwhelm your team and tax your resources, so be selective when investing in these opportunities. Still, having a handful in your repertoire could very likely give your organization a much-needed boost.
4. Be realistic about risks.
Projects always include risks — and if they don’t, then you probably won’t realize much of a profit, monetarily or otherwise. While you’re still in the planning face, you must incorporate risk management into your strategy, considering what the major threats are to your project’s success. They will vary from project to project, but you will almost always face competition from other providers in your space, among other obstacles.
The project manager, along with team members with expertise, should anticipate the risks associated with the undertaking and determine how they will manage and account for them in order to overcome them.
Billing and collecting are tedious tasks, but they are necessary ones. While many clients and customers will be reliable, this is not true of everyone — so you must be proactive about collecting.
According to a report by the Project Management Institute (PMI), “Project managers are often uncomfortable discussing money with clients. It is a PM’s job to ensure all allowable charges are billed accurately to the client and that invoices are paid promptly. The project manager must understand the billing procedures in his/her own organization as well as the payment procedures of the client.”
Determine your billing procedures, and standardize the process for all projects. This will help ensure that you are paid promptly. Moreover, incorporate other factors, such as scope creep — additional work that is not outlined in the original requirements and “creeps in” along the way. They can add to costs, so account for their possibility early on.
6. Know when to let a project go.
Many projects simply don’t succeed due to any number of factors. Perhaps resources are stretched too thin, or the project has extended far beyond its original scope. Or, you don’t have the manpower to complete the initiative. Maybe you’ve realized your organization simply isn’t realistically capable of pulling it off.
Every project management must recognize and understand if and when it’s time to pull the plug, however invested you and your team are in the process. This is an unfortunate but real part of the job — and one that has a meaningful effect on profitability.
Once you’ve completed a project or determined that it’s not viable, you’re not finished. You and your team still need to assess what went well and what could go better in the future. This will aid you with both estimating and maximizing project profitability for the future.
Assess all reports, KPIs, and metrics you have to determine whether you’ve met your goals, Additionally, consider the process. Did everyone assume their appropriate role? Did they carry out their responsibilities? What were the hiccups, and how could you have better anticipated them? These are just some of the factors you should reflect on.
Every project is different, but you will find that each of these elements will almost certainly play a role — and they will serve you well in the future.