In the relentless chase for new business, Professional Services firms often neglect to plug the hole that is revenue leakage, which can turn a seemingly profitable business into a loss maker.
What is revenue leakage in Professional Services?
Revenue leakage happens when you don’t receive the income you should receive for the work your team puts in. There are several ways in which this can happen:
- Delivering more on a project than what was agreed to
- Escalating costs on a fixed price project due to inaccurate estimations
- Invoice rejections due to lack of dependable time and effort tracking software
- Delay in invoicing clients due to slow finance and accounting processes
- Scope creep that increases workloads without a change request process to bill the client for the additional work
In most cases, this is revenue earned by the business, but there are gaps in collecting what is owed due to the systems and processes in place. This is particularly a challenge in the Professional Services industry where it becomes difficult to track revenue leakage.
Why is revenue leakage important?
Tracking revenue leakage should be a priority for growing Professional Services firms. Without it, the firm will continue to show high profitability and growth on paper, while the inefficiencies get hidden until they become too big to ignore.
Compare two businesses, one where revenue leakage is tracked and plugged and the other where there isn’t enough awareness of the problem. The former will have efficient processes and systems with a better bottom line. Organizations can leverage such systems and platforms to be more competitive and build on its strengths to grow rapidly. The other business will find challenges in different areas of the business, and it will become difficult to manage the finances.
A business that has revenue leakage problems will find its leadership dousing one fire after another and find ways like borrowing at high interest rates to manage the operations. The result is slower growth rates or stagnation until new processes and systems are implemented to correct the situation.
The first step you can take to prevent such a situation is to identify the reasons why revenue leakages happen and assess current processes and workflows to see if there are gaps that need to be filled.
What causes revenue leakage?
There are several reasons why revenue leakage happens.
- Manual processes with Excel being used to track time and billing that creates gaps
- Consultants don’t bill clients for all the work
- Ad-hoc sales processes with pricing and discount decisions left to individuals instead of standardized processes governing those decisions
- Inefficient billing processes that lead to inaccurate billing and consequently invoice rejections and rework
- Delays in invoicing clients that lead to delay in collecting payments
- Inaccurate estimation of scope of work and time to deliver resulting in project overruns and overshooting of budgets
- Lack of visibility on project delivery, client information, and invoices by client that leads to underbilling or overservicing
- Multiple systems and siloed data that leads to inaccurate pricing
- Inadequate client follow-up and collections mechanisms to receive payments on time
Once you understand how to track revenue leakage, which is the difficult part, the next step is to identify ways to prevent it.
How to prevent revenue leakage
Revenue leakage can be prevented when you have standardized processes and the right software to support those processes. For a specific issue like invoice rejection, for example, if you haven’t considered the rework as revenue leakage, then identifying it as one, is the first step.
Check how your team creates the Scope of Work and the Service Level Agreement (SLA). Then check how time and billing is tracked and identify the gaps. If you are able to accurately define what services you will offer to the client and then have accurate measures to track time and bill against that time, then there are very few chances of invoices getting rejected.
If you are looking for a Professional Services Automation (PSA) tool to help manage your projects more efficiently and prevent revenue leakage, you can consider evergreen from sa.global that is purpose-built for the Professional Services businesses.
Tags:
