For today's professional services businesses, it is crucial to adopt a systemized process of measuring your profitability (both target and actual margins) so that your business can effectively scale as it grows.
There are two foundational metrics that a services company must systemize. First, you need to understand the billable utilization of your team. While utilization rates can vary by industry, a healthy services business should target an 85 percent billable utilization.
For example, if you are the owner of a small services firm, you should be able to measure 85 percent of your employees’ hours toward billable, client-facing work. (What are billable hours defined?) The other 15 percent will typically be spent on non-billable, but required business tasks, including internal meetings, business development, training and planning. At that utilization rate, you are optimizing your staff resources and are poised for profitability.
Second, you need to achieve and maintain a 50 percent margin across the business. In the services industry, margins are measured most effectively at the individual level. You must know both how billable a resource is, and the differential between their loaded cost and bill rate. (Understand loaded cost and bill rate.)
These metrics become even more critical for small firms and agencies, who typically rely on a few key, in-house professionals – designers, writers, account executives – to both accomplish client work and manage their billable hours. At those firms, agency leadership must keep an even closer eye on team productivity to ensure their staff, and their billable utilization, is as optimized as it can be in order to maintain growth while maximizing profitability.
At Mavenlink, we’re passionate about helping professional services businesses improve profitability and achieve sustainable growth. I’ll be hosting a web conference soon where we’ll discuss the topic of scaling your business for growth, and I look forward to speaking with you personally about your experiences. In the meantime, I welcome your comments.