The importance of measuring cost to serve in professional services

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Measuring ‘cost to serve’ in professional services is of the utmost importance when it comes to sustainable growth and profitability. Cost to serve refers to the comprehensive analysis of the resources, efforts, and expenses incurred in providing a service to your clients. In professional services, measuring cost to serve plays a vital role in optimizing profitability, and has significant impacts on decision-making and operational efficiency.

However, many professional and business service firms have rudimentary or non-existent ability to measure their own cost to serve. Philip Biermann and Tom McClure, Professional Services experts at Simon-Kucher, have compiled the most common questions they receive when working with a new client to determine their cost to serve, and offer strategic advice to optimize their pricing strategy.

My company has not invested in monitoring cost to serve – should I be concerned?

Measuring cost to serve is essential for companies to make informed decisions and drive continuous improvement. It enables companies to align their pricing strategies, assess profitability, evaluate performance, and enhance operational efficiency, ultimately contributing to their overall success and competitiveness.

Your company will lack a defined and aligned pricing strategy: Measuring the cost to serve is crucial. It determines client-serving costs, enabling pricing that reflects value and ensures profitability. This analysis prevents underpricing, which preserves profit, and overpricing, which prevents client deterrence. Professional service providers can always benefit from cost analysis when establishing competitive pricing strategies. It creates a sustainable pricing structure, which balances client satisfaction and business profitability.

Your company will struggle to properly analyze profitability: Measuring cost to serve provides insights into profitability, identifying high-value clients, services, or projects. This analysis prioritizes resource allocation, investment, and client retention by focusing on profitable areas. It evaluates client profitability, enabling relationship management and increasing investments in high-value clients. It identifies unprofitable or low-value clients, which aids decisions on retention. Cost to serve analysis supports profitability, resource allocation, and stronger client relationships based on value understanding.

Your company will not be able to effectively evaluate performance: Cost to serve analysis is vital for performance evaluation and decision-making. It compares actual costs to budgets, allowing corrective actions. It sets realistic targets, monitors financial health, and identifies areas to improve. Additionally, it evaluates profitability of service lines, aiding in strategic decisions like expansion or resource reallocation. It supports data-driven decision-making, offering insights into the financial impact of options such as market expansion or technology investment. With a comprehensive understanding of costs and returns, companies can make informed decisions aligned with their objectives.

Okay, you’ve convinced me that this is important. Now what challenges will I face?

Measuring the cost to serve in professional services can be challenging due to several factors. Here are some common challenges we see with professional and business services clients:

Poor data availability and accuracy: Obtaining accurate and comprehensive cost data in complex service environments can be challenging. It involves collecting data from various sources, including personnel, time tracking, expenses, and overhead costs. Tracking time and effort accurately is time-consuming and prone to errors despite the availability of automated time trackers, potentially distorting resource utilization understanding. Finding the right balance between granularity and practicality is crucial. While detailed cost breakdowns offer valuable insights, excessively granular data can be difficult to manage.

Complexity of service offerings: Professional services involve diverse offerings and projects with varying scopes, durations, and resource needs. Attributing costs to individual projects/services is challenging due to overlap and shared resources. Isolating and measuring the true cost of serving clients or delivering services is difficult. Allocating indirect costs, like administrative overhead or support staff, requires careful consideration and appropriate methodologies.

(Lack of) integration with financial systems: Integrating cost-to-serve measurement with existing financial systems and processes can pose challenges. It may require implementing appropriate cost accounting methodologies, integrating data from different systems, or developing custom reporting capabilities.

My company is up to the challenge. How should I think about execution?

Addressing these challenges requires a systematic approach to data collection, accurate cost allocation methodologies, robust time tracking systems, and continuous monitoring and refinement of cost measurement practices. Your company can better measure cost to serve by:

Develop standardized cost allocation methodologies: Develop clear and consistent methodologies for allocating indirect costs to client engagements or service lines. This ensures that costs are assigned accurately and reflect the actual resources utilized. Methods could include activity-based costing, allocation based on time or effort spent, or usage-based allocation for shared resources.

Crucial step: chase good, not perfect. An 80/20 solution will deliver the value without creating a burden on your teams.

Engage cross-functional collaboration: Foster collaboration between finance, operations, and client-facing teams to gather valuable insights and ensure a comprehensive understanding of cost to serve. Encourage open communication and collaboration to share knowledge, validate assumptions, and refine cost measurement practices collectively.

Crucial step: pilot any planned rollouts with a select group of champions.

Regularly review and refine cost measurement practices: Continuously review and refine cost measurement practices to enhance accuracy and relevance. Periodically assess cost allocation methods, review data collection processes, and refine cost models based on feedback and evolving business needs. Regularly validate the accuracy and reliability of cost data through audits and cross-checks.

Crucial step: close the loopholes that allow teams and individuals to avoid properly allocating costs to their projects.

Establish comprehensive time tracking and cost accounting systems: Implement efficient time tracking and cost accounting systems to measure effort on client engagements. Encourage consistent and accurate time recording, providing guidelines and training if needed. Cost accounting should capture all relevant costs, including direct and indirect costs, and allocate them appropriately to client engagements or service lines, considering shared resources.

Crucial step: make it easy for employees to record and input their time!

Integrating cost measurement with financial systems: Ensure that cost-to-serve measurement is integrated with existing financial systems and processes. This integration enables easy access to financial data, facilitates data sharing and reconciliation, and ensures consistency between cost analysis and financial reporting.

Crucial step: tie compensation and incentives to true performance once your company has an accurate view of profitability.

By implementing these practices, companies can improve the accuracy, relevance, and usefulness of their cost to serve measurements. This in turn enables better decision-making, resource allocation, and strategic planning, which ultimately enhances profitability and operational efficiency.

Ready to determine your cost to serve and future pricing strategy? Contact our professional services experts today. We look forward to working on your unique challenges, and helping to create sustainable growth for your business.

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