Consulting firms often face a common challenge - fluctuating profits and the feast-or-famine revenue cycle. I recently had the pleasure of speaking with Nathan Young, an operations expert who works with consulting firms, just like I do. Our conversation covered the interplay between operations and strategic growth when it comes to consistently improving profits.

It Starts with Margins

As Nathan pointed out, many firms miss the mark early on when it comes to target margins. They land that first client just to get the business running, not thinking about long-term profitability. Before you know it, you've promised services at slim or nonexistent margins. As you add team members and scale, you suddenly realize your pricing model won't work anymore.

The key is defining target margins upfront, ideally aiming for a 100% markup. This gives you room in the budget to deliver quality work as well as fuel growth activities. It also affects decisions like whether you can bring on senior talent versus stretching your teams too thin.

The Danger of Getting Dragged into Dependency Work

When it comes to the work itself, firms often get pulled down the "dependency chain" - taking on project after project that stems from, but isn't, their core offering. You start with website design but end up needing to provide copywriting, branding strategy, product development, and more. Now you're delivering an array of services but at mediocre quality and hidden expense.

Deeply understand the dependency work involved in what you do. Identify partners you can recommend for complementary services. And grow thoughtfully into new offering vs. saying yes to everything.

And when it comes to internal growth work, the same problem occurs, but with different consequences. You want to redo your website, but miss important steps like getting your positioning nailed down first.

Investing in Growth Requires Margin

Generating new business requires investment, whether it's hiring a marketing person, buying media, or implementing sales technology. But adequate margins give you the budget for growth while still delivering profit. Nathan explained how he calculates the investment available from a new contract based on a 50/30/20 rule - 50% goes to delivery, 30% to fixed ops expenses, 20% to profit for future growth activities.

The Journey is Emotional Too

Improving profitability often involves difficult decisions like letting go of certain clients or team members. As leaders, we must acknowledge and plan for the emotional impact this brings. An aware, compassionate approach sets the stage for successfully implementing financial changes.

Balancing operations and growth is certainly no easy task. But as Nathan and I discussed, one enables the other when done right. With clear margins, quality delivery and smart investment, our firms can consistently increase our profitability.

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Ready to discuss how you can build a sustainable growth system? Reach out to schedule a conversation.