Understanding your key metrics
Working without clear KPIs makes it challenging for consultancy firms to assess their performance. Without insight into their performance across the essential metrics discussed in this article, it becomes nearly impossible to make and monitor improvements.
These metrics, which include understanding margins, optimising utilisation, leveraging expertise, strategic rate-setting, and ensuring customer satisfaction, are crucial for the success of professional services. Grasping these metrics enables your firm to identify areas for improvement, implement changes, monitor progress, and ultimately achieve greater success. Allow us to guide you through understanding and utilising these key metrics for your firm's success.
1. Margin
Your margin is the difference between revenue brought in and costs going out. You can measure margins in several ways - per person, project, or company.
All professional services firms want to make a healthy margin on their projects. You'll be heading into troubled waters if you have a low or non-existent margin. Despite this, you'd be surprised how many firms don't actively monitor their margins!
You need to be tracking your margin, here's why.
Margin is one of the top metrics you need to track because it helps quickly identify problems in revenue generation or costs. Business owners often don't have time to analyse costs and revenue every day. Monitoring real-time profit margins can encourage them to investigate further if the margin appears unusually low.
Monitoring your gross margin over time helps spot patterns, allowing you to adapt costs and revenue to remain profitable and competitive. For example, if you observe a drop in revenue every December, you can proactively adjust your revenue throughout the year to cover this period.
In short, knowing your margin in real time allows your firm to stay on the pulse of changes and mitigate issues in advance.
Tracking your margin by company, project or person.
Looking at margins at different levels helps to assess specific areas instead of just getting an overall view. It identifies specific areas that may require optimisation or strategic adjustments based on individual contributions and project outcomes.
We would recommend using gross margin as an overall guide to the margin of your business but assigning someone to analyse your company, projects and people margins monthly.
Additionally, the project margins metric is useful for project managers to monitor their project's margins closely.
Projected margin
Projected margin is one of the most powerful financial planning tools you can have at your professional services firm. Even before starting a project, you can estimate its margin by considering expected revenue and delivery costs. This helps check if the project meets financial expectations or if you make changes if needed before starting.
Setting margin targets
Read our article about specific metrics for your margin based on your firm type here: 4 types of professional services firms & their benchmarks — Projectworks.
3. Utilisation
Utilisation measures the efficiency of resources within your professional services firm. It compares the percentage of billable hours your team dedicates to revenue-generating activities.
Utilisation is calculated by comparing an employee's resourced hours to their actual billable hours, which are recorded on timesheets.
You need to be tracking your utilisation rate, here's why.
Utilisation is vital for assessing workforce productivity and overall operational efficiency. It provides insights into how effectively your team is contributing to revenue generation.
A low utilisation rate indicates something is blocking your staff from doing their billable work. You need to find and fix this issue fast to stay profitable and offer the best services to your clients.
For example, if your staff spend too much time on non-billable admin tasks, you'll want to be aware of this and find a solution. Perhaps incorporating a PSA tool will allow your team to return to billable work for your clients.
Monitoring your utilisation rate by company, project or person.
Analysing utilisation at various levels, company-wide, per project, and individually, offers a nuanced understanding of resource allocation and productivity across different organisational dimensions.
Various methods of viewing your utilisation rate can assist you in identifying what is hindering your team from performing billable tasks.
For example, if you find your company-wide utilisation rate is low, you can explore if that is because of one particularly difficult project or a more widespread issue. If just one project has a low utilisation rate, you can explore if that is because of the way the project is managed or due to a few employees who are struggling to manage their billable work alongside other tasks within the business.
Ultimately, understanding where your high and low-performing companies, projects, and people are helps you identify blockers and keep your billable hours high and the profit flowing in.
Setting individual utilisation targets
Utilisation targets are set for individual employees, ensuring that they are working towards their expected amount of billable hours. You set the target based on how much of their capacity you expect them to spend on billable work, and the employee works towards hitting 100% of their target.
Considerations such as individual capacities, management responsibilities, and leave policies are essential in crafting realistic and impactful utilisation targets.
Setting a utilisation target for your business
Read our article about specific metrics for your utilisation based on your firm type here: 4 types of professional services firms & their benchmarks — Projectworks.
3. Leverage
In professional services, leverage is the ratio of senior professionals to less experienced counterparts within a firm.
Striking the optimal balance is essential for leveraging the experience of senior professionals across projects while keeping the overall costs of the project down.
Having a good leverage ratio plays a pivotal role in maintaining the quality of your services and contributing to your margin.
Why is it an important metric?
The leverage metric is important because it directly affects service quality and project costs.
Achieving appropriate leverage ensures that your projects are staffed with the right mix of experienced and junior professionals, striking a balance between expertise and cost efficiency.
How do I know if my leverage is balanced?
Knowing if you have the appropriate leverage is more nuanced than calculating an exact number.
Our advice for getting the right leverage is to know first what margin you want to be making on your projects, then use a resource planner to balance your employee's expertise across multiple projects.
A project with only senior consultants is expensive, while a project with only junior employees may lack quality control.
Based on what type of practice you are running, you'll want to aim for a different ratio, but overall, you'll want to have a balance that allows you to make a healthy margin.
Setting a leverage target for your business
Read our article about specific metrics for your leverage based on your firm type here: 4 types of professional services firms & their benchmarks — Projectworks.
4. Rates
Rates are simply the fees your firm charges for its services. But it's not just about setting a number; it's about how much your clients think your services are worth. This will be different depending on the 'type' of firm you are running.
Why this is an important metric
The rate you charge influences not only your financial success but also the perceived value of your services. A good rate considers your costs, market conditions, and the value you provide to clients. Understanding and setting appropriate rates is crucial for your business to thrive and grow.
Setting and measuring your rates
There is a lot that goes into setting your rates; here are just some of the things you'll want to consider.
- Understanding your costs. This includes direct costs associated with service delivery, overhead expenses, and any other relevant financial considerations. Knowing costs helps you set a rate that covers costs and makes a profit.
- Get familiar with your market: Stay informed about the market dynamics in your industry. Analyse competitors' rates and industry benchmarks. Consider factors such as regional variations, client expectations, and the overall economic landscape.
- Define your value proposition: Clearly articulate the value proposition your services bring to clients. Understand the unique benefits and outcomes clients receive by choosing your firm. Aligning your rate with the perceived value of your services allows you to justify your pricing to clients.
- Choose a pricing model that works for you: Select a pricing model that aligns with your business goals and client preferences. Whether you opt for T&M, fixed-fee, or percentage-based, each model has its advantages. Consider the nature of your services, client expectations, and the complexity of the projects you undertake.
- Regularly monitor and adjust: Rates should not be static. Regularly assess the effectiveness of your current rates and be open to adjustments. Stay agile in response to changes in your cost structure, market, or shifts in the value you provide to clients. We recommend a bi-yearly review to ensure your rates remain competitive.
Client-specific rates
Custom rates give a personal touch to your pricing plan, letting you adjust rates for each client's specific needs and importance. By offering specific rates for key clients, you not only acknowledge their significance but also enhance the likelihood of maintaining long-term, mutually beneficial relationships.
Alternatively, you can tailor your rates based on factors such as the scope of work, project complexity, and the overall value delivered to specific clients. This personalised approach ensures you are recognised for the unique services you offer.
Using PSA software you'll be able to set different time codes with unique rates allowing you to quickly adjust what you charge a client as you need.
What is a typical rate for a professional service like mine?
Read our article about setting rates for your firm based on your business model here: 4 types of professional services firms & their benchmarks — Projectworks.
5. Customer satisfaction
Understanding the process of gathering, measuring, and applying feedback is essential for businesses aiming to enhance customer satisfaction.
Why customer satisfaction is so valuable to business leaders
Customer satisfaction is crucial for business success as it affects customer loyalty, brand reputation, and profitability in the long run.
Understanding and acting upon customer feedback is crucial in identifying areas of improvement, meeting customer expectations, and fostering a positive customer experience. Helping you retain existing customers and attract new ones through positive word-of-mouth.
In today's competitive market, a satisfied customer is more likely to become a loyal advocate, contributing to sustained growth and success. Plus, who doesn't like free marketing!?
How to gather customer feedback
Our advice for businesses wanting to start measuring customer satisfaction is to start with a simple Customer Satisfaction Survey (CSAT).
Craft a clear and concise survey using a mixture of open-ended questions to get direct feedback and rating scales so you can monitor how the rating evolves.
Typically these surveys are deployed at the end of a project to gather information about their full experience.
Tip: if you are struggling to get clients to fill out your feedback survey, try offering an incentive, such as a gift card.
Here are some example questions you could use:
- On a scale of 1 to 10, how satisfied are you with the services provided by our firm?
- Which specific aspects of our team's expertise and performance exceeded your expectations?
- Are there specific areas in our service delivery where you believe we could enhance our effectiveness?
- On a scale of 1 to 10, how would you rate the clarity and effectiveness of communication between our team and your organisation during the project?
- On a scale from "Not Likely" to "Extremely Likely," how likely are you to recommend our professional services to others in your industry?
- Were you satisfied with the responsiveness of our team to your inquiries or concerns throughout the engagement?
- How well did our services align with your initial expectations and project requirements?
- Do you feel that the professional services provided by our firm offer a strong value proposition for the investment made?
How to apply customer feedback
The next crucial step is applying the feedback to your business. When you read through your feedback, identify common themes and prioritise these areas for improvement.
Create an action plan to address highlighted concerns and communicate these changes transparently to your customers.
Implementing positive changes not only demonstrates a commitment to customer satisfaction but also contributes to the overall improvement of your products or services. Establish a continuous feedback loop to monitor the effectiveness of implemented change.
Proactive and strategic application of customer feedback is key to fostering a customer-centric culture within your business!
How can I measure success?
Do you expect all of your customers to love your services every time? In an ideal world, this would be true, but sadly, not every project will be a success, no matter how good your services are.
What really matters is what you do with the feedback; if you make changes and see the ratings from your customers going up, that's a sign of success. The same applies if a customer is unhappy with an aspect of your service and you actively take steps to address it and keep them informed of the changes.
Clients love it when you listen to them and are more likely to be advocates after having their concerns addressed.
Without clients, a consulting business is in a world of trouble - so show appreciation to your repeat clients and make sure you're offering them the best service possible!
The continued success of your business
To sum it up, grasping important metrics like margin, utilisation, leverage, rates, and customer satisfaction is crucial for success in professional services. These metrics give you insights into how your business is doing and highlight areas that need attention. Essentially, if you're unaware of a problem, you can't address it. By using PSA software, you enhance your ability to see and track these metrics, providing better visibility into your business operations.
If you're interested in learning more about optimizing your services business, be sure to check this out: