Borrowed from the world of cycling, Marginal Gains refers to gaining an exponential overall improvement by maximizing performance across increasingly granular areas.  In cycling, every gram you reduce weight, and each small improvement in aerodynamics makes very little difference. But by relentlessly focusing on such things the seconds and minutes are shaved from a racer’s time - leading to victory. While better time tracking, or meeting protocols to save minutes on every meeting seem like small areas for gains, together, they add up to winning companies.

Understanding Professional Services Valuations

Valuation for a professional services firm at its most common is a formula of:

                  Total Valuation = EBITDA x Value Multiple

EBITDA is a firms overall profitability.  Value Multiple ranges from 3x – 14x and is a composite of a number of factors including the following (each of which we’ll dive into later.)

·       Scale of Revenue

·       Year over Year Growth %

·       Type of Service Offering

·       Scale and Commitment of Accounts

·       EBITDA %

·       Level of Differentiated Expertise

·       Experience/Quality of Leadership Team

By incrementally improving many different financial measures, you can a large improvement to overall profitability. 

Let’s take a company doing $10M in revenue doing $1M in EBITDA (10% EBITDA).  Assuming all other factors are normal, that company might command a 4x multiple or a $4M valuation ($1M * 4 = $4M.)

Let’s assume through a Marginal Gains focus we improve the business to $12M in revenue with $2.5M in EBITDA (20%).  Let’s say you got here by eight Marginal Gains initiatives each with only 1-1.5% EBITDA impact. Without changing any other aspects of the business, we might see this business valued at 6x or a $15M valuation.  You can see in this example how driving incremental performance improvements drives an exponential valuation gain.

Where to Start

There are four primary domains upon which a PS firm can focus

1.     Increase average bill rate

2.     Decrease average cost/head

3.     Increase utilization (or % of hours billed)

4.     Reduce non-billable / overhead costs

Under each category, there are initiative which a PS firm can undertake.  This playbook articulates specific initiatives and ideas that we have seen drive improved performance.  These initiatives can then be prioritized and mapped to different bullets:

Initiatives

 

Proposal Revamp

 

 

Financial  Focus

 

1.     For increasing average bill rate, you can:

·       Sell to companies with bigger budgets

·       Sell to a bigger budget holders (title)

·       Sell around a strategic result (vs. a “competency” sell)

·       Sell differentiated competency

·       Increasing your rate card (and accepting more loses)

2.     For decreasing your average headcount cost you can:

·       Hire in less costly geography

·       Sell more maintenance 

·       Leverage methodologies to enable/hire lower level staff

·       Change service mix to using cheaper resources

·       Reduce/convert contractor spend

3.     For increasing utilization you can:

·       Sell more T&M “projects”

·       Sell more maintenance per project

·       Create more staff augmentation selling channels

·       Structure overage clauses

·       Improving staffing process to reduce downtime

4.     Reduce non-billable / overhead costs you can:

·       Use systems to replace overhead personnel

·       Cut overhead personnel

·       Cut bad debt

·       Cut sales expense (pitch costs, marketing spend, etc)

·       Cut travel and entertainment spend

 

 

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