The KPIs every consulting firm should obsess over

Scaling a boutique consulting firm in today’s fast-paced market can seem like an overwhelming task—on both sides of the Atlantic.  

Fortunately, we sat down with Prof. Joe O’Mahoney, Professor of Consulting for Cardiff University and Michael Zipursky, Co-Founder of Consulting Success, to hear their thoughts on the best practices growing firms can follow, and when to implement them to ensure success. Watch the full webinar here.

Key factors to consider

Before you jump in and start measuring your key areas, Joe has a few words of advice. First? Measure according to your size.

“There’s no point trying to measure everything when you’re small, because the measurements don’t mean anything,” he explains.  

“You’ll end up spending too much time measuring, and not enough time to doing business development.”

Second? Adopt a PSA (professional services automation tool) sooner rather than later, regardless of your size.

He expands: “Once a firm is looking to sell, the requirements around data from your buyer or even your bank are extremely demanding.”

Some firms make the mistake of leaving PSA adoption until they’re at 30-50 fee earners. This is risky, because implementing a PSA at that stage can be significantly more disruptive, with more resistance from your employees.

“My own studies show PSAs correlate to a higher exit value, a higher multiple, and even higher project margins,” says Joe. “You don’t have to use all of the metrics, but it will save you time and money.”

Margin and profitability

For Michael, one of the most important metrics smaller firms need to focus on is their margin and profitability. He suggests there’s two key ways to frame this analysis: client profitability and project profitability.  

On the client side of profitability, Michael was recently working with a firm whose marketing and messaging was cast quite broadly to all of their different types of clients.

But after conducting an analysis of their clients and the revenue they brought, they found that most of their business was coming from one larger, very specific client, adding up to the vast majority of their profitability.

With this insight, they were able to shift their targeting, messaging and content development to speak directly to that ideal client, driving a higher profit margin.

In terms of project profitability, keeping your finger on the pulse is vital; firms need to constantly monitor their projects to ensure potentially large revenue streams don’t end up becoming small trickles.

“Not all projects or services are created equal,” Michael says. “It’s not uncommon for firms to take on projects that seem like the revenue will be quite large, but the profitability ends up being next to nothing.”

Resource utilization

“Utilization rate is something many firms should be paying attention to,” says Michael. Resource utilization is a powerful metric for predicting the overall success of your projects and, ultimately, ensuring profitability.

It’s also critical for keeping your staff motivated and productive. Overutilization can lead to burnout, which can eventually lead to attrition—and that’s not what you want in today’s ‘war for talent’.

On the other hand, Michael notes that this is a less relevant KPI for firms under ten FTEs. “You won’t want to spend too much time there as you’ll already have pretty good visibility over your smaller number of staff.”

Distinguishing levels of reporting

“It’s important to distinguish between output and input KPIs,” says Joe.

For example, some of the major output KPIs for firms growing toward exit include revenue, EBITDA, employee churn and average client contract longevity. But there’s nothing you can really do to change these outputs without changing the inputs.

“Once a firm starts getting bigger, you need to distinguish between what’s being reported at different levels.”

This means that the senior leadership team will be looking at metrics around EBITDA and revenue growth at a more strategic level, while the management team may be looking at metrics around project profitability and utilization. Then, you’ll go further down to an operational level.

By building this hierarchy of reporting, you also begin to build a cadence. For example:

• Monthly: financial reporting, budgets, forecasts
• Quarterly: team reports, profit and loss

• Yearly: strategic reports around competitors, markets and new services

“If you don’t have some type of system in place to manage that, you’ll end up with fifty spreadsheets, wading through historical data,” warns Joe. “It’s much easier to simply press a button that runs a host of reports—and it’s better for your potential buyers.”

Key takeaways

• Adopting PSA software sooner than later gives you the best chance of reaching your growth goals and making a successful exit
• Boutique firms shouldn’t get lost in the weeds of metrics and spend too much time monitoring KPIs when they could be spending that time on business development

• Profitability can be measured in terms of both your clients and your projects, and it’s important to keep an eye on both
• KPIs should be broken down into different levels, such as operational and strategic, with a regular cadence to support this

CMap also recently shared a list of the 25 KPIs that consulting firms should be monitoring for success, including everything from operations to delivery—download and share it here.