Crucial KPIs

Wishful Thinking

In my previous role as the CEO of an integration firm I tried my best to keep an eye on the fundamentals of the business. I tried to use “the numbers” to paint a picture and help guide decision making. I took to sharing our results with fellow integrators as a way of understanding our business within the context of others in our industry. 

One of my peers asked for my “Top 10” measurements or Key Performance Indicators (KPI’s). I told him that wasn’t possible but I did commit to getting it on to one page for him. Here is a bit of an expanded view into that summary document. You may not have all functions within your integration firm so use as many as apply. For those that are not present in your business you may see a new opportunity.

Design-as-a-Service:

Most firms give away design and engineering. Charging for it is better. Design is a leading indicator of your sales pipeline so tracking design revenues and close ratio (Design to Project) becomes valuable. Target 70% for your close ratio and review your design board on a weekly basis.

Sales:

A sales pipeline is broken down by salesperson, count of opportunities, proposed value of each, percentage of likelihood to close, and expected close date. Each salesperson will have a historical close ratio. This determines your ability to meet your revenue targets. Review weekly with each salesperson.

Gross Margin is the difference between your cost basis (COGS) and your sell price (Income). This is easier with hardware as you can look at a price sheet for both numbers. Labor gets more tricky but should be for all project related labor (See Labor below) and the hourly cost will be comprised of hourly pay, burdened multiple, and utilization. Target above 50% of Gross Margin (GM%). Review on every proposal.

Hardware vs. Labor. The ratio is an inverse based on the expense of the hardware. Esoterically priced hardware will show a smaller amount of labor as a percentage of total. Inexpensive hardware should have a higher labor amount as percentage of total. In general look for a 60/40 split, hardware/labor. Take your hardware total and multiply by 0.67. If you are changing enough for your labor and billing for your actual time this will leave enough hours on the project. Review on every proposal.

Labor:

Bill for all project labor types (Engineering, Project Management, Technician, and Programming). Billable labor rates for each type can be calculated by taking the average hourly salary for the people within a labor category and multiplying by 4x (5x if you are really getting after it!). More skilled work can be billed at a higher rate so break it out and charge accordingly.

Bill for all labor hours used on projects (including project prep and drive time to the site). Unbillable labor is the final drive back to the office, vacation, sick time, training, company meetings, work on your own office tech, etc. The ratio of billable time to unbillable is known as utilization (also called efficiency or absorption). There are 2080 paid hours (40hrs/wk * 52wks/yr). The ideal utilization is 70% or ~1500 billable hours per billable employee. An easy way to see if you are on the right track is to take # of Billable Employees * 1500 * Billable Rate and then look at the Labor Income line on your P&L. Make sure you are sitting down – you have been warned! Evaluate every 6mo. Too short of an interval can be misleading.

Always per person, per hour. Some integrators discount for a two-person crew. Did you pay the employees less because they were in a van together? I didn’t think so.

Service Department:

Most integrators lose money on service. Ouch. If they charge at all they usually charge too little. If you paid attention above there is a 60/40 (hardware/labor) split for projects. Given that service is usually labor only it would make sense to take the gross margin dollars you would have made on the hardware and then add those dollars to your project labor rate for service. It’s probably not less than $250/hr and it’s likely $300/hr or more. The optics of that are hard for most to swallow so it would be smart to use a service agreement to obfuscate the Effective Hourly Rate. This is reviewed monthly as a department and annually per client.

Expenses:

Line by line, actual vs 12mo trailing average, on a monthly basis. Keep it tight!

Collections:

% of Total, each band (30/60/90), client by client, on a monthly basis. Keep it tight!

Accounting Dashboard:

I am shocked at how little most integrators pay attention to their finances! On a monthly basis keep a close eye on Net Profit, composition of that profit, gross margins (the actual vs. what you were targeting during sales), overhead costs, sales, open projects, % of open projects completed, net change to cash, and revenues per full time employee (FTE).