Improve Scheduling Efficiency to Increase Gross Margin In Your Service Industry Business
Looking to improve EBITDA and increase gross margin in the service industry? Effective scheduling is the key to unlocking both, especially for small professional service firms. It can mean the difference between 20%, 30%, or even 40% EBITDA and barely making it by. However, many service-based businesses struggle with optimizing their schedules, often leading to inefficiencies that erode profit margins and inhibit growth.
This article will break down how to improve scheduling efficiency as a driving force behind your business’s profitability.
Table of contents:
Building Your 12-Month Pro Forma
The Scheduling Process
Release Valve 1: Flex Work
Release Valve 2: Surge Capacity
Incorporating Gross Margin Per Week into Your Schedule
Dealing with Customer Unpredictability
Quick Response Manufacturing
Building Your 12-Month Pro Forma
The first step lies in building a pro forma based on a conservative estimate: four days a week, 42 weeks a year. This model should accommodate approximately 80% of your total capacity, ensuring the business model works under most conditions. This way, your business will have a clear and strategic framework to move forward.
The Scheduling Process
We've helped improve scheduling efficiency for hundreds of organizations, and one thing is clear: nothing ever goes according to plan. Most times the schedule vs. actual for the week and the schedule vs. actual for the day is really tough to get right.
When nothing goes according to plan, you need to have release valves. And by that I mean, you need to know what you're going to do when things don’t go right. Start with having a clear idea of what winning is and incorporate flex work and surge capacity into your pro forma. This will allow for staffing optimization and reduce downtime to increase productivity.
Release Valve 1: Flex Work
When you find yourself with more time than you thought you were going to have, you need to have “Flex Work” that you can sprinkle in to fill the gap. For example, if a client cancels the day before, what are you going to do with that hour?
A prime example comes from the accounting world. The number one killer of the estimated vs. actual productivity and profitability per week is clients providing incomplete information. We have now fixed this in multiple accounting firms to mitigate disaster by ensuring that they have three times as much work per accountant sitting in the queue. Now anytime they run into this challenge, the runner takes over to retrieve the information while the accountant switches to work that is waiting to be done.
If you offer a service where you rely on people or information to be accurate in order to do your work, you need to have contingency. When you are selling time, every minute you lose in a day, you can’t get back. Yes, you can re-book the client in, but you can never get the hours of profitability back. It doesn’t take much in the run of a month to completely lose the month. Increasing gross margin in the service industry requires these agile responses to deal with unexpected changes in workload that could be costing you dollars.
The Cost of Lost Time
The run rate of most organizations I see when they first start working with us is an EBITDA or net profit of somewhere between 3% - 15%. With such a tight profit margin, losing two to three days of work in a month could effectively erode most of your profitability for that month. This is why it all connects from the business model to the scheduling process.
Release Valve 2: Surge Capacity
When you find yourself overbooked, surge capacity is crucial. Do you have subcontractors that you can bring in? Do you have an amount of overtime hours you can rely on? What are you going to do when the amount of work you need to get done in a week equals more hours than you have? Addressing these questions is key to staffing optimization and ensuring that your service does not falter under unexpected demands.
Outsourcing and Staffing
In professional services, a team is performing optimally when it can sell services faster than it can deliver them and has effective methods for outsourcing any excess work. The golden rule is to maintain staffing levels adequate for your typical workload (staffing to the valley) and use subcontractors to handle peak demands (contracting to the cliffs).
In the beginning, almost every organization I work with is slightly over-indexed on labour. They get caught paying 0.5 of a full time employee (FTE) more than they need to serve the work. I always want to see us get to a 30-40% surge capacity when needed without hiring immediately. Then, once I’m consistently running two FTEs over what I have in my group, I hire one FTE. My effective margin goes up on the jobs and my gross margin for the week goes up as well. What I never do, is get caught being over-resourced with not enough work. This is the way in which you scale intelligently.
Incorporating Gross Margin Per Week into Your Schedule
The most important metric you have in any organization is gross margin per week. Gross margin per file or gross margin per widget or product doesn't matter. It is what all of that adds up to over a week that matters. Analyzing gross margin this way helps link scheduling back to the business model and is crucial for those looking to increase gross margin in the service industry.
When I look at the scheduling process, I first link it back to the business model vs. the planned schedule. I then look at gross margin vs. the plan for the week in the aggregate. Then I look at the planned schedule vs. the actual on the jobs. And finally, I look for how we utilize the levers - the flex lever and surge lever - in order to maximize.
Dealing with Customer Unpredictability
You can’t control people not showing up. But there are all kinds of mitigations that you can put in place. Charge a fee when they don’t show up, have a last minute-list, or create nag bots that remind your customers of upcoming appointments. These strategies help to reduce downtime and increase productivity.
Quick Response Manufacturing
If you work in a world where people are prone to calling last minute, they are no longer buying your service; They're buying the time to execute your service. It has a different value. People are used to paying rush fees.
If you get really good at this and you know that 20% of your customers are always going to need help at the last minute, you can actually create your schedule around this, booking to only 60% capacity.
Over a two week schedule, I can have six days booked firm out of the next ten. When I get to Thursday and no one has requested a rush? No big deal, I bring Monday’s work into Thursday. I get to Friday and no one's called? No big deal, I bring Tuesday's work in. I'm constantly working in a two day pattern where I can control the work I have and move the work to the left when I don't have rush work. But then when I have rush work, it’s no issue and what's even better, I can charge a lot more money. Customers are delighted, absolutely delighted. This is the power of improving scheduling efficiency.
Conclusion
Transforming scheduling inefficiencies into a robust, profit-driving system is not only achievable but essential for service-based businesses striving for higher profit margins. By focusing on how to improve scheduling efficiency and integrating strategic levers like flex work and surge capacity, businesses can substantially mitigate risks associated with unpredictable scheduling challenges. This strategic focus is essential for those seeking answers on how to improve EBITDA and increase gross margin in the service industry. You’ll ensure that each minute of service delivery is optimized for profitability, transforming potential losses into gains and pushing the business towards sustainable growth.
Remember, effective scheduling is more than just managing time; it's about strategically aligning time with business objectives to maximize every work hour. With the right approach, businesses can turn scheduling from a perennial challenge into a powerful competitive advantage.