What are the key metrics driving growth in your Professional Services Organization (PSO)? What key performance indicators (KPIs) should your company be monitoring?
Getting a concise picture of what’s taking place within your business is challenging. It requires measuring multiple metrics and observing how they affect each other. The result: A comprehensive picture of exactly what is and isn’t contributing to your business success (or failure). The alternative: Lack of visibility, waiting for the next weekly or monthly financial report, leading to managers making poor decisions that undermine business performance.
Furthermore, tracking certain business metrics can provide a cultural, almost corporate psychological dimension to drive forward modern-day businesses. They give all the company departments a reason to work hard, collaborate, and share each other’s achievements. Meeting goals can generate a culture of success where employees feel they are contributing to the business. There’s always a loud office cheer when the department or company hits its revenue target for the week, month, or year. When employees are satisfied with their work culture, they put in their best effort to ensure their client’s work is to the highest quality. In effect, a satisfied employee should lead to satisfied clients, which ultimately contributes to the bottom line through better productivity.
This article highlights the critical metrics that every service business should be tracking and have readily available for greater insight into and ultimate control over their day-to-day operations.
What: Project margin is the percentage of revenue that remains after paying for the direct costs of delivering a project.
Why: All PSO projects will have a margin target. By regularly monitoring project margins, you can make resource or project adjustments to hit margin targets. With this insight, you will determine if moving resources around, modifying the project scope, or reducing any third party costs would allow you to increase margins at completion. Furthermore, reviewing margins after a project’s completion is an important activity to support and improve margins on future projects before they start.
How: 100 X (Project Revenue – Project Costs) / Total Revenue
What: Project overrun is the percentage above budgeted cost versus the actual cost of a project.
Why: Project overruns damage profitability. This metric is important because any time a project goes over budget in either time or cost, it cuts directly into profitability. Project overrun may reveal internal efficiency or management issues, which also negatively impact bottom-line results. They are also detrimental to client satisfaction and indicate project management needs improvement.
How: (Actual project costs – Planned Budget) / Planned Budget
Annual Revenue Per Billable Consultant
What: This metric is a measure of a business’ total revenue divided by the number of billable consultants they employ. This is an important metric to track productivity within an organization.
Why: Understanding how much revenue each consultant is producing is a key indicator of financial health, but it must be assessed in relation to labor costs.
Public accountants such as Service Performance Insight, LLC suggest revenue per billable consultant should ideally equal one-to-two-times the labor costs of employing each consultant. Organizations with high annual revenue per billable consultant tend to do well. This is because higher rates indicate better consultant productivity with respect to larger projects, more revenue in backlog, as well as more on-time and on-budget completions.
How: Total Revenue / Number of Consultants
Annual Revenue Per Employee
What: Revenue per employee differs from revenue per billable consultant in that it measures overall organizational efficiency.
Why: The more non-billable employees an organization has, the less revenue each employee is bringing in. This metric is important for determining the appropriate size of the organization and how resources should be distributed. This number highly correlates with overall organizational health.
How: Total Revenue / Number of employees
What: This metric indicates how well you are utilizing assets. Employee utilization is defined by SPI Research on a 2,000 hour per year basis and is calculated by dividing the total billable hours by 2,000. Organizations can use a range of total billable hours from 1,700 to 2,300 depending upon location and industry.
Why: Utilization is vital to accurately measuring organizational profitability. It also supports decisions to expand or contract your workforce. By tracking work hours for billable employees, an organization can get a better picture of workforce productivity. However, while utilization is consistently the most measured KPI, it must be examined in conjunction with overall revenue and profit per person. Business leaders should also consider other leading indicators like backlog and size of the sales pipeline to make a difference.
How: Average billable hours per consultant/2,000
What: There is a wide range of metrics designed to measure customer or client satisfaction. The two most commonly used are customer satisfaction (CSAT) and Net Promoter Score (NPS). The latter reflects how likely clients are going to recommend your company to their network.
Why: It is important to measure client satisfaction, especially immediately after a client project or interaction, as the experience is fresh in their mind. These measures can help PSOs measure client loyalty and reference ability.
How: Customer Satisfaction Score can be measured with the help of CSAT surveys. A questionnaire asks clients to measure their satisfaction levels on a scale of 1-5. It can also be expressed on a scale of 0 to 100 percent. The higher the number, the higher the satisfaction score.
Formula to Calculate CSAT:
CSAT (average) = sum of all scores/ number of all scores
CSAT (percentage) = number of all positive scores/ number of all scores x 100
For NPS, the answer is given on a scale from 1-10. 0 stands for “unlikely” and 10 stands for “highly likely” to recommend your firm.
Additional Talent Management Metrics to Consider
PSOs often proclaim that their employees are their most important resource. Yet Talent Management metrics are often forgotten by businesses. Talent management metrics are the various tools to measure the internal talent trends in your organization. An HCM solution can be used to keep track of the most important talent management metrics. These could include:
- Mobility: the internal career movement of employees.
- Employee turnover or churn
- Employee Diversity
- Training spend
- Cost to hire
- Time to hire
- Time to full productivity per FTE
These are all important indicators of how successfully your business is recruiting and retaining talent.
How can we get the information for these metrics?
The reality for many PSOs is that they are making real-time project lifecycle decisions with yesterday’s data. Poor internal communication, scope creep, and unexpected technical issues can quickly impact profit margins. Waiting for the monthly P&L report from your finance department is maybe too late. This environment is further complicated by PSOs operating a host of disparate systems. Key data about people, projects, and financial performance are left in silos and must be brought together within a unified data model (UDM).
A UDM approach creates an opportunity for a PSO to analyze data from multiple sources in the context of shared business initiatives. It acts as a foundation upon which data can be consistently correlated, combined, and consumed. It is essential that managers in creative, technical, and professional service firms can access all the relevant metrics that impact their business.
The key to any successful services firm meeting its business objectives is the management of all revenue and cost information. Having access to essential metrics enables better business decision-making in the organization. Moreover, better decision-making should equate to more satisfied clients and happier employees.
To find out more about the importance of a unified data model in resource management read this white paper commissioned by Mavenlink. (registration required)
The Mavenlink Industry Cloud for Professional Services™ delivers transformative value by putting resource optimization at the core. It provides integrated project management, collaboration and accounting, enables complete visibility, and scales across hundreds of teams and thousands of projects enabling professional services organizations to operate with unlimited scale, drive predictable outcomes, and realize full margins.