Thursday, July 28, 2016
What Happened to All Those Billable Hours? Why Time Tracking is so Critical to Your Business Performance Metrics
Posted by Armanino Dynamics Team
Given that the Cost of Employees is the single largest line item in a professional services budget, a well-run organization must be relentless in tracking the usage, cost, and profitability of their billable consultants. In fact, consider that Direct Labor expense typically accounts for 40-50% of revenue; even more if you add subcontractor costs into your calculation. Because a professional service organization is all about delivering high quality projects for clients from skilled professionals, the single most important metric to track is direct labor margin.
This includes tracking the cost of projects delivered, time tracking and utilization of various tiers and skill levels of consultants, and ultimately, the Gross Margin of the company.
So, how do you track your firm’s overall business performance and, just as importantly, spot critical issues early that are eroding margin and profitability?
There are 4 crucial key performance indicators (KPIs) that you must be prepared to measure:
KPI #1: Revenue
Most organizations have a handle on where their top-line revenue is coming from. Generally, they measure Bookings (projects booked with signed contracts and purchase orders in place), account for any backlogs from bookings to project work beginning, and then track billings until revenue is realized on the balance sheet.
KPI #2: Client Satisfaction
Clients expect you to be on-time and on-budget, along with meeting or exceeding their expectations for your services and deliverables. Two KPIs to track client satisfaction and loyalty that are often overlooked are Contract Renewal Rates and, more generally, the Number of Customer References.
There are a couple of foundational business practices required to create satisfied clients and drive these two KPIs:
- Accurate Quoting and Forecasting of Work – How can you be on time and on budget (while preserving margins) if you are inaccurately quoting project time and fees in the first place? When quoting a new project or creating a Statement of Work for a new client, you have to use a methodology to accurately quote time and costs based on your learnings and reporting from similar projects you’ve completed. Otherwise, you’re just guessing.
- Consistent Delivery Methodology – Adopting a standardized process for the lifecycle of project delivery not only drives efficiency to avoid overruns in costs and times, but it’s the best way to ensure that you can consistently deliver results for your clients. Executives at your organization need to be able to continually monitor project health at both the individual client-level as well as at the firm level to track systemic issues and spot best practices.
KPI #3: Margin
Margin must be measured at several levels.
Firstly, if you are using subcontractor resources to scale your delivery capacity and/or to preserve profit margins, measure that first. Secondly, ensure you are measuring margin on any pass-through or sell-through products or materials that you are delivering to clients. Lastly, there is, of course, the margin on your
FTE employees (both billable and non-billable). All of these sources combined drive your overall gross margin. For services firms with significant “corporate overhead” costs or those that have embedded product companies, Contribution Margin will also be a significant measure.
The bedrock of ‘margin-tracking’ in most professional services organizations is the implementation of a project and time tracking solution. It’s critical to have accurate and timely time tracking for various tiers of billable consultants in place. Without this foundation (and an accurate view of your costs/projects), you simply cannot accurately view your margin at the project, client, or business unit level. This undermines your ability to assess the true performance of your business and create an actionable business plan that ensures long-term business health.
KPI #4: Workforce Optimization
Last, but not least, more than any other industry, services firms have one true source of business value for clients – their employees. The ability to hire and train skilled professionals with various skills and levels of experience is the talent pipeline that every Services CEO is concerned with filling and maintaining. The financial KPIs that you need to track to ensure that your workforce is optimized are: 1. Billable Headcount, 2. Bill Rates by Skill Level, 3. Utilization Rate, 4. Cost/Person, and 5. Attrition (both planned and unplanned).
You can start tracking many of these essential KPIs to improve your firm’s business performance today using a tool like Armanino’s Project and Time Tracking solution (built on Microsoft Dynamics CRM Online and integrated with Microsoft Outlook). Learn more about how a time and project tracking solution can help your firm or click here to request a free trial.
We enable an organization by supporting each stage of your company’s growth by implementing scalable Microsoft Dynamics solutions. As Microsoft Certified solutions experts and Inner Circle Partners, we work to eliminate redundant systems and leverage existing software investments, while keeping your goals for the future in mind.