Gross margins of a tech services business are a very good proxy for revenue quality. Customers are willing to pay up for the company’s services based on perceived value and customer business impact.
Working on improving gross margins (GMs) directly impacts EBITDA margins. All else being equal, every point in GM improvement flows down to EBITDA margin.
Other than increasing billing rates or decreasing costs, optimizing team utilization will also improve GMs in T&M engagements.
The team costs a fixed $50,000 per period in the above example. The company will promptly have operating leverage as additional hours are correctly billed, increasing revenue and, therefore, impacting margins. In T&M engagements, proper project allocations are the first step for any margin optimization initiative.
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