When the economy is booming and money is flowing, it’s easier for services companies to get away with sloppy operations and underperforming KPI’s.

However, when the marketplace shows uncertainty, businesses need to get laser focused on the measurable core objectives needed to effectively navigate turbulent times. I’ll use this example from Alexander Field, an economist, who was cited in a friend’s personal finance blog in the early days of Covid-19:

“The years 1929–1941 were, in the aggregate, the most technologically progressive of any comparable period in U.S. economic history,” Field said. The blog goes on to say, “Productivity growth was twice as fast in the 1930s as it was in the decade prior. The 1920s were the era of leisure because people could afford to relax. The 1930s were the era of frantic problem solving because people had no other choice.”

I challenge professional service leaders to drive progress before they feel the pain. 

Yes, every business has its own unique set of challenges and opportunities they need to manage, but regardless of maturity or size, there are two primary KPIs that all leaders of professional services organizations should hone in on and use as their guidepost during times of uncertainty: utilization and project margins. If you nail these two metrics, your services business will be strongly positioned to weather the storm.

Utilization and project margins: The KPI dynamic duo for professional services

We’re all familiar with dynamic duos: bacon and eggs, ketchup and mustard, Batman and Robin, Mary Kate and Ashley—and the list goes on. In the professional services world, the ultimate dynamic duo is utilization and project margin. Let us explain.

To not only understand the health of the business but to drive it forward, leaders need to effectively manage their team members (i.e., resource planning, which impacts utilization) and the billable projects those team members are deployed on. In other words, once you have people staffed on a project, how effectively are they delivering that project, and are they doing it in a financially responsible way? Utilization and project profit margins are the metrics that tell you how effectively you’re managing these elements of the business.

Here’s what these two KPIs include and account for: 

Utilization: This is a measurement of a consultant’s total time spent on billable projects versus the total time worked. High utilization indicates that an organization is efficiently using the capacity of their team, meaning team members are meeting or exceeding their billability targets. Low utilization, on the other hand, means team members aren’t meeting their billable targets and have available time to dedicate to projects. This is calculated by hours billed / hours available to be billed, though we understand that debating over how to properly calculate utilization is a sacred pastime of the professional services industry. 😉 Regardless of your measurement approach, it’s a useful metric in understanding how well you’re planning and how well you’re making progress toward those plans. 

It’s important to not drive utilization too high and not let it dip too low. If it’s too high, burnout will follow and it’s not a sustainable way to work. If it’s too low, you’re obviously going to see a negative financial impact, but people may also feel undervalued and bored. Luckily, there are several leading indicators to track that can help leaders land in just the right spot: planned backlog compared to capacity by role, forecasted pipeline compared to capacity by role, and planned utilization compared to quarterly target. And don’t worry—we have best practices to help track these metrics effectively as well: project-level resource planning governance (done weekly), timesheet governance (done weekly), and capacity and capability review (done monthly). These leading indicators and best practices are outlined in more detail here. 

Project margin: The project profit margin percentage is a metric that every growth-oriented organization should measure. In short, it’s a calculation that assesses the financial efficiency of the projects that are being delivered to customers. A high average means that the percentage of revenue generated versus the costs incurred for a project is meeting or exceeding targets (i.e., the business is healthy and profitable), and a low average means the percentage of revenue generated versus costs is falling short (i.e., your projects are taking up valuable resources while generating net-zero profit). Project margin is calculated by project costs / project revenues. For smaller shops that traditionally look at margin or profitability at the company or account level, getting to this level of more granular detail can deliver a leading indicator for account and organizational financial health. 

Just like utilization, there are several leading indicators and best practices for tracking project margins that all leaders should keep top of mind. To forecast and use margin accurately, organizations should be tracking planned margin in the sales pipeline, forecasted margin within active projects, and planned vs. projected vs. actual-to-date margin. Then, in order to track these leading indicators effectively, leaders need to implement project-level source planning governance (done weekly), timesheet governance (done weekly), and portfolio and key account review (done monthly). These leading indicators and best practices are outlined in more detail here.

Importantly, if you look at one of these KPIs in a vacuum, it’s difficult to understand the holistic performance story for an organization. Looking at utilization and project margins together, however, provides a clear, rich story of how that organization is performing and where leaders should focus their attention in both the short and long term. This dynamic duo ultimately enables informed, strategic decision-making that can drive business growth, even during turbulent times.

But wait – what about revenue growth?

Most professional services organizations want to grow—and for good reason! Growth is a critical component of the ‘leverage model’, by which an organization aims to optimize their mix of senior and junior billable resources. In his book ‘Managing the Professional Services Firm’, David H. Master says the following about the leverage model: 

“The market for the firm’s services will determine the fees it can command for a given project; its costs will be determined by the firm’s abilities to deliver the service with a cost-effective mix of junior, manager, and senior time. If the firm can find a way to deliver its services with a higher proportion of juniors to seniors, it will be able to achieve lower delivery costs.”

Our philosophy is that healthy margins and utilization will naturally fuel scalable revenue growth. Increasing project margins and utilization will generate additional revenue, which will enable leaders to invest that revenue into growing the team, ideally with lower-cost, higher-margin employees to maintain the leverage model and further fuel the engine. Hiring more junior resources will also open up opportunities for existing team members to step into more senior positions that come with increased pay, which should drive retention in a financially healthy way.  It’s the flywheel for success with professional services organizations.

All to say, revenue is an important KPI, and we’ve outlined our recommendation on how to track and measure revenue proactively, which includes creating greater visibility into the sales pipeline, so leaders can take action to generate new business before they miss revenue targets. 

Having difficulty tracking these KPIs? We’re here to help

As with everything, we understand there are hurdles to accurately and efficiently tracking KPIs—and all too often, they’re not monitored closely or prioritized across the business. Sometimes this happens because no one within the organization is familiar with the nuances of utilization and project margins; other times, it’s a data cleanliness challenge, when organizations don’t have best practices and processes in place to manage their data, so they’re manually pulling from disparate systems. This opens the door for reporting errors, and leaders are then operating based on an incomplete, or even false, picture of the state of the business, which is especially problematic when economic uncertainty is running rampant. 

There’s good news, however—you don’t have to tackle this alone. Parallax is a purpose-built platform, designed specifically to support professional services organizations to track utilization and project margins with ease and confidence. Reach out to learn how Parallax can empower you and your teams with the insights you need to navigate whatever comes your way.