Are you running a profitable professional services business?

April 30, 2010

As a growth capital fund, I am always surprised to find that expansion stage software companies that sell professional services rarely know whether they are profitable or not. 

While expansion stage companies have systems for tracking financial performance, they rarely capture essential information about the service side of the business. As a result, companies struggle to manage their service and support financials, while impacting margin.

What are the key performance indicators that matter?

Available Hours: Companies need to be realistic about this. Approximately 25-30% of these hours are attributable to non-delivery hours, i.e., vacations, meetings, training, etc. If your available hours fall below 50% of a normal work week, it’s hard to be profitable unless people are working extra hours.

Billable Hours: Well-managed professional services groups typically bill between 50-80% of their available hours. If you focus on greater than 80%, client satisfaction will certainly suffer.

Average Billing Rate: It is important that you maintain and even increase your average billing rate over time. It is easy for customers to haggle over product pricing, however, there should be no sensitivity to service pricing. Also, customers generally pay higher rates for services related to new or cutting-edge products. As customers absorb and build this competency in-house, it tends to commoditize or dilute the average billable rate. I have found that consultants are most happy/productive when they are working on the “new-new” thing and not exceeding projects greater than 3-4 months in length.

Profit Margin: Services margins typically run between 30-35%. Overhead costs will run 60-65% on average. Considering feathering in sub contractors to relieve this cost. Ideally, in house consultants should be focused on high value work. Also, investing in better efficiency, tools, reuse, and knowledgebase will ultimately increase productivity and thus margins.

Key Account Director

Marc Barry is an experienced sales leader in the Enterprise Technology Industry including Software, Cloud and Consulting. Currently, he is the Key Account Director at <a href="http://www.oracle.com">Oracle</a>. He was previously a Venture Partner at OpenView.