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Key Performance Indicators for Consultancies

Companies that sell services to other businesses, such as data management consultancies, software development or IT consultancies often track time in order to automate invoicing but they may be missing other benefits of these systems. Real-time access to relevant key performance indicators (KPIs) such as percent billable and completed versus estimated can give early warnings of project problems as well as lead your company to faster growth and more profitability. In this article, I will explain what KPIs are and show you how to use some simple ones to improve your business. We'll show you how to calculate them from any time and data labor source, including paper or Excel timesheets, if that's your preference.

What's a KPI?

A KPI is key. What does that mean? Your KPI has to be one of a very few things that you are measuring that you really think will make a huge difference to your business long-term. In other words, a KPI measures progress toward a strategic goal. If you have 100 KPIs, then you're not going to be able to use any of them to drive organizational behavior. After all, your company doesn't have 100 strategic goals. Ten KPIs can be effective. Five KPIs are great. One KPI approaches a religion.

Martin Luther King, Jr. had a morally compelling vision: multiracial peace. Your business needs a morally compelling vision, too, if you want to hire the best and retain them. King had a strategy to achieve his vision: nonviolent protest. If he'd had a KPI (and maybe he did), it might have been something like "number of violent incidents per protester," and he would push his organization to reduce that metric over time.

The closer you get to a morally compelling vision, a clear strategy and calculable KPIs, the more successful your company will be, all else being equal.

It's an indicator, i.e., it's quantifiable. A KPI must be measurable. "Make customers more successful" is not a good KPI without some way to tell which customers are successful. "Be the most convenient drugstore" won't work either if there is no way to measure convenience.

It is also important for KPI definitions to remain stable from year to year. For a KPI of "increase utilization rates," you need to address considerations like whether to measure by hours or by dollars.

It measures performance. KPIs are used to measure the performance of an organization, frequently through measuring activities such as performance improvement derived from training, labor utilization rates, or customer satisfaction. KPIs are often tied to strategy through techniques such as the balanced scorecard, but they don't have to be as complicated as that to be useful and effective. As with most things, simplicity increases efficacy.

KPIs can differ depending on strategy. They help an organization to measure progress toward their organizational goals, such as increased penetration of existing customers or markets, on-time delivery or reduced scope creep.

A KPI is a part of a specific measurable, achievable, relevant time-based goal (a SMART goal), which is made up of a direction, KPI, target and time frame. An example of this would be to "increase average revenue per sale to $10,000 by January." In this case, "average revenue per sale" is the KPI. The above-mentioned goal wouldn't be SMART if it wasn't an achievable goal. Nor would it be SMART if the word "January" was left out or if was not relevant, e.g., if this was a portion of the organization that had nothing to do with sales or marketing, like HR.

What are some easy KPIs that are useful for consultancies?

Billability

Billability (often termed "utilization rate") is the percentage of time in a given period during which an employee or set of employees are working in a revenue-producing capacity. You must configure your timesheet system to track whether work is considered billable to the customer or not. Then utilization for any period, group or person is found by the formula B divided by T, where:

B = billable hours for the employee or group in the period

T = all hours worked for the employee or group in the period

Most organizations are trying to keep utilization above 70 percent or so. The higher the better, until you've reached a point where administrative tasks that are necessary to the business (like tracking time) are not getting accomplished. Then you know you've pushed it too far.

Adherence to Estimate

Customers do not like it when you underbid, but you won't win the business when you overbid. Most consultancies do a poor job in this area. The KPI you want to minimize here is defined by the formula [(E-A)/E] where:

E = estimated hours to complete project

A = actual hours used to complete project

Just tracking this KPI is a good start, and you can get the data to calculate it from any timesheet system, including paper ones. Automated systems, however, often have reports to calculate this for you. Improving this number is often difficult for some companies until they understand a simple truth about most projects, which is that similar projects often have a strikingly similar ratio of early phase cost to overall project cost.

Usually the early phases of a project are called requirements, design, or specification, depending on what your consultancy is doing. If you find that after tracking time carefully on a batch of similar projects, the first two phases usually take about 10 percent of the project time, you can use that to predict future projects.

This diagram shows how tracking the time it takes to complete a project helps in planning future projects. By tracking time and subsequently learning that the first two phases of Projects one and two took 10 percent of all project time to complete, the projected length of Project three becomes easy to determine. If the first two phases of Project three take 1.8 months to complete, you can estimate that the entire project will be completed in 18 months, since 1.8 is 10 percent of 18. We've found this project estimation technique to be extremely accurate for similar projects in a variety of companies.

Figure 1: Percentage of Projects Profitable

Percentage of projects profitable is a KPI that can really turbocharge your business. As an analogy, consider the Journyx customer, British Petroleum (BP), and their experience drilling for oil. They created a strategic vision for their company, which they termed "no dry holes." Drilling for oil and not finding it is expensive. Rather than try to make up for all the dry holes by finding an occasional gusher, BP decided to try to never have a dry hole in the first place. Changing the attitude that dry holes were an inevitable cost of doing business fundamentally changed their culture in very positive ways.

Consultancies also have dry holes: projects that lose money for the company. Due to an inadequate understanding of costs, many of these go unnoticed. If you set a strategic goal for your company of "no unprofitable projects"; it will change the nature of discussions in your business. It empowers frontline employees to legitimately push back when a project is being taken on for political reasons, for example. Conversely, having the attitude that the winners will make up for the losers doesn't do this. Getting direct per-project cost data from a timesheet system is easy. Having indirect data (such as sales or accounting time) correctly applied to the direct costs increases complexity. Connecting all this to revenue data gives you per-project profitability. Once you have that data, you can work on your KPI of percentage of profitable projects and try to maximize it. The formula for this KPI for a given time period (usually a quarter or a year) is number of profitable projects divided by number of projects.

You should seek to maximize this number. Even if you are willing to lose money on a few strategic projects in order to enter a certain market, you probably want to know how many you're willing to do that on, and keep your losses around that area reasonable.

I've shown three KPIs that may be useful for your consultancy and explained how to calculate them. None of these require an automated system (although that dramatically lowers the effort of data collection). Other KPIs that could be useful are calendar time to complete a job (because overhead costs go way up due to all the status communication problems when there are delays), percentage of customers satisfied and time to complete initial free estimate. Any of these may be right for your business once you've picked a strategy. But a strategy without metrics won't get you very far. KPIs are the answer.


Curt Finch is the CEO of Journyx, a provider of Web-based software located in Austin, Texas, that automates billing, payroll and project accounting by tracking time, expenses and mileage. Finch is a software industry veteran. In 1997, he created the world's first Internet-based timesheet application - the foundation for the current Journyx product offering. He has managed development teams creating enterprise-level software solutions since 1985, with a focus on project accounting.

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