How to measure a successful IT consultancy company
What is a successful IT consulting company? “It’s a company that’s growing and is profitable, with satisfied employees, and which is attractive to both customers and investors,” writes Runar Vestrheim. He also gives eight points of advice on how to measure success.
I have previously blogged about "How to build a successful IT consulting company". In this blog, I follow up on measuring a successful IT consultancy company and which measurement parameters or Key Performance Indicators (KPIs) you should manage to substantiate success.
Most people are probably familiar with the term "you get what you measure, " which also applies to consulting companies. There are, of course, many KPIs to choose from. Below I propose eight measurements. These are the ones that are the most important and where the actual results of the measurements collectively make up the difference between really successful and less successful consulting companies.
Let's discuss what constitutes a successful consulting company. Here I define it as a company that grows year after year with solid revenue and income growth and with satisfied employees. A company that’s attractive to both employees and investors. Attractive for employees because they are part of an exciting company in a tailwind and a high employee engagement. Attractive to investors due to increased company value.
Briefly and concisely, here are the parameters I recommend to measure:
- Revenue grows by at least 15% annually
- Share of service-based revenue constitutes a minimum of 1/3 of total revenue
- Invoicing rate is more than 80%
- The average hourly price is in the upper range of your country’s average hourly price.
- The number of consultants grows by at least 15% annually
- Good diversity with an average age below 35 and at least 40% women
- Employee satisfaction is at least three percentage points above the industry standard
- Good profitability with an EBITDA margin of at least 15%
The above is actually all you need to know and take away from this blog. Is it really that simple? Yes, actually, but it is challenging to deliver consistently year after year. Start your measurement, try - and good luck! If you manage this, you are on the right track to something big and profitable.
PS! The target figures are general. If my target figures do not match your business or geography, adjust the target figures, but use the measurement parameters. And below I amplify each measurement parameter if you want to put meat on the bones.
1. Revenue grows by at least 15% annually
Revenue is, of course, a crucial measuring point, and in the consulting industry is often governed by the number of consultants, invoicing rate and hourly rate. But the problem with revenue is growing, and it should be at least 15% year over year. I define recurring revenue as repeating year after year without you having to do much. In the SaaS world, it is reminiscent of the "net retention rate", which measures how much you manage to grow revenue from the existing customer base through renewal and upsell over a given period. Often is, the term "stickiness" used, i.e. how well the customers are tied to you. As far as I know, there is no exact definition of recurring revenue. Still, it could; for example - be a customer relationship that has lasted over many years and which is likely to last for many more years. It is wise to have a side view of how much of the revenue is recurring. Investors likerecurring revenue because of less risk of rapid loss of revenue. This is in contrast to short term one-off assignments, which have a higher risk.
2. Share of service-based revenue constitutes a minimum of 1/3 of total revenue
In service-based revenue, the delivery to the customer is carried out as a service instead of, i.e. selling one or more named consultant(s). Then you can achieve scaling, and scaling is good. What I mean by scaling here is that the EBITDA grows faster than the revenue. Suppose you manage to deliver as a service. In that case, you can often find opportunities to automate or sell the service as a kind of insurance so that the customer does not have to worry about what you are responsible for. You use fewer resources to deliver the same high quality. Then you can get an almost perfect business. Effective services businesses can make a bottom line of over 50%. Then you are in the SaaS league, which is highly valued in the financial world. If you have, for example, 30% of your revenue as service-based, things start to get really good. Furthermore, service-based revenue is also very often recurring revenue due to its form of delivery. That’s twice as good!
To the extent that you can reuse code, automation, methods, knowledge, etc., between deliveries (I call these “reusable assets”), it is extra valuable, and I would argue a kind of service-based revenue. Then you can charge a higher price for the result because it is based on something you have already created, which has a direct increase in value for the customer. Reusable assets are more difficult to measure. The principle here is that you focus on it and that reuse actually happens. Then it will gradually happen more and more often and provides an opportunity for additional scaling beyond what I have quantified here.
3. Invoicing rate is more than 80%
Invoicing rate speaks for itself in the consulting world. But how should it be measured, and what is a reasonable billing rate? You can measure it however you want by finding your level that generates the desired profitability, as discussed below. My rule of thumb for measurement is to include all the management and admin you need in the delivery unit itself, hence also a target figure of "only" 80%. However, remove support functions such as HR and finance. Then you can have the number of support functions you want without it affecting this measurement parameter. Invoicing rate measures how efficiently the delivery organisation uses resources in payable assignments. A rule of thumb is that a billing rate of over 80% usually is reasonable.
4. The average hourly price is in upper range of county's average
Hourly rates also speak for themselves in the consulting world. It indicates how much customers are willing to pay for the expertise of your consultants. Many factors affect the average hourly rate your consulting company should have. Therefore, it is challenging to specify a correct concrete average price. Without knowing anything about the age mix or services, this should generally be in the upper range of your country's average hourly price. Here you can find the level that is right for your profitability.
5. The number of consultants grows by at least 15% annually
Of course, the number of consultants is also a vital measurement parameter unless one delivers primarily service-based. This also speaks for itself. In today's IT market, it can be challenging to attract talents. Many factors come into play in the search for consultants. Still, the biggest driver of success is active and visible employees inside and outside the company (for example, organising meetups, holding lectures, etc.), as well as the company brand created through marketing. If you are going to build on more measurement parameters than the eight that I propose here, I recommend that you think in the direction of branding and marketing. It is effective. Net growth in the number of consultants (new hires minus departures) should be a minimum of 15% year over year.
6. Good diversity with an average age below 35 and at least 40% women
Diversity in the form of a different composition of age and gender is essential in today's global IT industry. Diversity affects employee satisfaction positively in almost all cases through greater well-being, commitment and learning. In addition, it is good for creativity and robustness in the business. If you don’t want a company that will be retired for a few years, you must renew yourself. Not least, diversity is crucial for you to be able to recruit at a high pace. An average age lower than 35 years and at least a 40% proportion of women should be a goal to strive for. It's not easy, but the smartest get it done.
7. Employee satisfaction is at least three percentage points above the industry standard
If the company is to succeed, the employees must be motivated and committed. This is measured through employee satisfaction. Employee satisfaction expresses whether the employees have exciting tasks, learn something, have/get the opportunity to further development, have faith in the company's journey, are proud of the company, have fun socially with their colleagues and that the compensation (the salary) is suitable. Fair pay for hard work. Salary should be a hygiene factor. Employer and employee must both be quite satisfied with the salary, and it must be market-adjusted. There are various ways to measure employee satisfaction. I recommend buying services for this. Then you also get to benchmark your results against the industry. Make a goal to be a certain percentage above the industry average, for example, three percentage points above your branch.
8. Good profitability with an EBITDA margin of at least 15%
If you manage to do all of the above, you will typically also get a solid bottom line with an EBITDA margin of at least 15%, and preferably much higher if you are good at service deliveries. A prerequisite is that you only have a few support functions in your company or that other financial circumstances don’t negatively affect your result.
Suppose you have a combined revenue growth and EBITDA margin of over 40 (revenue growth year over year in % + EBITDA margin ≥ 40). This is known as "the golden rule of 40" in financial circles. In that case, you are indeed an outstanding company and have managed something that few others in the industry are able to. If so; congratulations!
