This is a beginner level introduction to KPIs for new and growing companies. VOGSY has advanced KPI capabilities for larger, established organizations. If that’s you, read some of the following in-depth resources:
A friend of mine once described running a services company like being on a money rollercoaster with dramatic ups, downs, loops, twists, and turns. He said, “It’s an exhausting cycle of: We’re rich! We’re poor! We’re rich! We’re poor!” His firm had just passed the million dollars in sales milestone, but the ups and downs were constant. Even with more money coming in than he had ever seen, he was essentially living “invoice to invoice,” paying almost all of his profit right back out.
Where did all the money go?
Key Performance Indicators (KPIs) can help! KPIs help you understand where the money is going by measuring the most important things in your business so you can build around your success and avoid repeating mistakes.
In this post, you will learn what KPIs are and why you should use them. You’ll identify the most important KPIs for a services business to start with. Using an example scenario, you’ll learn step-by-step how to create a KPI, set a KPI Target, measure the KPI, and how to act on them in real time using a professional KPI dashboard.
What are KPIs?
KPI stands for Key Performance Indicator. The purpose of a KPI is to measure performance toward a goal. If that seems simple, it is! We can make them super complex but ultimately a KPI is just being intentional about understanding if we are actually moving toward an important goal.
A great KPI…
- Is clearly defined and measurable
- Has a target you want to hit
- Can be easily communicated to others
- Measures something that is critical and meaningful
A set of KPIs becomes a way of measuring the most important things you need for a healthy, growing services business. KPIs can then be shared with your team so that better questions can be asked, better decisions can be made, you can continue more of what is working, and stop doing what isn’t.
Why Should You Use KPIs?
The standard business answer to “why should I use KPIs?” typically starts with the famous management adage: “What gets measured, gets managed.” In my friend’s situation, since he wasn’t measuring where his money was going in an actionable way, the gains and losses blindsided him into a rollercoaster of emotions. By using KPIs, you can measure where the money is going so that you can manage the money better.
Obviously, every business wants to bring in more money. But in professional services, perhaps more than any other industry, we are knowledge workers. If we want to grow in any meaningful way – be that profit, quality of work, customer satisfaction – the majority of the time, it means investing in people.
And to invest in people, we need money. A good set of KPIs will help you invest in your people and improve your business.
What are the Most Important KPIs?
Profit! That’s the most important Key Performance Indicator for almost every services business. If you have no profit, you’ll soon have no money, and then there’s serious trouble ahead. You’ll be like my rollercoaster friend, but you’ll only be shouting, “We’re poor! We’re poor! We’re poor!” as your business crashes off the rails.
It sounds basic because it is: Making sure you can turn a profit is the bedrock for future success.
Perhaps the most important profit-related KPI for services companies is Project Profit Margins (PPM). This is your best starting point to finding out “Where is the money going?” because a PPM tells you how much of every dollar that you charge the client you get to keep. If the amount you get to keep is too low or starts declining, this is a red flag that your business may be in trouble. The benefit of tracking this at a project level is you can often correct issues before they become critical.
I’m going to guide you through the steps to create your own PPM KPI. You’ll discover that once you have your PPM KPI set up, you’ll be able to create a great set of KPIs that can help you find out where the money is going and take steps to increase your profit.
How Do You Create a KPI?
This is how to create and use the Project Profit Margin KPI:
- Set an objective
- Identity the formula to create the metric to start with.
- Collect the data you need for the formula.
- Set a target for the KPI.
- Measure progress toward the target and review consistently.
Most KPIs can be created similarly, so by learning how to build your PPM, you’ll also gain the knowledge to build other KPIs as well. You already have your objective: “Where is the money going?”
The Formula for Project Profit Margin (PPM)
You can calculate PPM in 5 steps:
- Calculate Actual Sales: Hours spent x Sales Rate = Actual Sales
Note: For Fixed Price projects, Actual Sales equals the fixed price you charged.
- Calculate Actual Cost: Hours spent x Employee Cost Rate = Actual Cost
Actual Cost is what you pay the employee who does the work the client is paying for.
- Include any Expenses associated with the project.
- Calculate Actual PPM($): Actual Sales – (Actual Cost + Expenses) = Actual PPM in $
- Calculate Actual PPM(%): (Actual Profit Margin ($) / Actual Sales) x 100 = Actual PPM as a %
Collect the Data the KPI Needs
Now that you know the formula for calculating the PPM, it’s time to collect your data.
Here is an example to illustrate:
The client hired you to redesign their existing website. It is a small project for an exciting client, so you want to do a great job for them. Your services are organized into Design, Development, and Content. You charge $150/hr for Design. You charge $125/hr for Development. You charge $95/hr for Content. You have multiple people on your team, each with a different cost rate. You also purchased a few things for the project.
You’ve already completed the project, so you can just organize the data in tables.
|Actual Sales Data|
Now that you have all your data, you can calculate the PPM for the Website Project.
|Actual Sales||Actual Costs||Actual Margin($)||Actual Margin(%)|
(As a reminder, the formulas to get Actual Project Profit Margin in dollars and then as a percentage are in steps 4 & 5 above.)
Uh oh. You’ve just discovered that what you feared is true: you didn’t make very much money on this project! In fact, you’re only keeping 2 cents of every dollar earned. Don’t worry, you can and will do better – by setting targets with your KPIs.
How Do You Set a KPI Target?
At this point your PPM is not a KPI yet. You have a metric – a data point that can be measured, but with no action plan attached. To make a PPM KPI, you need to set a good target for it. Your KPI target is the PPM amount you want to reach in the future, relative to where you are now, the Actual PPM.
A good KPI target is:
- Clearly communicated.
- Accurately tracked and measured.
- Reviewed consistently.
Since this is an example, you can travel back in time and start the website project again, using KPIs to help you make better decisions as real life impacts the project.
Your original plan is to have Jian, a junior designer, do all 60 hours of the design work. You know that will cost $3600 (60hrs x $60). With your newly acquired KPI knowledge, you calculate a Project Profit Margin of 16%.
You’ll use this calculated 16% as the KPI target for your Actual PPM. In other words, when the project is finished, you want your PPM to be 16%, just like you’ve planned.
If you are measuring KPIs accurately in real time from the start of the project, you can make a better decision on how to replace Jian when he unexpectedly gets sick. That means it’s time to take a closer look at how to measure a KPI.
How Do You Measure a KPI?
Once you have established a Key Performance Indicator target, measuring a KPI is about consistently collecting the data and running the formulas to see whether you are getting closer to or farther from the KPI target. This usually means having a set of tools and processes in place to ensure that measurement is happening consistently and accurately.
For our website project example, the most critical data to measure is time: the heart of so many critical services KPIs, where “Time is Money.” In order to measure almost any meaningful KPI in a time-based business, you must have your team record and report their time – daily if possible, or by total project hours spent.
It can get complicated to collect and process the data; pulling everything together correctly to make the information useful in real time. This is where a professional KPI dashboard can be a life saver.
How Do You Use a Professional KPI Dashboard?
A KPI dashboard brings your KPIs into one place, allowing you to quickly review progress in real (or close to it) time so you can check your targets and prioritize your time and effort. In order to be an effective tool, a professional KPI dashboard needs to do these things:
- Display the information in a logical way.
- Visually call-out critical areas based on your KPI targets.
- Enable you to drill down quickly into any areas you want to.
- Offer transparency, so you can show KPI information to your team.
There are a lot of “dashboard” solutions out there. Here is what the beginning of the website project looks like in VOGSY.
Early in the project, Jian gets sick after only accomplishing 10 hours of work. You consider replacing him with Aliyah, a senior designer with a much higher hourly rate. You update the Dashboard with the new “Aliyah” plan and immediately see that the Actual PPM dips below 16%.
Because you know that 16% is the Target for the Actual PPM, you foresee how this switch would cause the Actual PPM to drop to 2%. You instead assign Reuben, another junior designer at Jian’s rate. As the project progress you can see that the project will end up around 16% as planned.
You save your profit margin and prevent a stomach-churning rollercoaster plummet.
Great KPIs Lead to Better Decisions
You’ve taken your first steps into the world of KPIs. By keeping track of your team’s time, you were able to establish a Calculated Project Profit Margin which empowered you to track your Actual Project Profit Margin in real time. You can take all the information and build additional KPIs with this same data like Services Profit Margins, Average PPM, Client Profit Margins, and more.
As you start adding more KPIs, you’ll want your “professional KPI Dashboard” to grow with you. There is a type of software called Professional Services Automation (PSA) that can help you automate everything we just covered and a whole lot more. A great PSA solution will let you concentrate on improving your business instead of manually untangling all the data sources and running the numbers yourself.
Of course, I can’t claim to be impartial. VOGSY is a beautiful solution for tracking where your money’s going. Since it’s built on Google Workspace infrastructure, it’s immediately intuitive and streamlines beautifully into existing practices. We invite you to take VOGSY for a spin and see how you prefer it to the old rollercoaster ride.