Updated: Aug 14
It’s no secret we’re on a mission to help small- and mid-sized companies reach their potential through leadership development and sales and marketing growth. The next ten blogs are part of a series that will cover two core concepts of our growth strategy framework for professional services and technology organizations.
The first concept covers the relationship between business maturity and profitability. The more mature a company is across its functions (service delivery, marketing and sales, finance, etc.), the more profitable they will be. Young, less mature firms have EBIDTA of less than 1% while more sophisticated firms often have profitability greater than 30%.
Second, functions of the company need to mature at a consistent pace. If one pillar becomes more developed than others, it won’t necessarily result in increased profitability. To result in greater profit, all functional departments need to advance at the same rate.
This blog series shares best practices and insights that will help professional services firms boost their maturity consistently to maximize their profits.
Essential professional services metrics– items to measure that will be predictive of your business maturity
The relationship and importance of managing utilization and bill rates
Growing your current accounts to more strategic projects as a way to increase revenue
Service packaging – integrating marketing, sales and delivery to release new products
Read and bookmark each one as they pave a roadmap for you to achieve greater impact!
Essential Professional Services Metrics
New businesses crop up every day. They usually start with a great idea that solves a problem the average consumer is having. If you have the answers and the service, it might seem like drawing in tons of business would be a piece of cake. However, it takes a lot more than that, and revenue is not a guarantee. There are also important metrics to consider, whether you’re a new company or an established one. With the right growth strategy framework, your organization can become an expert in your niche and market your services lucratively. Below are the metrics that are vital as you start and/or grow your professional service business.
It's a Balancing Act
The best-in-class service organizations look at balancing competing demands. You have to balance your time among existing clients, prospecting, internal projects, and public and private clients. You also have to continually shift your focus between the short- and long-term, balance your energy between doing and delegating, and your approach between detailed and high-level.
4 Critical Factors You Must Balance for Successful Growth
For success and longevity, a professional services company needs to balance these 4 items, being careful not to emphasize one over another. A business that is out of balance is less profitable and usually doesn’t last very long. These include:
Revenue: Consider your sales pipeline, client mix, and service mix. Revenue must be high-quality, and you must deliver on time to avoid nonbillable hours.
Demand-Solutions: This includes client requirements, marketing, sales campaigns, and relationship management. These must be relevant, and a good portfolio allows you to work with clients over time.
Supply-Resources: This includes the development, retention, and recruitment of people, as well as other supplies and resources needed to provide your services.
Costs: How much revenue is coming in? Also consider the size of your nonbillable team and ensure it is a reasonable proportion. Also consider project costs (resources, travel, materials) and overhead.
If you have too much emphasis on one of these over the other three, your whole organization is thrown off balance, and ultimately, your profitability suffers. You want to ensure that you are selling high-quality services that your customers value and that you are hiring people who are the best fit for their role. A culture focused on continuous growth and improvement will also serve you. Resources, like technology, should be leveraged to their fullest potential, as this can save you time and streamline processes.
4 Business Metrics To Measure for Growth
As we provide companies with a growth strategy framework, we emphasize 4 metrics that will make or break you. These metrics determine your overall success and set profitable businesses apart from those with their heads barely above water.
Monitor these metrics early and often:
Revenue: This includes your sales pipeline, bookings, backlog, and overall business revenue.
Client Satisfaction: Examine your top clients, as well as new versus existing clients, to determine what you think is the right mix. Note your referral rate as well.
Margin: This includes your direct labor (gross margins) as well as your subcontractor margin, hardware and software pass-through margin, and your earnings before interest, taxes, depreciation, and amortization (EBITDA), which is also your net margin.
Workforce Plan: Look at your total billable headcount in proportion to overhead costs so that your overhead is not growing faster than revenues. Also look at billable revenue per person, as well as the costs associated with each person.
Metrics Targets for Professional Services
Included below are some targets for professional services organizations to consider. Note these are rough targets we recommend based on an average sale size of $200,000. The bigger the average deal size, the more it allows your resources to be predictable.
Average Deal Size– $200k
Bookings – You want your pipeline to be 2 times your forecasted bookings
Backlog – 50% of your forecasting should already be in backlog (quarter or year)
Revenue consultant – Double the cost per person, for example, if their salary is $100,000, the revenue they should be billing is $200,000
When it comes to your clients, here are a few key metrics to keep in mind.
Top Clients – 20% of your clients should represent 80% of your revenue
New clients – 40% of your active accounts should be new clients
Repeat clients – 60% of your active accounts should be existing clients
References – 8 out of 10 clients are referenceable
Professional Services Margin Targets
Direct labor margin – 50%
Subcontractor margin – 30% gross margin
Hardware and software pass-through margin – 15%
EBITDA – Net Margin – 20%
The key for workforce planning is that your billable headcount should be greater than 80%. Meaning, 80% of your staff’s time should be billable, to reduce overhead costs.
Billable headcount >80% does not have too much overhead
Bill rates – $250+/hour
Billable utilization – 80%
Billable revenue per person – $250K
Cost per person – $100K
Growth Strategy 101: Track Metrics
Metrics are the language of business. They tell the story of where your company is, where you want it to go, and how you plan to get there. The right metrics help you stay on track and make adjustments as needed.
To create visibility and get the most out of your metrics, they need to be collected, organized and displayed in a way that makes them easy to access and interpret.
Fast-Track Growth Action Steps:
Hold a sales delivery meeting to discuss revenue collaboration with the delivery organization.
Organize a weekly delivery meeting for reviewing/using projects/data. Embed your metrics into cadence.
Use metrics to develop functional accountability. Functions should have very clear metrics directly related to profit and loss. Divisions – including HR, marketing, training and development, and finance – can all be defined using a functional accountability chart.
Use scorecards for each role in your business. These should include core values, behavioral competencies, and technical competencies, which are metrics that clearly define what the role is accountable for. Scorecards should include reflection pieces to allow each employee to understand how they know they’re having a good month and a good week.
Leverage technology. A Professional Services Automation System (PSA) makes tracking easier. This includes Mavinlink (now Kantata), FinancialForce, and Deltek, to name a few. It becomes much easier to track these metrics using those tools.
ALTA Consulting Powers Professional Services Growth
Metrics are the foundation of growth in any business. They are overlooked by professional services firms – though they are arguably more essential to ensuring profitability and, as a result, longevity. ALTA Consulting works with professional services firms to reach their true potential through leadership development and our proven business growth framework.
Ready to grow like never before? Book a call.