According to recent research, mid-market companies, particularly those engaged in the service industries, are some of the US economy’s biggest drivers.
These service businesses can monitor their customer retention, revenue, growth, and customer satisfaction score using Key Performance Indicators (KPIs), which is a practical and potent business resource.
The more development a services business experiences, the more important it becomes to measure the various factors related to such development. For example, the quality and quantity of what you’re trying to monitor should be considered. Attention needs to be given to the specific KPIs you will use in order to evaluate your business growth.
No more than seven to 10 key performance indicators are advised for application either at the company level or in a particular department. Going overboard with your KPI for a service company could lead to overthinking and no decision being reached, which is what the business world refers to as “analysis paralysis”. This article will discuss different KPIs, so you can decide what KPI for a service company to use.
KPIs vs Metrics
First, what is the distinction between KPIs and metrics?
A key performance indicator focuses on a specific goal. It quantifies the performance throughout a period of time to a strategic goal, or outcome. These outcomes (goals) can range from reaching a specific quarterly income to drawing in a number of new customers per month.
Metrics back KPIs by identifying the strategies and methods required to achieve the outcomes set by those key performance indicators. These metrics are then used to trace and evaluate how much of the specified objectives (catalog downloads or store visits, for example) are achieved.
A business’ targets and priorities are constantly evolving, but its financial statements remain stable. This is where you introduce KPIs to shake things up.
A well-thought-out plan highlighting these KPIs and metrics, together with your financial reports, will accomplish three things for your business:
- ensure fundamental objectives are allocated responsibility and accountability
- expected outcomes are set using data that can be assessed and applied when making decisions
- link up your fiscal information with your administrative processes in order to convert temporary priorities into long-range objectives
The List of the Best KPIs for Professional Service Firms
Time utilization can be applied to either team members or fiscal performance. It involves noting the number of hours each team member spends on billable projects and dividing it using the overall hours left available.
This key metric helps you to better comprehend the overall welfare of your team and the company’s productivity levels.
Professional services organizations consider this metric to be vital for performance management, resource planning, and establishing a pricing method, among other things.
Companies occasionally apply a specific point of reference for the denominator shown in the equation below. The standard point of reference ranges from 1,800 to 2,100 for the amount of possible billable hours per year. It is regularly determined by the company itself or by the industry in which it operates.
Time Utilization Rate = Billable Hours / Total Work Hours
The billable rate is the amount a customer is charged per hour for the service provided by the business and its employees.
Your client will then consent to paying a set price (billable hourly rate) determined by dividing the final amount with the number of hours spent performing the job.
You can then contrast the difference between the actual billable rate and the price initially set. Companies need to understand the necessary principles of billable hourly rate management if they’re looking to upgrade that particular detail.
Billable Rate = Total Revenue / Total Billable Hours
Revenue Per Billable Team Member
This KPI falls under the process category. It helps you to monitor three essential aspects: your team’s workflow, productivity, and general profitability. You can work this out by dividing your trailing 12-month (TTM) revenue by the amount of billable team members.
If you’re wondering when to hire someone new, merge the data from this KPI with the overall figures related to your utilization rates and sales pipeline.
By monitoring this metric monthly, you’ll gain a comprehensive understanding of the developments in the team’s productivity and the effect that major projects are having on your ability to deliver what your customer wants and needs.
A general guideline is to have the revenue per billable employee be at least one to two times the cost per billable employee. A company that is providing a quality specialization service might deal with higher totals. For example, legal or management consulting firms can charge up to three times that rate.
Employee Billable Rate = Revenues Billed by Employee / Billable Hours Related to Employee
Customer Retention Rate
The percentage of your current customers who return during a particular period is known as your customer retention rate. Having this information helps you to know what keeps your customers coming back and can pinpoint any areas where you could enhance customer experience.
Drawing in new customers can cost five times more than retaining current ones. It’s logical from a business growth standpoint to foster strong professional relationships. You want customers to make an effort to engage with your business on a variety of levels. A customer effort score (CES) will help your service teams to identify how they can create such brand advocates.
With the competition just one click away (literally), it’s become a necessity.
There has been a 22% rise in service organizations who have set customer retention as one of their KPIs. You can avoid losing customers if you follow their example.
Customer Retention = Number of Customers at the End of the Period – Number of New Customers Acquired over the Period / Number of Customers at the Beginning of the Period
This key performance indicator measures the potential money one could earn on a project and the profits and losses from a project. The percentages determined for both profit and margin are employed to indicate the project profitability KPI for a service company.
Each project is different from the next and can have a distinct effect on the general performance and financial status of the business. If a company understands why specific projects brought in a profit or resulted in a loss, they can focus on more promising enterprises. Bypass enterprises that will lead to a revenue deficit.
Project Profitability = Project Revenues / Billable Hours Related to that Project
Scheduled Billable Hours
This service KPI informs you of how busy billable employees are expected to be. The key to this is being proficient in scheduling and supervising all projects and resources within the company.
If you combine this with utilization tracking, you gain a better understanding of the predicted revenue per billable consultant. It also helps delivery organizations know what to sell and when to launch such an operation.
Gross Margin Profit
This key indicator works out not only profitability potential but helps you get control of current projects. If a projects’ requirements have become unmanageable (scope creep) or if a project was mispriced due to errors in working out the estimate, this KPI will help you.
When it comes to projects, you can determine if you are allocating your staff efficiently (for example, if more high-priced employees than required are assigned to a low-revenue client). You can see which services are being carried out successfully.
The service industry median sits at 34.5% across a variety of companies, as shown by the research.
Gross Margin Rate = Revenues – Cost of Services / Revenues x 100
Realization Rate is another crucial metric regarding profitability. To calculate your realization rate, you must divide the number of working billable hours by the number of hours for which the client was charged. Imagine, your company spends 50 hours working on a project, but the contract stipulates that the client be billed for 40 hours. The realization rate is 80% because the client was billed for 40 hours which is divided by what the team worked, 50 billable hours.
This metric is focused on revenue. How many hours can you monetize for the services you deliver? It’s a measurement that lets you make the most of a project’s profit potential. Use key metrics like this to evaluate project overruns, calculate hours worked but canceled to curtail costs, and scope projects.
Realization Rate = Number of Billable Hours Worked / Number of Hours Billed to Clients
Average Resolution Time
How long does it take you to acknowledge concerns and requests from clients? How long will it take to iron out those issues? Both are equally important, but clients prefer a low-resolution time to a low response time. Three days is considered average, but the top 20% have resolved problems in less than two days.
Quick resolution time is important if you want to maintain your reputation and build good client rapport. A client who can rely on you will support your company instead of taking their business to another MSP competitor.
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Good management of incoming projects allows for a service business to expand consistently with each fiscal year. As more projects are taken up, a backlog can occur. It is vital for a business to manage this key performance indicator well.
A backlog includes service projects and income that the team is currently working on or that have been put on hold for a time. Understanding a backlog in real time gives your team the data they need to plan for both current and future projects. They can also make decisions related to important processes, such as who to hire for the job.
Annual Overhead Per Billable Team Member
This is a standard metric that determines the revenue per billable team member to offset operational costs. It falls under the process category and correlates to the KPI for revenue per billable team member. You divide the trailing 12-month overhead costs (what it costs to run the business apart from team member costs) by the number of billable team members.
You can find out what it costs to run your service company, and it’s a vital KPI for any startup wanting to evaluate the effect a new hire can have on overhead expenses. This performance indicator is fundamental in setting the billable rate for team members. Its progression is key to identifying if your company’s effectiveness is advancing and if there is an increase or decrease in revenue as it relates to the growth of your business.
Annual Overhead Per Billable Team Member = Annual Overhead Costs / Number of Team Members
Return of Investment (ROI)
The return of investment KPI lets you know how much money you make on each investment. The amount of return is often equal to the net profit or revenue. On the other hand, your investment is an aggregate amount of company assets that include real estate, equipment, stock, cash, and the like.
ROI = Net Result / Investment x 100
From Tracking to Understanding the KPI for a Service Company
Teams involved in running service businesses can use the metrics discussed in this article to take the company’s operation and performance to the next level. A good KPI for a service company can create a general positive brand image that goes beyond customer expectations.
If you liked this article about the KPI for a service company, you should also check out this one with service business examples.
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