How to measure revenue and margin performance in your consulting firm

written by
Fraser Moore
Jul 9, 2024
number
minutes read

Research shows that adopting a Professional Services Automation (PSA) tool is one of the best ways to boost performance and growth within your consulting firm.

A 2023 independent study from Consultancy BenchPress identified that consulting firms who adopted a PSA generated +2% higher utilization than firms using standalone solutions, and +7% higher than firms using mostly spreadsheets.  

These firms also grow revenues faster, can expect a much higher revenue portfolio under the wing of each of its partners, and are more tuned into measuring KPIs regularly.

The benefits of having an integrated (eco)system are significant both in terms of operational efficiency and time & cost saving, as well as key insights into the performance of a consulting business, automating core processes, and supporting faster and better decision making that is crucial to be successful in a highly competitive market.  

Interested readers can find more detail on the benefits of a PSA and an overview of our 5-point performance measurement framework here.

Adopting a measurement framework appropriate for your needs can really help you see the areas of your business that are working well and those that might need some attention if you want to stay on track and hit your performance goals.  

We think of a PSA as an operations platform that supports the core consulting processes across the areas of sales and pipeline, revenue and margin, project financial performance, invoicing and WIP, and people and resourcing – plugging that “operations black hole” between your CRM and your finance system.

So, let’s take a deeper look into which metrics we should be measuring to see how we’re performing in terms of revenue and margin.

Monthly recognized revenue

This is the total revenue that has been delivered each month.  

There are different ways that consulting firms recognize the revenue that they deliver. The following are the calculations that I've generally used the most:

Time and expense-based

Calculating time

The total time booked in timesheets (for the period) x charge rate.

Calculating expenses

Approved expenses that are rechargeable to the client (plus mark-up if applicable).

Fixed-fee deliverables

Calculating time

Total time booked in timesheets (for the period) x charge rate, capped to the total value of the planned project fees.

Note: If the total planned project fees have already been recognized, then any subsequent time booked into timesheets is effectively written-off.

Calculating % complete

  • Step 1 - estimate of the actual amount of work to complete the project
  • Step 2 – divide the estimate by the total planned hours to give you % of the project remaining to complete
  • Step 3 - 1 minus this figure represents the % complete
  • Step 4 - multiply the % complete by the total project fees to calculate recognized revenue

Note: As this is based on an estimate of the actual amount of work remaining, the % complete can reflect a higher or lower percentage (and therefore higher or lower value of recognized revenue) than the exact number of approved hours booked in timesheets as a % of total planned hours.

Calculating on milestones

Apply a % of work completed (and therefore revenue value) for each milestone deliverable completed, recognizing the revenue as each milestone is passed.

As a general rule, it’s sensible to take a prudent approach to revenue recognition in order to prevent unhappy situations where, towards the end of an engagement, all the revenue has been recognized (the full contracted value of the project) but there is still work to do (and costs to incur) to finish the project off.  

My preference for fixed price engagements is to take the lesser of Time Booked and % Complete. It’s also important to adopt a consistent approach, so choose the ones that work best for your business based on your commercial arrangements.

Monthly revenue forecast

Your monthly revenue forecast represents the revenue from won opportunities that is still to recognize in future months (sometimes also referred to as the forward order book).

This can be combined with either your probability weighted or unweighted sales pipeline to give you an accurate estimate of your future revenue profile and the gap each month to your target.

This would be calculated as follows:

  • Revenue target (your revenue budget for the month), minus
  • Committed Revenue (revenue you have forecast you will recognize on your current projects), minus
  • Revenue forecast (from your sales pipeline, either probability weighted or unweighted)

My preference, again, is to combine committed project revenues with probability weighted pipeline for the next 6 months, which is represented in the example below:

Monthly recognized revenue vs revenue forecast

Revenue forecasting is such an important measure as a guide to near term future business performance, so it makes sense to validate the accuracy of your monthly revenue forecast.  

This can be achieved by comparing actual recognized revenue for the month to the revenue that was previously forecast for that month.  I recommend doing this at a project level as it’s then easier to see and analyze where any variances have occurred and mitigate for these events in the future.

Average charge rate per consultant

This is the average day rate that you charge to your clients for your consultants.  Most consulting firms will have a target rate card they use to price projects, but it’s important to compare it to the actual average day rate that you’re achieving to ensure your margins aren’t being eroded through discounts.  

This can be calculated as recognized revenue divided by the total days taken to deliver the revenue.

Average revenue per consultant

This measure looks at the average revenue that you are generating per consultant. This can be calculated as the total recognized revenue in a given period (month / quarter / year) divided by the total number of consultants (factored by FTE).  

Average revenue per consultant can vary depending on the type of services you offer, the market you operate in, and the level of billable utilization you expect from your team, but some interesting high-level benchmarks can be found here.

Average cost per consultant

The average cost per consultant can be calculated as the total salary costs for consultants in a given period (month / quarter / year) divided by the total number of consultants (factored by FTE).

Average gross margin per consultant

Average gross margin per consultant seeks to measure consultant profitability.  It’s interesting to look at this at a consultant, role grade, and overall level, and track over time.  

This is calculated as the total recognized revenue minus the total salary costs.

Revenue growth rate

This measures the rate at which your revenue is growing from one period to the next. It’s important as it reflects on the effectiveness of the firm's sales and marketing strategies, customer retention efforts, and overall business performance.  

It also serves as one of the key markers for future valuation, as potential investors/advisors look for consistent revenue growth performance over time.

Margin growth rate

While revenue shows the total income earned from sales, profit margin represents how much of that income contributes to profits after expenses have been deducted.  

Margin growth rate therefore demonstrates the firm’s ability to scale revenue from one period to the next without unnecessarily adding an equivalent amount of additional cost to do so.

Revenue performance by customer, sector, service type, business unit, or geography

Analyzing your revenue performance in various different ways can help you understand where your business is performing well – which sectors, services, business units - and provide a focus for specialization and future growth potential.  

It can also help you understand how much revenue is derived from key customers and identify potential risks of customer reliance.

In conclusion

Remember, it would likely be too onerous for you to be measuring all of these, so choose the ones that make most sense for you and your business.

In my next blog, we'll be stepping through Project Financial Performance measures in more detail to explain how and why these measures help you understand your delivery projects and tracking and how profitable they will be.

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About the author

Fraser Moore, Head of Consulting at CMap, has over 30 years' experience as a business leader in the consulting sector and is passionate about building successful, sustainable, and caring consulting organizations. Having implemented CMap at several businesses in the past 15 years, Fraser strives to help businesses achieve operational success and achieve strategic ambitions. Read more about Fraser's journey here.

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