What to look for from last year’s numbers
March 1, 2019
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It’s not likely that successful professional service organizations can see into the future. But if it appears so, it’s because they’re equipped with metrics that help them make more informed decisions.
Before looking ahead, we must first look back. That’s why you need to look at last year’s numbers.
But, what do you need to look at specifically? Your future revenue banks on many different factors. In the ocean of metrics, how can you know which ones to focus on?
To make projections, those in professional services should consider looking into research by SPI (Service Performance Insight), which compiles global statistics for professional service organizations (PSOs). SPI can help PSOs understand their performance metrics in comparison to other businesses.
Key performance indicators that service professionals should focus on revolve around employees, customers, revenue, and process.
Strategy & process
Your metrics are clearly important. But how can you access, present, and process them? These are only parts of the process. Next, comes action.
In terms of presentation, consider automation software that can make metrics reader friendly. Cloud software make your metrics transparent to your entire team.
When it comes to determining your KPIs and selecting which metrics you need to focus on, you’ll need a strategy. Without an overall goal, you’re likely to become overwhelmed with numbers.
The proper metrics depend on the PSO’s headcount. According to PSVillage, almost all service sizes will focus on utilization, PSO gross margin, customer satisfaction index, speed of adoption, and revenue per PS head.
Services with a headcount over 20 generally focus less on speed of adoption and revenue per PS head, and more so on gross sales booking, contracted backlog, earned and un-recognized revenue, and (for larger organizations) project gross margin.
These metrics are always relevant and all affect each other. Let’s talk about KPIs that small PSOs focus on.
Without looking into your annual revenue, you can’t see what’s changed. Last year delivered tons of information that can help you determine future goals. It also brought you money. To understand your annual revenue growth, compare the most recent period with a period of the same length from last year. It’s simple.
However, it’s also important to understand the fluctuations from period-to-period, month-to-month. These changes in revenue happen for their own reasons, be it seasonality, special events, and in some cases, the weather. The trends should be taken into account for future planning but should not represent your business’ overall performance.
When considering revenue, it’s important to factor in EBITDA (Earnings before interest, tax, depreciation and amortization), profit margin, revenue/employee and revenue/customer, cash conversion, and of course, year-after-year growth.
For small PSOs, revenue per PS head, or revenue per person, is amongst the top five metrics. It’s the total revenue or sales a company makes divided by the headcount.
Gross margin is what’s left of your revenue after subtracting production costs (your total revenue minus cost-of-goods sold [COGS]). This margin must be closely monitored. Of course, one factor influencing gross margin is utilization, so optimizing it should be a priority.
Employee utilization, or billable utilization, measures the amount of time employees work on a project against the amount of time budgeted. It allows your business to see how busy employees are. This can help with future planning. If your workers have a surplus of time based on the budget, then you clearly need to adjust the allotted time.
Utilization measures productivity of specific departments and allows managers to match specific employees with tasks. With this information, utilization helps managers get the greatest sales efficiency (time spent per lead).
Utilization is one of the biggest factors for profit improvement.
Additionally, PSOs should focus on employee retention and attrition. When you lose an employee (quit or fired), the costs of replacing them is more than many expect. Your business could get hit by recruiting costs (including advertising a position, hiring, training), loss of productivity and expertise, customer dissatisfaction, and the risk of a domino effect.
Businesses can avoid future attrition by recognizing the reasons for employee loss. Just like with any metrics, you should consider the value of the numbers. What solutions can you recognize based on your findings? Are there opportunities for growth?
When PSOs make adjustments based on customer feedback, they prove to be highly effective. Small business PSOs look to the customer satisfaction index as one of their most valuable KPIs. How can they measure customer satisfaction?
Many professional services rely on reference customers who have experienced the service and then go on to promote it to peers. Since the industry is highly competitive, the key to beating out competition is by reference.
Another was to promote customer relationships and to gauge their satisfaction is to use customer surveys and feedback. Surveys and feedback give you a direct and private look into what your business could do better. Public reviews can work to market for your business, although don’t give you the opportunity to correct the issues before they’re made public.