By Dave Hofferberth
5 KPIs that matter most
This is the second article in a two-part series on performance improvement in the delivery of services, based on measuring and monitoring five critical key performance indicators. Part one provided insight into why professional services organizations should specifically focus on five performance indicators in order to improve service delivery performance. This article digs more deeply into the KPIs and the value of improving each one.
KPI 1. Project duration
The average project duration in months depicts the effectiveness, or lack thereof, of selling longer-term projects. The average project duration is important in that it shows the average length and scale of today’s projects. Although easier to staff, longer projects are not necessarily more profitable because longer and larger projects may involve significantly more risk and complexity. However, extended projects with large project staffs can yield significant revenue and stability to the organization because there is less consultant churn from project to project.
Table 1 shows the majority of projects take between one and nine months. Clearly, revenue per project increases as project duration increases; billable utilization also rises as the duration increases. But what is perhaps most important about this table is that organizations with the largest projects tend to grow at a much higher rate than those organizations focused on very small projects.
KPI 2. Standardized delivery methodology
Consistency of service delivery is imperative in order to improve quality and instantiate best practices. While not all work can follow a standardized or structured service delivery methodology, the higher the percentage, the better the firm typically operates.
Mature firms invest significant time and attention to methodology development as a means of standardizing project processes, defining expectations and institutionalizing quality. Using a standardized delivery methodology is a critical component of a services productization strategy. It helps improve project forecasting and resource management by lowering costs while enhancing predictability. PSOs that can accurately plan and execute services in a structured way are more productive and more likely to deliver quality results.
There is significant effort involved in developing, implementing and adhering to standardized delivery methodologies, but the net impact for PSOs is beneficial.
Table 2 compares the percentage of time standardized delivery methodologies are used to other key performance indicators. It shows that PSOs using a standardized delivery methodology have improved on-time project completion, higher revenue per employee and are more likely to achieve their annual revenue targets.
KPI 3. Billable utilization
Employee billable utilization is one of the most heavily tracked and scrutinized KPIs. While there are many definitions of billable utilization, the benchmark’s definition is based on a 2,000 hour per year basis. Employee utilization is calculated by dividing the total annual billable hours by 2,000. This key performance indicator is central to organizational profitability.
To be meaningful, utilization must be examined in conjunction with overall revenue and profit per person along with other leading indicators like backlog and size of the sales pipeline. It is a major indicator of opportunity and workload balance as well as a signal to expand or contract the workforce.
To improve margins, PS executives must continually focus on increasing employee billable utilization, as well as increasing the percentage of billable employees. The primary gain from increased utilization is a significant increase in revenue per employee. Interestingly, PSOs with higher employee utilization also reported more revenue growth, more revenue per consultant, more revenue per employee and larger projects. The dynamic combination of high utilization and a high percentage of billable employees leads to better financial performance.
Table 3 shows the actual benefits this year’s firms experienced from increasing employee utilization. As you might expect, billable utilization is critical in terms of meeting deadlines and profit margin targets. High billable utilization is directly tied to the percentage of employees who are billable. This chart shows that firms with very high utilization are much more likely to meet their margin targets.
KPI 4. On-time delivery
The percentage of projects delivered on time is a measurement determined by dividing the number of projects completed on time by the total number of projects. This KPI is critical for billable services organizations because when it decreases, both profitability and client satisfaction also decreased. The bad news is that the average on-time project delivery rate tends to be less than 80 percent for PSOs.
On-time delivery is an important key performance indicator as it affects client satisfaction and the ability to take on new projects. When projects are delivered late, client satisfaction suffers. It also causes new projects to be delayed. When planned resources are still working on the late project, they are unable to start another project. PS executives strive to keep employees utilized. However, when they cannot start work because prior projects are late, it affects everyone. The effectiveness of quality and knowledge management processes correlate highly with on-time delivery and, ultimately, help drive revenue per employee upward.
KPI 5. Project overruns
Project overrun is the percentage that actual costs exceed budgeted costs or it is the percentage actual effort (time) exceeds the budgeted time. Project overruns may be expressed in actual time versus plan, actual cost versus plan or both. PSOs want to track this KPI because whenever a project goes over budget in either time or cost, it cuts directly into profitability.
Project overruns, like projects not delivered on time, limit future work and client satisfaction. In many instances, project overruns indicate a lack of project governance, which hurts project quality. Table 5 highlights how average project overruns influence on-time completion, annual revenue and margin target attainment. Obviously, project overruns are negatively correlated with on-time completion, as one increases while the other decreases.
What’s most important — as shown in the table — is that PSOs with high levels of project overruns yield poorer revenue and margin performance. Focusing on why projects run over is a critical step in performance and profitability improvement.
Using information wisely
These key performance indicators for services delivery, and many more like them, can be tracked through an organization’s Professional Services Automation (PSA). PSA is used specifically for improving services delivery and all five of these key performance indicators. PSA helps PS executives plan, sell, deliver and collect for work that meets targeted delivery dates and margins.
PSA solutions manage resources and projects, which helps improve billable utilization and bottom-line results. Twenty years of research have shown that those using PSA see a 5 to 7 percent improvement in billable utilization. That translates into an additional 100 to 140 hours billed annually per consultant. As you can imagine, the dollar value and profit associated with these hours are significant.
How these KPIs can help PS firms grow
To compete successfully today, professional services executives need to optimize every aspect of their organization – from the creation of a solid strategy and accompanying business plan to the sale of services that offer the greatest potential for growth and profit. It also requires a staff of high-quality talent.
Regardless of all of the other areas of the PSO, delivering services is where money is made in professional services. Achieving organizational growth and profit begins with project profit margin. Therefore, for PSOs to grow and prosper, they must be astute in terms of how they deliver services. The five key performance indicators discussed here are a good place to start.