Measuring the success and growth of a fast-growing IT services business is challenging. In this blog post, we'll discuss the top 5 KPIs that every fast-growing IT services business should be tracking, along with industry benchmarks for each KPI, and how to measure them. Founders of IT services companies need to monitor these metrics because these metrics reflect the performance and health of the company.
1. Revenue growth
Revenue growth is a critical KPI for any business, and is the most important indicator for future performance. You need to track both year-over-year (YoY) growth and quarter-over-quarter (QoQ) growth to gain a comprehensive understanding of the business's performance. Revenue growth needs to be reviewed on a quarterly basis.
Industry benchmark: A well-positioned early stage IT services company should be growing at 50% YoY, but a good number is 100%. The growth rate of the business should also strive to be higher than the growth rate of the underlying eco-system it serves. For example, a company serving the AWS eco-system should strive to have a growth rate above the growth rate of AWS itself.
Measurement: To measure revenue growth, calculate the difference between the current period's revenue and the same period in the previous year. For example, to calculate YoY revenue growth, subtract the revenue from the same quarter in the previous year from the current quarter's revenue and divide the result by the previous year's revenue.
2. Gross profit margins
Gross profit margins measure the amount of money the business earns after deducting the cost of goods sold. Tracking gross profit margins both acts as a counter measure to ensure the revenue growth is healthy and help identify areas where the business may be able to improve its pricing or reduce its costs.
Gross profit margins take precedence in this list over net profit margins because a fast growing company will reinvest its profits back into growth. So the net profit margins don't reflect the reality of the company health. Not tracking gross profit margins makes you susceptible to bad growth (e.g., unsustainable discounts), inefficiencies, and reduced quality.
Gross margins can be improved by either lowering costs or increasing pricing, with increasing pricing being the preferred method. This can be done by creating a highly differentiated service focused on value. Costs can be reduced through automation, and accessing cheaper labor markets. Gross Profit need to be reviewed on a quarterly basis.
Industry benchmark: A well-differentiated company should have gross margins around 45% or higher, with very well-differentiated businesses boasting margins as high as 70-80%. Less than 30% gross margins in services delivered is a red flag.
Measurement: To calculate gross profit margins, divide the gross profit by the total revenue and multiply the result by 100 to get the percentage. Gross profit in IT services companies can be calculated using the following formula: Gross Profit = Total Revenue - Total Cost of Services Delivered. Cost of services delivered in IT services can be calculated as the sum of direct labor, direct materials, and overhead costs associated with delivering a specific service. It needs to be noted that the cost of services delivered does not include bench costs. So to calculate the Total Cost of Services Delivered you will need to sum the costs for each project.
Total Cost of Services Delivered = Sum of cost of all services delivered
Gross Profit = Total Revenue - Total Cost of Services Delivered
Gross Profit Margin = (Gross Profit)/Revenue * 100%
For example, if the IT services business earns $100,000 in total revenue and has done two projects each costing 25,000 for services delivered, the gross profit would be $50,000 and the gross profit margin would be 50%.
3. Customer satisfaction
Customer satisfaction is a key driver for repeat business and can impact the overall reputation of the IT services business. Surveying customers regularly to measure satisfaction and gather feedback helps identify areas for improvement and ensure that the business is meeting the needs of its customers. It also makes you aware of opportunities to increase prices. Customer satisfaction needs to be reviewed on a quarterly basis.
Industry benchmark: The Net Promoter Score (NPS) is a commonly used industry benchmark for customer satisfaction. An NPS score of 50 or above is considered good, while a score of 70 or above is considered excellent.
Measurement: To measure customer satisfaction, conduct surveys or gather feedback through various channels, such as email, phone, or in-person interviews. The responses can then be analyzed and used to calculate a customer satisfaction score or rating, such as the NPS score.
4. Employee satisfaction
Employee satisfaction is necessary the long-term success of the IT services business. It's not just that happy and motivated employees are more likely to provide high-quality services and be productive. The factors that allow you to run a high margin practice (specialized skills, productive teams, IP-backed services) all depend on retaining your best employees. So employee satisfaction is necessary for sustained growth for an IT services business
Regular employee surveys can help measure satisfaction and provide insight into areas where the business can improve its work environment and culture. Employee satisfaction needs to be measured on a quarterly basis.
Industry benchmark: The Net Promoter Score (NPS) is also a commonly used industry benchmark for employee satisfaction. An NPS score of 50 or above is considered good, while a score of 70 or above is considered excellent.
Measurement: To measure employee satisfaction, conduct regular surveys or gather feedback through various channels, such as email, phone, in-person interviews, or even specialized tools like OfficeVibe. The responses can then be analyzed and used to calculate an employee satisfaction score or rating, such as the NPS score.
5. Utilization rate
The utilization rate measures the percentage of billable hours worked by the IT services business. Tracking this KPI ensures your sales engine is working correctly to bring in new business at the right and that you are growing your delivery organization appropriately to handle the demands. This number needs to be looked at on a weekly basis.
Industry benchmark: A well-managed IT services company should target utilization to be about 85%. Utilization rates lower than this will erode profit, while utilization rates higher than this will negatively impact employee and customer satisfaction.
Measurement: To calculate the utilization rate, divide the total number of billable hours worked by the total number of available hours and multiply the result by 100 to get the percentage. For example, if the IT services business has 100 total billable hours and 200 total available hours, the utilization rate would be 50%.
Utilization = (number of billable hours)/(total number of hours)*100 %
The total number of hours in a year is 2080, and typically number of available hours is 2000. So the formula can be simplified to:
Utilization = (number of billable hours)/20 %
Conclusion
By tracking these five KPIs, fast-growing IT services businesses can gain valuable insights into their performance and growth. Regular monitoring of these KPIs, along with the industry benchmarks provided, provides an understanding on the overall health, valuation, and trajectory of the IT services business. It's important to keep in mind that these KPIs and benchmarks are just a starting point, and every business is unique.
The specific KPIs and targets that are most relevant will depend on the individual needs and goals of the business. In addition these metrics are outcome-based metrics. They reflect your performance, and provide a health check to ensure we haven't compromised future performance. As you're working on your execution strategy you'll need to create input-based metrics to drive improvements to these outcomes.
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