Key Performance Indicators (KPIs) are metrics used to set goals for continuous improvements, track and measure business performance, and take action when the plan falls apart.
With the right KPIs in place, firms can shift toward more outcome-based engagements – using accurate, real-time data to win bids, track progress, and show clients the impact of their investments.
In this piece, we’ll focus on five KPIs that all professional services firms should be tracking to get a pulse on business performance, profits, and progress toward high-level objectives.
What Metrics Should Professional Services Firms Track?
The short answer is, it really depends.
KPIs serve as targets that individual contributors and teams can aim for. They’re a tool for understanding where, specifically, changes need to be made, as well as a checkpoint for getting a pulse on your firm’s overall health.
Professional services firms use them for several reasons, including:
- Understanding what makes customers churn or employees stick around
- Helping clients understand and improve their business performance
- Determining which strategies are most effective when it comes to driving revenue
- Identifying and eliminating waste centers
Every organization has a unique set of business models, clients, and goals — and the KPIs they select should reflect those differences.
Additionally, good KPIs always answer a specific question about your business in a way that allows you to take action. And, they only answer one question at a time – so you’re clear on things like the root cause of a problem, which tactics are (or aren’t working), or what levers you need to pull in order to deliver a certain outcome.
All that in mind, here’s a look at a few key metrics all pro services firms should be tracking — regardless of what their business looks like.
1. Profit Margins
Profit margins represent the percentage of revenue left over after you’ve covered all costs associated with delivering a project. Naturally, margins are one of the most critical KPIs for any project-based firm. But – they’re also notoriously difficult to monitor and control — particularly at the project level.
Firms face several challenges – effectively managing resources – both billable and non-billable, linking project performance to financial outcomes, and optimizing the overall portfolio – that can prevent them from achieving healthy margins.
Professional services orgs also tend to have complex financials — with multiple billing models, rules, regulations, contracts, and currencies that need to be managed alongside resources, materials, and employee time to ensure projects actually make money.
According to a 2021 Sage white paper, margins are impacted by several factors.
For example, project teams often complete 80% of the work with the last 20% of the budget.
Late or inaccurate time-sheets can lead project managers to believe they have more budget to work with. Other problems include underbidding during the sales process and handling client disputes.
This KPI is used to calculate your gross margin percentage (total revenue – delivery costs) / revenue). This calculation helps firms ID top performing service offerings, determine appropriate staffing levels, and avoid out of scope requests.
Tracking profit margins also allows you to determine your realization rate – or your ability to monetize every hour spent that goes into delivering a project throughout its entire lifecycle.
You’ll want to make sure you accurately capture and bill all eligible hours to the client in a timely manner.
This makes it easier to manage projects by tracking actual spending against the original budget — which both prevents revenue leakage and improves project scoping moving forward.
With more accurate budgets, estimates, and timelines, project managers are better positioned to manage client expectations and avoid costly surprises.
Getting a handle on profit margins starts with end-to-end visibility into the whole portfolio.
That way, you can identify which variables are behind the numbers – and understand what it takes to maximize utilization, generate more accurate estimates, and plan for future demand.
2. Resource Utilization
Resource utilization is a big deal for pro services firms, as it directly influences profitability, client satisfaction, scheduling, and the rest of the business.
According to Microsoft, people represent nearly 80% of the revenue generated by the professional services industry. So, as you might imagine, one of the best ways to power revenue growth is effective resource management.
Measuring utilization supports decisions about hiring, outsourcing, talent development, and distributing workloads and is key when it comes to pulling the levers that maximize profitability.
Though, it’s worth noting that utilization shouldn’t be analyzed in a vacuum.
Instead, you’ll want to track this metric against things like total revenue, revenue by billable resource, backlog value, the sales pipeline, client satisfaction, etc. to get more detailed insights into your performance.
Utilization goals must also be set with different, and often competing needs in mind. Think — revenue, retention, skills development, and your growth strategy. They should also strike a balance between short and long-term goals.
For example, maxing out employee capacity to hit quarterly revenue targets can cause long-term damage — burnout, attrition, or poor quality work. At the same time, under utilizing resources means you’re leaving revenue on the table and as a result, can run into cash flow problems.
3. Year-Over-Year Revenue Growth
Tracking year-over-year (YoY) revenue growth can help you determine the effectiveness of your firm’s processes, people, strategies, and technologies. On its own, this metric offers a high-level understanding of your overall performance. In other words, is your strategy still working?
YoY can be used to measure the effectiveness of your sales and customer service teams, marketing tactics, M&A strategies, and other sources for driving growth.
Then, you might dig into sales performance, customer retention and satisfaction rates, utilization, and so on to determine whether (and where) things fell apart on the operational side. If something’s off with the strategy, you might look at your training program or what resources are available to employees.
If the issue is more about volume, maybe you’ll work on developing new service offerings, expanding your portfolio, or tweaking the sales strategy so that reps focus on increasing average project/deal size or upsell/cross-sell opportunities.
If year-over-year growth slows – or completely tanks – you might then look at the demand for skills and services your firm has to offer. Are they still relevant given the current market conditions? Are you missing something your competitors are already offering? Do your experts anticipate client needs or are they scrambling to catch up?
The point is, YoY provides a great jumping off point for diagnosing what’s getting in the way of growth.
4. Revenue Per Billable Resource
Revenue per billable resource is an important metric for measuring employee output against client impacts. You can calculate this KPI by taking your total revenue over a defined period and defining it by the total number of billable employees.
Tracking revenue at the team level can tell you whether overall productivity is increasing or decreasing. Or — what kind of ROI you’re getting for your annual spending per team member.
From there, you might drill down and look at total revenue generated by each team or individual contributor to learn more about where revenue is coming from, who’s performing really well, who’s struggling, etc.
Those insights, in turn, inform decisions about training, project assignments, hiring, and the tech investments that help staff spend more time on billable work.
Additionally, this metric helps you determine how to price services accordingly to ensure project profitability. In part it’s about aligning the right resources to the right projects – using factors like skills, experience, focus areas, and relevant credentials to set rates based on experience, project-type, and difficulty. Then, maximizing billing rates by placing experts where they’re most likely to deliver the biggest impact.
Additionally, it’s about building some room into both the initial quote and the contract for unexpected expenses, delays, and extra hours. You’ll also want to ensure that the contract language covers rework, extra hours, and out of scope requests so you’re not stuck doing work for free.
5. Forecasted Revenue Recognition
Forecasted revenue tells you how much income you can expect to receive within a specific timeframe. Where the sales pipeline represents how much you expect to sell over a certain period and the backlog represents what’s on the books, revenue recognition calculates how much you’ve actually earned.
This includes recurring subscription payments, retainers, and scheduled payments – as well as the revenue realized over the course of a long-term project. For instance, if a project lasts six months, revenue should be spread across that six-month period and recognized at key milestones.
Knowing when and where in the project lifecycle you can recognize revenue is crucial – it helps you understand how much cash is hitting your account within a certain timeframe – which is critical when you’re juggling multiple projects on different timelines and need to ensure you’re able to cover all the costs.
Revenue recognition is also required for GAAP and International Financial Reporting Standards (IFRS) compliance – without it, there’s no guarantee that you have enough cash to cover all overhead costs – let alone make any big investments in the business.
Again, you’ll need to make sure your ERP, project management, and reporting tools provide detailed project tracking – including the ability to pinpoint key milestones and provide real-time status updates.
Over time, as you gather more data – this KPI will help you generate accurate cash flow forecasts and plan for the future. For example, you might look at what’s left over at the end of the quarter, year, whatever, after you’ve covered your operating expenses. That extra cash might be used to invest in solutions that support long-term goals – i.e. acquisitions, transformations, etc.
The KPIs we’ve outlined above are far from the only metrics worth tracking.
Hopefully, these examples give you an idea of how you might use specific data points to understand how your firm is performing – and what specific actions you can take to deliver positive outcomes for your clients and your bottom line.
That said – you’ll need to have the right infrastructure and tools in place before you decide which KPIs to track.
Without a robust ERP system with baked-in finance, project management, professional services automation (PSA), CRM capabilities in place, firms struggle with visibility issues, information silos, and bad data. In turn, business leaders end up focusing on the wrong metrics. And in many cases, make “data-driven” decisions with no basis in reality.
With all data in one place, firms are better positioned to make decisions that get them closer to hitting critical milestones. In other words, strong measurements mean more control – something worth bearing in mind given the uncertainty of today’s business environment.
Whether you need help putting together a system capable of tracking critical KPIs in real-time, setting up reports, or defining the metrics that matter, Velosio can help. Contact us today to learn more about our professional services and project management solutions.