Springthrough Thoughts

Metrics That Matter To Service-Based Firms

Jun 28, 2016 by Springthrough

When it comes to making decisions, data matters. It helps reduce bias. It shows trends and can often predict future performance. There is plenty of data out there, which can be why some people avoid addressing it. In order to make sense of the numbers, your business needs to understand how the data reflects your business goals.

At Springthrough, we obtain meaningful data through tracking key metrics that define our organizational performance. Many will define these metrics as their Key Performance Indicators (KPIs).

Each metric connects to Springthrough’s strategic plan. With some financial metrics, that part is easy. The utilization of our employees, for example, connects directly to the profitability of our company as a services-based firm. We can also evaluate profit/(loss) by employee to see how our staff time coverts into profit. With other important metrics, they paint a picture of Springthrough’s reputation with its clients and employees. Both kinds of metrics define the performance of our company and what we can anticipate in the future. At a firm like ours, where people are the “product”, the numbers can reveal a lot about the health of our company.

Our Key Performance Indicators

Net Promoter Score

Customer satisfaction should be one of the first things any service-based organization tracks. Quality service will lead to additional business from existing clients and referrals for new business. One way to track customer satisfaction is through tracking your net promoter score. A net promoter score measures how likely an organization would be to recommend you to another business. At Springthrough, we ask most of our clients to provide us with a net promoter score between 1 (bad) and 10 (great) at the end of a project. Our goal is to have an average net promoter score of 8 or better.

Utilization 

Utilization refers to the percentage of employee time that is spent on client-related work. For example, if an employee works 40 hours in a week, and 30 hours are spent on client projects, they would have a utilization of 75% (30/40 = .75). There is a high correlation between utilization and profitability. This is especially true with projects that are invoiced based on time and material. However, utilization is still relevant with fixed recurring invoices due to opportunity cost. What I mean by opportunity cost, is that the developer could have been working on other billable projects, generating further revenue for the company. It may also mean that the client is overpaying for their support contact. Since we strive to provide value to our clients, we actually prefer when developers providing support are highly utilized. 

Staff Retention Rate

Springthrough’s staff are its greatest assets. As our President likes to mention, we have to think of ourselves as a talent agency. For this reason, we track employee turnover. Employee turnover is calculated as follows:

Annual Retention Rate = 1 - (Number of employee separations during year / average number of employees during the year) * 100

Example:

100 - ((10 employee separations / 45 employees) * 100) = 77.78%

The web/software development industry traditionally has very high turnover. This can be partially attributed to the fact that web/software developers are in high demand. Meaning that they can find work easily compared to many other fields. Our goal is to stay under the industry average. When people do decide to leave, it is important that we celebrate their accomplishments at Springthrough. We model many aspects of the Netflix Culture Deck, and that means that we encourage employees to keep learning and growing.

Profit/(Loss) by Employee

Profit/(Loss) by employee is another metric which we use to track financial performance. It is calculated as by first determining profit and then dividing by the number of employees.

Example:

Monthly Revenue of $500,000 – Total Expenses of $400,000 = Profit of $100,000

Monthly Profit of $100,000 / 50 staff = Profit by Employee of $2,000

We calculated profit/(loss) by employee on a monthly basis. Considering that salaries and benefits represent over 80% of our organizations cost structure. We find that this metric is useful for determining how efficiently the organization is converting staff into profit.

Other Metrics To Consider

There are dozens of other financial metrics that can be used to determining business performance. Some examples include accounts receivable turnover, day’s sales outstanding, quick ratio, return on assets, revenue per employee, and net profit margin. If your small business is not tracking metrics, I recommend that you research some meaningful metrics for your business model and start tracking them on a recurring basis. You may be surprised by the insight it will bring to understanding your business’s performance, and they will give you the clarity to make sound business decisions.

 

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