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What are the KPIs of an IT Consulting Business?

consulting business KPIsI have been recently been solicited to act as the CFO of a growing International Tech Consulting Firm for a period of one (1) year. While the company has propietary software they sell, most of the revenue comes from Consulting.  In summary, the company is a professional services firm charging hourly fees.

What are the KPIs that you have used in the past for Performance Measurement? 

What tools do you use to measure this KPIs?

And how to do you implement this tools?

Thanks a lot.

Answers

James Scott
Title: Consulting CFO
Company: Early Growth Financial Services
LinkedIn Profile
(Consulting CFO, Early Growth Financial Services) |

The most common KPI is consultant utilization, based on 2040 total hours in a year, you will want 75-80% billable time per consultant. KPI of 130 billable hours per month per resource. (130 x 12 =1,560 billable hours, 1,560/2,040= 76.4%.) You can tweak it a bit higher or lower. You should also track revenue per billable hour, and compare that with the all-in cost per consultant per billable hour. (That is the fully loaded cost per billable hour.) Most consulting companies go bust from not ensuring utilization and average hourly revenue are managed closely.
To optimize valuation, you also should be watching your total direct margin for software plus services in an engagement. The mix is important, as some projects may have a low software component and a high labor cost for services. A bad mix. High margin software sales should not be subsidizing low margin services.

The best companies I have worked with have regularly attained 90% gross margins on software and 60% on services, with a total gross margin just over 70% optimal.

Irv Williamson
Title: Owner
Company: Growth Guidance Solutions
LinkedIn Profile
(Owner, Growth Guidance Solutions) |

I have two consulting clients and James has it right. Utilization of in-house consultants is the key driver. Also try to keep your subcontractor margins separate from your in-house resources and be sure to include the full cost (wages, taxes, benefits) of in-house resources when looking at their contribution margins.

What kind of IT consulting does your organization provide?

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

Utilization is one of the key drivers as mentioned above. We established a weekly outlook or review of the month (forward looking) to determine what resources were booked and what utilization we would be at. Software revenue is often very "lumpy" so the weekly review was very helpful to determine if any software sales would occur. Besides looking at margins, we monitored average billing rate per hour. If our profitability was not where we targeted, we looked at changing our mix of projects or getting resources that could do higher value work. Good luck and feel free to contact me if you have any questions.

Anonymous
(Chief Financial Officer) |

Thank you very much for your answers. All of them are insightful and right-on-point.

@James Scott: Thanks for all the info. Regarding your last statement: What's the average overhead you've seen in the companies you've worked for. For example, I am noticing an "Ok" margin with room for improvement, but the Administrative load takes a heavy load on the EBITDA. What is the average EBITDA margin for this sort of industry?

@Irv Williamson: The company sells internally developed, but customizable software: hybrid between an off-the-shelf / from-ground-up solution. Interestingly, they measure a lot of KPIs for Healthcare, Pharmaceuticals, and Banking. Thanks for the tip on the sub-contractor separation.

@Patrick Dunne: I have already noticed a very "lumpy" curve on the revenue stream. Thanks for your input.

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