Most CFO’s in professional services businesses say that employee “chargeability” is one of their company’s key KPI’s. I agree but I believe that there is an even more important KPI that should be tracked.

In a previous post I spoke about the challenges that professional services companies face in motivating their employees to complete timesheets. On other hand this post relates to completed time-sheet data.

Example

Imagine the scenario, at the beginning of the year you used the budget etc. to give your staff billing rates and chargeability targets. It’s now half way through the year and your staff are meeting or over achieving their chargeability targets but you’re not hitting your numbers! Why? How?

Back in the day, project based businesses were able to charge their clients on a time and materials (T&M) basis. In this case “chargeability” is the key KPI because every chargeable hour is a billable hour. “Unfortunately” their customers cottoned on to the fact that they were bearing the risks of project overruns so T&M projects are pretty much extinct now.

Most projects are now fixed price so all the profit risk of project is firmly now in the professional services company. In this scenario a chargeable hour is not necessarily a billable hour.

Back to the question: why are my people so busy and yet the company is not meeting its budget?

Billability/Efficiency

You have probably already guessed from above but this is because chargeability is not the only KPI that you need to worry about. You also need to look at hours billed.” We like to call this “efficiency” because, while chargeability shows the percentage of billable hours that your team worked, their “efficiency” shows the percentage of those hours that were actually billed.

This can be difficult to distill but the information should be available assuming that you have a decent ERP or a professional services automation (PSA) system and that project estimates are calculated based on hours. In a fixed price project, the estimated number of hours will be the “billed” hours.

The trick is not to over-complicate the analysis since the objective is to give high level insight and analysis to the management team/board of your company.

People also struggle to visualize percentages so it’s much better to show the data in a more tangible format – In this case cash $.

For example:

• A company
  • with 10 employees
  • billing rate is $1000 per day
  • target utilization of 75%
  • works a 20 day month
  • will have a target chargeability of $15,000 per month
• If the employees’ actual utilization is 80% then the company should have $16,000 of revenue.
• Unfortunately, actual revenue shows $14,000

This example clearly shows the dollar impact of meeting and exceeding chargeability targets. It also shows that there is something going wrong as $2,000 of chargeable work was not billed.

Overwork

This known as overwork and could be for a number of reasons. For example:

• The estimate was flawed,
• The team was not briefed properly,
• Scope creep etc.

The use of $ values shows the magnitude of the problem, particularly if the company has a lot of work, or worse, is hiring contractors to cover high volumes of work.

So where does the efficiency come in.? In the example above this is 87.5% (14/16) of the percentage of chargeable hours billed.

Wouldn’t it be great if you had a report that showed you both the chargeability and efficiency as KPIs?

Wouldn’t it be great if these reports showed you the percentages and the absolute cash values?

Believe it or not there are tools on the market that will provide this information. Contact us to find out more.