The professional services market is back—and more competitive than ever.
- How will you outperform your competition?
- What professional services KPIs will keep you competitive?
Service Performance Insight (SPI) has analyzed and identified the profit-centric measures with the highest correlation to financial success in Professional Services Organizations (PSOs).
In 2014, SPI saw growth of 10% or more for the third consecutive year, signaling the end of the recession in most markets and geographies.
In fact, according to SPI, many small improvements combined to make 2014 an excellent year in professional services – a Goldilocks year featuring incremental growth, productivity and profit enhancements combined to deliver results that were not too hot, not too cold but just right and prime for driving professional services to strong levels in 2015.
What trends and top issues is SPI forecasting for professional services today?
- Steady revenue growth: The leading indicators for growth — annual revenue growth, headcount increases, size of the deal pipeline and backlog — were all up slightly in 2014, signifying, steady, consistent and manageable growth. Predictable growth helped firms optimize supply and demand resulting in significant profit improvement.
- Productivity improvements: Across the board professional services organizations experienced moderate increases in billable utilization and the percentage of the workforce that is billable resulting in significant improvements in revenue per consultant and revenue per employee.
- Sales and marketing remain the top challenge: Perennially, firms rate business development as their top challenge. Sales results were very positive in 2014 with stronger sales pipelines; shorter sales cycles and larger backlogs, which all added up to more firms achieving their revenue targets. Sales, marketing and solution development effectiveness ratings all went up while the overall cost of sales and marketing went down from 9.1% to 7.4% of total revenue.
- Profits are up: A host of incremental enhancements added up to strong profit improvement in 2014. Profit was up in all vertical markets and all geographies. Embedded service organizations delivered exceptionally strong performance with net contribution margin increasing from 15.4% in 2013 to 19% in 2014.
5 KPIs that Matter for Professional Services
SPI has spent the past several years benchmarking PSO operational performance or “maturity” to determine the characteristics and appropriate behaviors for PSOs based on their organizational lifecycle stage. In its research, SPI drilled deep to determine trends in the 200 key performance indicators (KPIs) demonstrating overall performance improvements as PSOs matured by aligning people, processes and systems.
The most mature organizations exhibited, according to SPI, high levels of organizational visibility with optimized business processes and integrated systems, which spanned all major functional groups. With a focus on profit improvements, SPI highlighted the five most important and influential financial metrics for the professional services market.
Annual Revenue per Billable Consultant
Annual revenue per billable consultant depicts the service organization’s total revenue divided by the number of billable consultants. Revenue per consultant provides an indication of consultant productivity. SPI Research considers revenue per billable consultant to be one of the most important KPIs, but it must be viewed in conjunction with labor cost. Revenue per billable consultant should minimally equal one- to two-times the fully loaded cost of the consultant. Revenue multipliers of three and higher are typical for engineering and architecture firms, as well as in management consulting and legal professional services.
Annual Revenue per Employee
Annual revenue per employee is different from revenue per billable employee, it focuses on organizational effectiveness. It is similar to annual revenue per billable consultant; it divides total revenue by the total number of employees so it includes both billable and non-billable employees. Revenue per employee is a powerful indicator of the overall profitability of the firm because if the average cost per employee is known, profit can be estimated representing the difference in cost per employee and overall revenue per employee. Similar to revenue per consultant, this KPI is highly correlated with profitability, utilization and bill rates. PSOs with a high percentage of non-billable employees have lower annual revenue per employee. Revenue per employee is very important in determining the appropriate size and financial health of the organization. Based on the high cost of talented consulting staff, SPI Research believes this figure should be close to two times the fully loaded cost per person to maintain strong financial viability.
SPI Research defines employee utilization on a 2,000 hour per year basis, and is calculated by dividing the total billable hours by 2,000. This key performance indicator is central to organiza-tional profitability. Utilization is consistently the most measured key performance indicator but must be examined in conjunction with overall revenue and profit per person along with leading indicators like backlog and size of the sales pipeline to become truly meaningful. Utilization is a major indicator of opportunity and workload balance as well as a signal to expand or contract the workforce.
Project overrun is the percentage above budgeted cost to actual cost. Project overruns may be expressed in actual time versus plan or actual cost versus plan or both. This KPI is important because anytime a project goes over budget in either time or cost; it cuts directly into the PSO’s profitability. Project overruns, like projects not delivered on time, limits future work that can be initiated. In many instances it shows a lack of project governance, which negatively impacts bottomline results.
Project margin is the percentage of revenue which remains after paying for the direct costs of delivering a project. Projects can be fixed-price or milestone-based, where the PSO commits to a “Not to exceed” price, or Time & Expense, where the PSO essentially charges by the hour with additional payment for any materials used during the engagement. The key to any successful professional services organization meeting its financial objectives is the management of all revenue and cost information.
A professional services organization’s financial infrastructure can be complex, with different rules and regulations and currencies that must be man-aged in order to reduce waste and fraud, while maximizing profitability. The solution must also be flexible and agile, so that as conditions change, such as mergers and acquisitions, practice changes, new regions, and other areas, that the financial information will remain transparent, stable and accurate. How will you outperform your competition? By monitoring the right set of financial metrics.