John was on his way back to the office for a financial review late on Friday afternoon. He was the President of a small IT consulting firm that had grown quite rapidly. They were poised to have a great year with growth in Revenue. On his way to the office his cell phone rang. It was the Director of Finance. To his surprise, he found out that the company had significantly missed their monthly profit goal. How could this possibly be? Revenue has been growing!
This type of situation happens all the time in professional services companies. Maintaining profitable growth is a constant challenge. One of the main culprits is tracking too many lag indicators that don’t predict the future. We suggest using a mix of lead and lag indicators as a more realistic approach to ensure on-going profitable performance. The following is the list of essential KPI’s that every professional service firm should be using to manage profitability.
1) Revenue per employee
Calculated by dividing the total revenue of the company by its total number of employees. It is one of the simplest and referred to metric while comparing similar companies within an industry. It reflects the overall organizational effectiveness.
While maximizing productivity is one way to achieve higher revenue per employee, at times, a lower revenue per employee tells if you have too many or the wrong mix of non-billable staff.
2) Revenue per consultant
This metric is the ratio of the total revenue of the company divided by the number of consultants that are billable. It serves as a benchmark for comparing an individual consultant’s productivity simply by finding out the difference between the revenue generated by that consultant and the average revenue per consultant in the organization.
Low revenue per consultant is often an indicator of the need to better manage the lower performing consultants to bring the company average up and improve overall profitability.
3) Revenue from new clients
This metric is the total amount of revenue generated via services delivered to the new clients. This does not include selling to another department within an existing client’s organization. The new client here is referred solely to a new logo client.
Revenue from new clients, compared to the total revenue generated by the organization reflects the effectiveness of your sales and marketing efforts. It is pivotal to determine a target percentage of the revenue to be generated from new clients. And, at the end of every reporting period, the difference between this projected percentage and the actual percentage of revenue from new clients will determine the need for revision of sales and marketing budgets and resources. The ideal ratio of revenue from new VS existing clients may vary for each organization.
4) Revenue from new services
It is as its name suggests, the revenue generated from the sale of new services. It is the total of new services sold to new and existing customers combined. The purpose of this metric is to tell you how effective your solution crafting and service packaging capabilities are. Apart from that, this metric tool is an indicator of your sales and marketing effectiveness.
5) Non-billable time
The time spent on internal meetings, writing proposals, calls, emails, invoicing, team planning etc. is usually not paid for by the client and needless to say, should be minimized to the extent where the organization is able to squeeze maximum profitability.
It is essential to regularly analyze this metric as it predicts the effectiveness of the service delivery methodologies and overall delivery.
6) Average Deal size
It is the average dollar amount per closed deal/contract. Bigger deal size ensures a higher degree of predictability of revenue. This again is an indicator of your sales, marketing as well as service packaging effectiveness. A low average deal size often means one is not able to understand the customer’s needs and propose a suitable solution. Often professional services firms propose what they know or are comfortable talking about as opposed to what the clients need. More effective needs analysis leads to bigger deals and more predictable revenue.
The world of IT services is expanding and becoming increasingly competitive. It is critical to monitor the right set of financial metrics in order to constantly track your performance and take necessary steps to be able to outperform the competition. With reports from various reputed organizations showing that the world’s spending in IT is growing at a flourishing rate, experiencing revenue growth is very achievable. But it’s the profitability that’s more crucial to achieve and maintain.