Not all revenue streams are created equal. At WPC, we talked about what partners are earning in gross margins across product, project services, managed services, and packaged IP. We emphasized managed services and packaged IP because those two are recurrent and provide a higher return. However, results from our survey work indicate that many partners still depend on billable hours as they work to build, deploy, and customize solutions.
Given the importance of billable hours, it might be useful to know the key metrics leading business model transformation firms use to help partners increase gross services margins on project services. It’s important that partners maximize the output of this work in order to achieve higher levels of net income so you can fund future growth and your transformation to a cloud-oriented business. Here are the five killer metrics you need to keep in mind:
Idle resources are like inventory sitting on the shelf, costing the company money in the form of salaries and other related personnel costs. Resource utilization is the foundation for everything and will serve as the basis for our second key metric of billable markup rate (BMUR). The aim here is, of course, 100% utilization.
The challenge we often see is lack of discipline in tracking utilization. First: set the right denominator. Many partners use the baseline of 2080 hours in a given year, not taking items such as statutory holidays, vacation, and training into consideration. The first step is to set that base line correctly, typically in the range of 1500-1700 hours.
The second issue is inconsistent tracking. Often when we asked partners how many hours a given resource billed in the past twelve months, they were unsure. Highly skilled companies know this metric down to the decimal point for each resource. Without this level of discipline, managing capacity and overall profitability is extremely difficult. The key here is to set a realistic denominator and manage each resource to 100% utilization.
Many partners use variable income to accomplish this by providing an incentive based on the number of hours billed, gross margins achieved on projects, and cross-sell of additional products or services. How are you inspiring your billable staff to maximize their utilization?
2. Billable Markup Rate (BMUR)
This measure comes courtesy of an old friend of mine, George Brown, formerly of Salesworks. BMUR measures the profitability of any given billable resource. It’s calculated by taking the hourly charge-out rate of the individual and dividing that by the loaded cost (salary, variable compensation, and benefits) per billable hour. Below is an example for illustrative purposes.
|John’s hourly charge-out rate||$125/hour|
|His annual, fully loaded cost||$85,000|
|Hours billed over the past 12 months||1540|
|Hourly billed cost ($85,000/1540)||$55.19|
|His BMUR 2.26||($125/$55.19)|
Best in class partners tend to achieve >2.5 on this metric with 2.0 being the generally accepted baseline. Anything below 1.8 indicates an issue that needs to be addressed, usually by raising the hourly rate, driving higher utilization, or reducing the cost basis.
Raising rates is the quickest fix and one of the areas I often challenge partners on. Rates have largely been stagnant over the past five years as the landscape has become increasingly competitive and customers more price-sensitive. This is another reason why building specialization into your business can drive growth and profitability.
This measure is simple: the total amount of work you have outstanding in days (includes project work, support work, ad hoc work with clients) divided by the total number of billable resources you have in your organization.
Getting to the ideal level of backlog is largely a function of having effective, efficient sales and marketing. Beyond that point, project management discipline becomes critical. Anything beyond 120 days indicates a strong pipeline of work and enough line of sight into when marketing and/or sales activities needs to be ramped up. Ninety days is considered a baseline of acceptability; anything less than 30 days may be problematic.
4. Efficiency Factor
I’ve heard some of our most seasoned external consulting firms compare a successful project services practice to a factory: good manufacturers constantly look for ways to increase productivity and optimize performance. For partners, this may mean looking for project or ad hoc client work that can be re-used or leveraged in future projects. For example, a report object that is already defined, written, and tested can be re-used in future projects and therefore counts in calculating the efficiency factor. Integrating this into your practice can increase margins and lessen the need for expensive resources. This can be difficult, as the numbers can vary depending on the type of projects delivered, but initially, I’d recommend aiming for 10% and striving for upwards of 20% as you build a library of these assets.
5. Quota Run Rate
While this is more of a measure of sales performance, it’s also a leading indicator of future health of the services practice. YTD Sales/YTD Quota indicates to the practice leader what the sales outlook is for the next 90-day period, helping determine future capacity requirements and providing foresight into staffing needs. Anything above 110% should be your aspiration, with 75% or below indicating that a correction-of-errors plan is necessary.
These measures aren’t revolutionary; in fact, they’ve been around for as long as services businesses have been in place. The challenge is how you manage them. Are these metrics (and others) being tracked on a regular basis? Do you have a well-established process and cadence for reviewing them? What is your plan if one falls below the baseline? I fully believe in the saying “inspect what you expect,” and not having rigor or corrective guidance in place opens up risk and impacts profitability.
While gross service margin, utilization, and BMUR are the most significant KPIs in managing project services, you should include all of these factors in your BI dashboards. Each will provide a lens into the regular health of the practice and provide early warning when adjustments need to be made.
We’d love to hear from you. What other metrics do you track? What best practices of managing against them have you implemented? How has it positively impacted your business? Share your story – we’d love to tell it. Follow me on Twitter @BrentCombest where I share our best resources, tools, and insights from across the channel and industry.
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