Professional Services Organizations (PSOs) like financial services, advertising and marketing agencies, legal, and other consulting businesses, now face a multitude of unique challenges to success and growth. The complexities associated with billing rates, different regulatory environments, worker compensation, and workload management continue to be a burden on both cash flow and profitability.
Additional obstacles include:
- A shortage of talent due to baby-boomer retirement and fewer STEM (science, technology, engineering and math) university graduates
- Increased client demands and expectations for greater service value for their dollars
- More complicated projects, which require resources that may be remotely scattered
- Different billing structures which complicate invoicing and managing cash flow
With these challenges in mind, how can PSOs continue to deliver high-value and high-margin services, while at the same time meet profit objectives? Below are the five most important financial metrics PSOs should use to track and improve financial performance according to
1. Annual Revenue per Billable Consultant
Annual Revenue per Billable Consultant is a measure of a business’ total revenue divided by the number of billable consultants they employ. Understanding how much revenue each consultant is producing is a key indicator of financial success, but it must be assessed in relation to labor costs. 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 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.
2. Annual Revenue per Employee
Another core metric, Annual Revenue per Employee, is measured by dividing total revenue by the total number of both billable and non-billable employees. Similar to annual revenue per billable consultant, high annual revenue per employee is strongly correlated with profitability and efficiency. By measuring how much revenue each employee brings in relative to how much they cost, you can accurately determine the financial health of an organization.
While not everyone on staff can provide billable services, it is important to be aware of the risks of too many overhead costs in relation to revenue per employee.
3. Billable Utilization
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. Utilization is central to accurately determining organizational profitability, as well as a key signal to expand or contract the 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 key performance indicator, it 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 really make a difference.
4. Project Overrun
Project overrun is the percentage above budgeted cost versus the actual cost of a project. This KPI is important because anytime a project goes over budget in either time or cost; it cuts directly into profitability. Whether a project goes over in either budget or allotted person-hours, it can limit future work and in many cases reveal internal efficiency or management issues, which also negatively impact bottom-line results. Project overruns are also detrimental to client satisfaction and even incoming sales opportunities.
5. Project Margin
Project margin is the percentage of revenue which remains after paying for the direct costs of completing a project. Keeping project margins high is essential as it ultimately drives overall profits. Poor financial performance can often be directly correlated to low project margins, as organizations are no longer able to invest in future growth activities.
In addition to the above core KPIs, there are hundreds of metrics that PSOs should be aware of when assessing financial performance. Any financial management solution should be integrated with the other departmental solutions to centralize and utilize relevant information to make confident decisions to help grow the professional services organization.
For more in-depth information on each of the five KPIs for greater financial success, check out the full SPI Research note provided by Intacct.