What’s the most obvious sign of a successful Professional Services Organisation (PSO)?
Well, one of the most tempting signs is an air of industry, of busyness approaching panic, staff rushing from job to job, from one client to another, busy on their mobile phones.
Granted, this may be the sign of a happy PSO, since hyperactivity is often the lifeblood of consulting, but is it the sign of a successful one?
The answer, of course, is ‘It depends’.
- On what your staff are actually doing
- On how much of their time can be invoiced
- On whether your level of activity is as planned
- On the rates at which they’re invoiced
- On how much of the time has been invoiced
- On whether the client will pay
- On whether your fees really cover your consultants’ costs
- On whether you’re squandering your profits on unnecessary overheads
Each of these measurements, in isolation, is insufficient and more or less meaningless. Together, they are the key performance indicators of a PSO.
Let’s take utilisation, a common measure of how busy a PSO is.
It’s my experience that PSO managers are often wary of discussing utilisation. Ask a professional services manager what level of utilisation he or she has achieved and you’ll get an evasive answer, or a very precise answer accompanied by an evasive demeanour. I’ve never been quite sure why this is so. Is it because they have an imprecise idea of what utilisation means? Is it because they’re incapable of measuring it? Or is because they are ashamed of the value they’ve calculated? It can often be all three.
Utilisation, the term customarily used as a standard measure of busyness, can be defined in many ways, but best practice suggests something like this:
Utilisation, usually expressed in percentage terms, is the proportion of available time spent (and/or invoiced) by professional service staff on projects, which add value to the organisation.
But this is already troublesome, and begs at least the following questions:
- What exactly is available time?
- Who exactly are the professional service staff?
- Which projects add value to the company and in what kinds of ways?
Available time is usually defined as the maximum amount of standard time (in other words normal daily office hours) that can be spent on projects. It will usually exclude holiday time, planned training time, and any other time (such as company meetings) that professional staff are required to spend on non-project work. Available time is the limit on the standard time that can be turned into value.
Professional Staff are those whose time is for sale. In most PSO the majority of staff are available for sale 100% of their time. Where staff have management responsibilities they will be counted as being professional staff half the time or less or more, accordingly.
Time is considered ‘utilised’ if it adds value to the organisation. There are two ways projects can add value:
- By generating revenue from specific clients for specifically contracted work. In these cases, it doesn’t matter whether the revenue is directly related to time by a declared fee rate per hour or day, or in some more complex way, such as in fixed price projects, or milestone-based projects, or success-fee projects.
- By increasing the capability of the company to earn revenue at a later stage. This might include product development work, other forms of research, or even sales support work.
But there’s a problem. If utilisation becomes your only guiding principle you will lose sight of the commercially more important measure of chargeable utilisation. If you’re not careful, and especially if you are measuring and motivating your staff by the simpler measure of utilisation, you will find that utilisation stays relatively high even as fee-earning client-oriented work declines. This is because your staff will deliberately or unconsciously fill their time with work on internal projects, albeit important ones that add value. Internal projects have a tendency to take up the slack when client project time declines.
Chargeable Utilisation can be defined in this way:
Chargeable Utilisation, usually expressed in percentage terms, is the proportion of available time spent (and/or invoiced) by professional service staff on projects which are charged to clients (irrespective of contractual conditions).
These are the golden rules:
- Measure overall utilisation, but
- Keep a close eye on chargeable utilisation, and
- Control your internal projects as carefully as your external ones.