Stop Guessing and Start Measuring Success with Data-Driven Financial Management
How do you measure success? Is it just cash in the bank or the number of engagements won? Achieving and subsequently, measuring success is more than what you can read on your Profit and Loss statement. Suhail Doshi, Executive Director at Mixpanel said, “Most of the world will make decisions by either guessing or using their gut. They will either be lucky or wrong”. With that in mind, I want to give you something to consider:
- When your company sets targets or identifies required results, are you able to achieve them?
- Are your people aware of your commitment to growth and continuous improvement? And are they working to support those goals?
- Most importantly, when you don’t achieve required results, do you know why?
The world generates an enormous amount of data, IBM estimates it at 2.5 quintillion bytes every single day. As much as 90% of the world’s data was created in the very recent past. With all of this data being generated, how do most companies leverage the comparatively minuscule amount of data produced by their own businesses?
A few months ago, I wrote about what it takes to become a data-driven organization in my post called, Data Driven Financial Management for Project-Businesses. One of the most important things to do is establish quantitative measures or Key Performance Indicators (KPIs). So this time, I’ll focus on specific metrics that your firm should consider tracking in the coming year. Most firms are already tracking the top three; revenue per billable consultant, revenue per employee, and billable utilization. I’m not including those below because we are already pretty comfortable leveraging these. Instead I’ve listed an additional 6 metrics that your firm needs to start tracking. Guess what? They aren’t even all financial.
#1 Project or Engagement Overrun
According to the 2018 Professional Services Maturity™ Benchmark Report, Project or Engagement Overruns cut directly into profitability, impact utilization rates, and often speak to a lack of project or engagement governance. Overruns happen when you underestimate the expenses or the amount of billable time needed to successfully deliver the work. There are three ways of calculating this metric and in my experience, it doesn’t matter which one you choose as long as you are consistent.To calculate:Let’s assume you completed a project or engagement with budgeted costs of $15,000 and the actual expenses came in at $18,500.
- Take the percentage above budgeted costs to total actual costs. In this case, the Project or Engagement Overrun was 19%.
- Take the total percentage including and above the original budget. In this case, you’re looking at a budget increase to 123%.
- Take the percentage of the cost overrun compared to the original budget. In this case, the cost overruns exceeded the budget by 23%.
#2 Project Profit Margin
The majority of firms are looking at their gross profit margin, but are not concerned about the profit margin of individual projects or engagements. Sometimes this is due to weak financial systems that are not equipped to handle more complex project accounting, other times organizations are wooed by positive Profit and Loss statements (P&Ls) and believe that there is nothing more to learn. Big mistake. Project profit margins are trending downward and fell to 31.5% in 2017, the lowest point in the past five years. Leading organizations strive for an average project profit margin of at least 35%, but less than 1/3 of companies achieve profit margins greater than 40%. To truly understand what’s happening on your projects, you need to be looking at individual project P&Ls on a regular basis.
Let’s assume you completed a project or engagement and recognized $140,000 revenue. You incurred $25,000 in non-billable expenses and $80,000 in labor costs.
Your Project Profit margin would be 25% or $140,000 – 25,000 - $80,000/$140,000.
#3 Client Acquisition Percentage
We all know it costs more to win a new client than it does to continue working with an existing one. Your firm’s ability to go after and consistently win the right engagements helps to eliminate unnecessary business development costs. Strive to keep this percentage as high as possible. When you see this metric start to trend downward, it’s probably time to review pricing models and business development strategies. Keep in mind that pursuing the right work is as important as creating the best pricing structure.
Let’s assume you acquired 10 new clients in a specific period and sent out 14 proposals. The client acquisition percentage is calculated by dividing the number of new clients acquired during a period by the number of project proposals that were sent out.
Your client acquisition percentage would be 71%
#4 Repeat Business Rate
This metric measures how many clients request more work, or an additional engagement, after an initial contract has been completed. Use this metric to understand how happy your clients are with the services performed and to monitor the quality of engagement delivery over time. Extensions and additional engagements mean that your consultants have an opportunity to establish relationships and deeply understand your clients’ businesses. Both results can mean even more work in the future.
Let’s assume you had 15 clients request additional work in a month and the total number of your clients is 45. Take the number of repeat clients within a period and divide that by the total number of clients within the same period.
Your repeat business rate would be 33%
#5 Client Satisfaction
Most companies don’t have a formal process that measures client satisfaction either during or after a project or engagement is completed. Don’t underestimate the value of feedback provided by your clients. It’s one more way to collect actionable data that can drive improvements to your service delivery model. This metric is closely tied to project or engagement quality. Most firms understand the need to maintain quality, but lack the disciplined processes to ensure consistency. This is a great area to address in 2019, because your company will see improvement across the board as effective quality processes are implemented.
Client satisfaction surveys are the most formal and complete way to gather the data. If you’re hesitant to put a formal survey in place, look into pulse surveys. Pulse surveys are typically used to gage employee satisfaction, but the concept would work well here, too. Pulse surveys are shorter and easier to complete and can be administered more frequently. They will allow you to assess the satisfaction of the client throughout the engagement, not just at the end when it’s too late to make a course correction. They are also more cost effective and more efficient.
#6 Employee Engagement
Consulting can be a tough gig. Depending on the delivery model, your consultants may be sleeping in hotels far more than they are able to sleep in their own beds. It’s not for everyone, so it’s imperative that you have a pulse on how satisfied your employees are with their jobs. You may consider implementing programs that will improve employee engagement and retention over time. Think about ways you can improve work-life balance for your road warriors or look at investing in learning and development for your workforce. Low unemployment will require you to raise the bar on what you offer your employees. Think beyond salaries to career path development and succession planning. Align your growth goals with your employee engagement strategy for the biggest return on the investment.
Employee engagement surveys are often completed annually, but they can be lengthy to complete and expensive to administer and analyze. As an alternative, you may consider using pulse surveys with your employees as well as your clients. You will be able to secure ongoing feedback and react faster to retain more of your top performers and consistently attract the top talent in the marketplace. Establish a benchmark and work toward incremental improvements over time. Engaged employees result in increased client satisfaction, improved productivity, and positively impact your bottom line.
Stop waiting for your financial statements to measure and monitor your success and incorporate these metrics into your business processes in the coming year. Over time, you’ll start to see correlations between some of your metrics and will likely be able to anticipate dips in client satisfaction when you see dips in repeat business and employee engagement. This will allow you to react more swiftly to correct issues and accommodate market challenges before they have a material impact on your Profit and Loss statement. So, stop guessing and start measuring. Be sure to subscribe to receive notifications when new blogs are posted and keep your finger on the pulse of the industry.
About the Author
Amy Champigny spent more than 15 years working in finance and accounting and most recently she served as Director of Finance for a management consulting group. In 2015 Amy implemented a Deltek ERP and transformed the finance function in her firm.