The Profit Leaks
Hiding in Every Firm
A field guide for owners and managing partners. By George DeVries.
Before we start.
We've spent our careers inside professional service firms, sitting in the finance chair, managing the P&L, and trying to figure out why the numbers on the income statement don't match what we were seeing in the business. If you're reading this, we think you already know something is off. Revenue is growing. The team is growing. But profit isn't keeping pace, and you can't quite put your finger on why.
You're not wrong. That feeling is almost always right.
This guide walks through the six places we keep finding margin leaking in firms your size: pricing that's drifted below what the work costs to deliver, work you earned but never billed, payroll that's outrun the revenue it produces, vendor spend no one owns, software seats nobody's using, and cash tied up in receivables you've already earned. These aren't exotic problems. They're the ordinary ones that accumulate quietly while everyone is focused on winning the next client.
We wrote this because we think you deserve to see the mechanism before you hire anyone to fix it. If even one of these sections makes you uncomfortable, that discomfort is data. Trust it.
Price Leakage.
Price leakage is margin you were owed but never captured. It shows up two ways: prices set once and never revisited as delivery costs climbed underneath them, and a rate card that exists but that nobody enforces when a deal needs closing. Both are quiet, because the revenue line still looks fine while the margin under it thins.
I worked with an $18M engineering firm that had set its rates during a competitive stretch four years ago and never gone back to them. When we rebuilt the fully loaded cost to deliver their three core service lines, two of the three had slid from a 44% gross margin at pricing to under 20% today. Salaries had risen, scope had crept, and the rate had held flat the whole time. On their single largest account, that drift alone was worth $210K a year in margin they’d priced away without ever deciding to.
The other half was a rate card nobody enforced. They had one, but any team lead could price under it to win work, with no approval step and no way to see who had. Close to a third of their active book was sitting below the floor, and nobody could tell us which accounts. Just bringing the clearest below-floor accounts back toward the card was worth another $120K to $260K a year.
Billing Leakage.
Here’s the pattern. The work gets done. The invoice goes out sometime later. The client pays sometime after that. And in the gap between work-complete and cash-received, the firm’s working capital is tied up funding operations out of pocket. Worse, write-downs accumulate quietly because nobody is tracking the delta between billable hours worked and hours that actually make it onto an invoice.
The firm had an average of 34 days between project completion and invoice delivery. Their DSO (days sales outstanding) was another 52 days on top of that. So the firm was financing 86 days of operations on every engagement before seeing cash.
When we measured the write-downs that were happening between timesheets and invoices, the firm was losing $12K to $18K per month in billable time that never got billed. That’s $144K to $216K per year that showed up nowhere on the P&L because it was never recorded as revenue in the first place.
Labor Leakage.
Here's what this tends to look like. The firm is growing, so leadership hires ahead of demand. New people come on. Revenue keeps climbing. But nobody goes back to check whether each new hire is producing revenue that justifies their fully loaded cost.
Over 18 months they’d added nine people. Revenue had grown 22% in the same period, which felt great. But when we traced revenue production back to each role, four of those nine hires had no direct revenue attribution and no documented justification tying them to a specific capacity need. The fully loaded cost of those four roles was $340K per year.
Not all of that was recoverable, but roughly $180K to $260K was margin that had quietly walked out the door through reactive hiring.
Vendor Leakage.
What we keep seeing looks like this. Every department buys what it needs when it needs it. Nobody owns the vendor list. Renewals happen automatically. And over time, the firm ends up paying three different vendors for things that overlap significantly, because each purchase made sense in isolation.
We looked at the vendor ledger and found 47 active vendor relationships. Fourteen of those vendors had been added in the prior two years with no competitive bid and no renewal review. When we consolidated overlapping services and renegotiated three contracts that had auto-renewed at list price, the recoverable amount was $145K annually.
The managing partner had no idea the firm was spending $38K a year on two separate document management platforms purchased by two different practice groups.
Software Leakage.
The shape of this one is familiar. The firm adopts a new platform. The old one stays active because a few people still use it, or because nobody remembers to cancel it. Seats get purchased for employees who left six months ago. And renewal notices go to a distribution list that nobody monitors closely.
The firm was paying for 74 licensed seats across four project management and collaboration tools. 23 of those seats hadn’t been logged into in over 90 days. Two of the four tools did essentially the same thing, purchased 18 months apart by different office locations.
The annual spend on redundant and unused software was $67K. Not a staggering number on its own, but it had been compounding for three years because every renewal was automatic and nobody had done a seat-count review before any of them.
Collection Drag.
Collection drag doesn’t erode your margin. It ties up your cash. Every day a receivable sits past its terms is a day you’re funding your own operations on money you already earned, and if you’re drawing on a line of credit to do it, that carry has a real, measurable cost.
I reviewed a $16M IT services firm that was profitable on paper and always tight on cash, and the reason was sitting in its receivables. Days-sales-outstanding had drifted to 71 days against 45-day terms, and no one owned the number. That gap meant roughly $1.1M of already-earned revenue was tied up in receivables at any given moment, and because the firm was drawing on its line of credit, it was paying to carry it.
The drag itself, the interest cost of carrying receivables that should already have been collected, was running about $28K to $40K a year. It was the smallest number in the diagnostic and the fastest to move. A weekly aged-AR review on their direct-billed accounts started pulling DSO down inside the first month, and the carry cost came down with it.
What to do with this.
You don't need to hire anyone to start. Pick one of the six sections that made you the most uncomfortable and do one thing this week. Pull a single vendor report and sort it by vendor name. Look for duplicates. Or run one utilization query and see if the hours your team is billing match the hours they're working. You already have the data. The question is whether anyone has looked at it through this lens.
The typical range, added up.
If any of the six self-assessment questions in this guide felt uncomfortable to answer, the diagnostic is designed to put real numbers on exactly that feeling. It won't tell you something you don't already sense. It will make the invisible visible, give you a specific roadmap to fix what we find, and hand you a comprehensive package of materials you can take directly to your leadership or Board.
A free 30-minute diagnostic review call.
If you'd like to walk through your situation and see if BaxterLabs would be a good fit, we're happy to talk it through. No cost, no obligation, just a conversation.
george@baxterlabs.ai · baxterlabs.ai