Running a professional services firm requires a steady hand a keen eye. You have to be able to implement changes on the ground in real-time.Professional services firms’ product is their time, and time lost is opportunity lost. That’s why it is important to actively monitor key performance indicators. Being agile can make the difference between profit and loss.
To help you develop and maintain agility, it’s important to track the right metrics:
- Utilization (by firm) – This is one of the most meaningful metrics to judge the relative health of a professional services firm. The utilization rate is a snapshot of the number of billable hours relative to the total possible hours. This metric is calculated by taking the total number of billable hours and dividing it by the total hours that are potentially billable.
total billable hours / total billable employees x 2000 *
* This assumes that the resource is 100% allocated to a billable job rol
- Utilization by individual/department – While utilization across the organization is an important metric, it doesn’t tell the whole story. It cannot tell you if specific individuals are over/under utilized, which can be important when gauging bottlenecks and employee morale. The appropriate target for this metric varies by industry. But regardless of industry, the goal should never be 100% utilization. If a resource is 100% utilized, there is no flexibility in their schedule and they are unable to participate in important functions such as continuing education, employee development and other firm-related functions.
- Project budget vs. actual – A project that is over hours will almost always be over budget. Cost overruns can kill project profitability and lead to poor customer/employee satisfaction. If a project is over or under-budget, noting this metric may allow you to change resource mix or make other changes to course-correct. Budget vs. Actual should be tracked real-time, so issues can be recognized and addressed early. Late and over-budget projects can have a cascading effect on downstream tasks and milestones.
- Project margin – Margins vary by industry, but generally a 40% margin is heathy and sustainable goal. If you are unable to sustain 40% margins, you are likely underestimated hours required or underpriced the engagement when it was sold. Poor project margins can have a negative impact on employee retention and adversely affect raises and bonuses.
- Sales pipeline – To keep other metrics in line, it’s important to have plenty of work for employees to do. Long lags in business development can wreck profitability and adversely impact employee morale. Monitor sales leads and track them by stages (either timeframe or percentage likelihood to close.) Poor monitoring of the sales pipeline can adversely impact firm readiness and resource allocation.
Have questions about how your professional services firm stacks up against others in your industry? Want to know how to improve your profit margins? Call one of our Zinner professionals today.