A well-managed PSO anticipates change with the right key performance indicators — helping leaders look ahead instead of always over their shoulders. Whether PSOs are considering M&A, structuring pricing or forecasting capacity, it comes down to numbers.

Every service organization should have a list of key performance indicators (KPIs) that measure how well the business is doing. KPIs will be different for every organization, but in general PSOs should look at the following five:

• Annual Revenue per Billable Consultant – Total revenue divided by the number of billable consultants — this should minimally equal one to two times the fully loaded cost of the consultant
• Annual Revenue per Employee – Total revenue divided by the total number of employees (billable and nonbillable) – this should be close two times the fully loaded cost per person
• Billable Utilization – Calculated by dividing the total billable hours by 2,000 (the average utilization per employee) – this KPI is central to profitability and signals the need to expand or contract the workforce
• Project Overrun – Percent of budgeted cost to actual cost – consistent project overruns eat into profits and signal inefficient project governance
• Profit Margin – Calculated as revenue that remains after paying for the direct costs of delivering a project (payroll, transportation, materials, etc.) – can be fixed-price or not to exceed price or related to hourly time and expense.

Because they sell knowledge and service, PSOs realize revenue growth and profits mainly by leveraging people effectively. Time is truly money in a PSO. Not every minute can be billed, and many PSOs support nonbillable activities such as volunteering to enhance their team culture. However, the ratio of billable activities must be high enough to achieve per person revenue goals and margins. By the same token, nonbillable employees must be a smaller percentage of the overall employment base compared to billable employees.

Effective KPIs are monitored and reviewed regularly. This can happen during senior leadership team or sales meetings, but the emphasis is on regular review. The biggest squeak gets the grease, and leaders must commit to change before they will see it in their organizations.

Here are some of the ways that PSOs can improve the five primary KPIs:

• Leveraging senior-level professionals for high-level consulting and project oversight
• Delegating project management and technical services to mid-level professionals
• Right-pricing engagements
• Defining and focusing on ‘A’ clients
• Increasing efficiency of project delivery through processes, productization and automation
• Outsourcing nonbillable or repetitive tasks that relate to running the organization

Such methods sound like common sense in theory, but we are still dealing with people. Depending on the size of the organization, prioritize which methods to pursue first that would make the biggest impact on profits.

• Do you have low-profit clients that need to be transitioned to another service provider?
• Do you have senior professionals unaware of tasks they could delegate (or unwilling)?
• Are your processes inefficient because they are tailored too much for each client, and therefore impossible to delegate?
• Are you underpricing your services or underestimating the actual time it will take to deliver them?
• Are you sacrificing client service in the pursuit of new business?

Every PSO experiences these challenges. Being aware of them is the first step to discussing solutions to eliminate them.

In any event, one of the simplest ways to boost KPIs is to limit the time that owners and senior staff spend working in the business rather than on it. This relates to all of those time-consuming administrative, financial and operational tasks that must be done, but could be done more efficiently and cost-effectively by someone else — allowing professionals to focus on billable client work.

At Cornwell Jackson, our tax and business services teams have worked with clients for many years to optimize back-office functions, but also assist with business strategy and planning. We have supported PSOs in determining the best KPIs, the optimal level of staffing and timely introduction of accounting tools and processes that enhance their growth. For more information on how your PSO can face today’s growth challenges head-on with a qualified outsourced relationship, contact us.

Mike Rizkal, CPA is a partner in Cornwell Jackson’s Audit and Attest Service Group. In addition to providing advisory services to privately held, middle-market businesses, Mike oversees the firm’s ERISA practice, which includes annual audits of approximately 75 employee benefit plans. Contact him at mike.rizkal@cornwelljackson.com.