As the leader of a professional services organization, your company and its people rely on you to make decisions about the business. Metrics undoubtedly help you make operational and financial decisions – however, with a plethora of information out there, some may be more helpful than others. And some may be worth the investment into analyzing them, while others could waste unnecessary time. If you could determine and understand the state of your company by viewing one set of regularly updated metrics, what metrics would you include?
A thoughtful set of key performance indicators (KPIs) bridges the gap between your financial information and organizational strategy to spur progress and empower action. The wrong KPIs can lead to wasted time and, at best, chaotic efforts at achieving growth. Compound that with the current business climate – where team members are increasingly working outside of the office and economic uncertainty is high – you’ll find it’s perhaps more important now to monitor not only your bottom line but also the set of KPIs that provide insight into the health of your people, processes and customers.
What makes a good KPI?
A KPI is a measurable value tied to your business objectives. The right set of KPIs demonstrates how effectively your company is achieving its objectives.
Every KPI should include the following:
- Measurable value (and a target to compare against)
- Timeline of your goal
- Data source
- Reporting frequency
- An individual or a group of individuals who is/are responsible for the metrics
Your company’s financial statements contain a breadth of information, but they also tend to stay static while the priorities and objectives of your company change. That’s where KPIs come in.
A thoughtfully structured set of KPIs, working in conjunction with your financial reporting, can accomplish three goals for your business:
- Assign responsibility and accountability to key objectives
- Organize your business results in measurable and actionable data points for improved decision-making
- Bridge the gap between your financial information and your organizational strategy, from short-term priorities to long-term objectives
Building your dashboard
The practice of consistent KPI monitoring alone can put your organization in a healthy cadence for discussing and acting on key priorities. When building a dashboard, start by framing your organizational priorities into four categories:
- Financial performance
- Team member
These categories provide a picture of your business that is more complete than focusing purely on financial health – a common pitfall for organizations when choosing KPIs.
6 KPIs to track
Now that you’ve begun building your dashboard, the following are six KPIs – in three of the four categories (customer KPIs are often highly specific to your business model) – that should be on every professional services firm’s dashboard.
Falling within either the team member or the financial performance category, utilization is the number of hours team members spend on billable projects divided by their total hours available. This metric is crucial for professional services organizations and is used in a variety of ways, including performance management, resource planning and determining your pricing strategy.
When looking at an individual team member or the entire company, utilization proves a key metric in overall resource and workforce planning. High utilization throughout your organization may indicate that it is time to bring on additional team members or tools to increase efficiency.
Utilization is also used in the calculation of your gross margin, a critical profitability metric discussed further below.
2. Annual Revenue per Billable Team Member
This KPI, in the process category, gives you an idea of the productivity of your team members, processes and overall profitability. To calculate it, divide your trailing 12-month revenue by the number of billable team members.
Annual revenue per billable team member is a key factor in workforce and growth planning and can be used in conjunction with utilization to measure team member efficiency. As a benchmark, the industry average of this KPI is $165,000 per year for early-stage professional services firms.
Used in combination with your utilization rates and sales pipeline, this KPI can help you understand when it’s time to bring on new team members.
As you continue to track the metric monthly, it also reveals how your team’s productivity changes and how key initiatives impact your organization’s ability to deliver for your customers.
3. Annual Overhead per Billable Team Member
Complementing the revenue per billable team member KPI, the overhead per billable team member is a baseline metric for revenue needed for team members to cover operating costs. This KPI, also in the process category, is calculated by dividing the trailing 12-month overhead costs (costs of running a business outside of the cost of team members) by the number of billable team members.
This KPI helps provide visibility into the cost of running your organization and is especially important for startup organizations, where each new hire can have a significant impact on overhead cost. A building block in determining the billable rate for your team members, this KPI’s trend is also important, as it can track whether your organization’s efficiency is improving and whether costs are going up or down relative to growth.
When looking at profitability as a financial performance KPI, there are two critical metrics that you should consider adding to your dashboard: gross margin percentage and realization rate.
Gross margin percentage is a key indicator of profitability, whether measured in aggregate for your firm or at the individual project level, and can help you manage “scope creep,” or mispricing due to incorrect estimations of the work required.
At the project level, the gross margin percentage shows whether you are staffing your engagements appropriately (i.e., too many high-cost team members for a low-revenue client) and which service offerings are performing best.
The gross margin percentage is calculated by dividing the gross margin by the revenue of the company in a given time, where gross margin is equal to total revenue less the cost of delivering services (primarily the cost of your team members).
The second metric that is also critical to understanding your profitability is the realization rate. The realization rate is calculated by dividing the number of billable hours worked by the number of hours billed to clients. For example, if your organization spends 50 hours on a project, but your contract only allows you to bill 40 hours to the client, your realization rate is 80% (40 hours billed/50 billable hours).
While gross margin percentage considers your cost of delivering services, the realization rate is a revenue-specific measure that reflects your ability to monetize each hour that you spend on delivery. Like gross margin, it can provide deep insight into profitability and is often used to assist with scoping projects, measuring project overruns and calculating hours worked but written off to reduce fees.
5. Annual Recurring Revenue (ARR)
Annual Recurring Revenue (ARR) is an estimation of your company’s total revenue for the year based on your current month (multiply your current month’s recurring revenue by 12). It considers your yearly recurring revenue including churn.
This key indicator of financial performance provides a quick and understandable measure of the current state of your business and your growth trajectory. While this metric is mostly used in the software-as-a-service (SaaS) industry, it is a valuable input for professional services firms because it forces your organization to think critically about retention and growth planning. It will also help you evaluate new projects or clients and identify current projects or clients that you may not want to retain.
6. Team Member Satisfaction
Keeping your people happy is perhaps the most important ingredient to a successful professional services firm; however, firms often have trouble finding a measurable way to track team member satisfaction. For example, one-on-one meetings, coaching sessions and other training activities may improve satisfaction but are not KPIs of team member satisfaction levels if they cannot be consistently measured.
Team member satisfaction is a measure of your team members’ contentedness with their jobs. To gauge this KPI more accurately, NPS and team member surveys are a go-to for many companies’ KPI dashboards. Other metrics for team member satisfaction include tracking engagement in organization-wide activities, promotions and social media.
As your organization scales, keeping a pulse on your team members can increase productivity, reduce turnover and improve the effectiveness of your organization.
From tracking to understanding
Once you have determined your goals and established KPIs to track them, you will be able to see how your KPIs interact with one another. Recognizing these interactions is important for making sound business decisions. Understanding the relationship between the goals you set and your results provides powerful insight into how your business operates and helps you create more focused objectives and targets in the future.
So, as the leader of your organization, which KPIs are important to you? To discuss your goals and business metrics with a professional, please contact our team of outsourced accountants: