Lost time is never found again; and what we call time enough, always proves little enough. — Benjamin Franklin, The Way to Wealth (1758)
In my last post on the topic of KPIs, we explored the marketing and financial metrics that I felt were critical for companies to measure. The focus of this post is your services team – that is, the team who rolls out your product or service to your customers, managing the solution implementations, integrations, associated training, and customizations. This post is mainly aimed at software or software-as-a-service (SaaS) companies; however, this may be helpful to other types of companies that have a very similar functional area.
Your professional services team is somewhat analogous to the Marines: when something needs to get done, you call on them to get “down and dirty” and find a way to success, no matter the obstacles. As a former professional services engineer myself, I can tell you that it’s very common for folks in this role to have a “can do, will do” mindset. That attitude is a great asset when it comes to helping ensure successful project delivery; however, it also comes with significant risk, as a zealous project manager could unwittingly degrade your company’s financial performance by failing to balance between pleasing the stakeholders with the best solutions and ensuring that her own company is fairly compensated for services rendered.
To mitigate this risk, I highly recommend you start tracking on at least three KPIs, if you aren’t already (and if you are, I recommend you make these among your more important metrics):
- Billable Utilization Rate – One of the most common errors of a product company is a tendency to undervalue the services it sells alongside the product (e.g. training, customizations, or installations to enable sales). In most cases, a healthy product company can have a profitable, or at least break even, services team – and still perform well in the market. Tracking the Billable Utilization Rate – the percentage of Services employees’ time that is billed out to customers, rather than spent on unbilled time (overhead) – is critical to re-capturing the value of services.
- Average Billing Rate – This is a measure of the actual pricing-per-hour for all non-overhead services labor (i.e. excluding non-customer work, but including any work that’s given away as a result of a fixed-fee engagement or similar arrangement). The goal is to achieve a billable rate that is well higher than the actual total cost of the labor (fully-loaded, including benefits and other costs of the employee or contractor), so as to ensure profitability even after considering unbilled time. Calculating the billing rate excludes unbilled time. Therefore, this is a sister KPI to the Billable Utilization Rate.
- Estimate to Actual Ratio – This KPI serves as a measurement of the accuracy of professional services in estimating the amount of work to be done. This is especially important when you have switched to a “time & materials” model (over fixed-fee), as you don’t want the customer to be unhappily surprised with a higher than expected bill. Additionally, in the spirit of continuous improvement, this KPI – especially the “actual” denominator – is essential to help the project teams to be as fast and efficient as possible, over time. The value of measuring professional services efficiency is not so much about in driving their own profitability as a team/department, but more about how the acceleration of a successful customer implementation of your product impacts your revenue – especially if you are a SaaS company. This is because revenue recognition can’t begin until the product has gone live.
You likely have noticed a recurring theme throughout this blog post: time. To calculate any of these KPIs will require a very well-tuned, project-oriented time tracking solution. Moreover, your finance department would likely prefer if the solution integrated with their ERP/accounting solution.
In my view, the key takeaway here is that your company can be more successful when it sees professional services not just as a cost center that’s a means to the end of product revenue, but as an engine of revenue, and even some profitability, in its own right. It requires discipline – from both sales and services – to make this work. But once done, your company will be on the path to driving greater enterprise value.