There are a lot of consulting businesses that only know their business is going well because they can see the balance in their bank account going up. I am always surprised when I run into companies like this. You would think it is purely a small company problem, but I have seen companies with thousands of employees that have no idea which resources and/or customers are making that account go up.
They might say to me,
As long as the bank account is going up, who cares how it got there?
And that does work to a degree. Congratulations really, because you are doing something right and are probably in a vertical that is highly profitable and low in competition. The problem is, any business that is highly profitable will attract competition sooner or later. If you don’t have a good handle on what’s going on, you are risking getting a competitor who does and they will run circles around you - potentially fatally.
What you need to know is three very basic things: Utilization, Profitability by Resource, and Profitability by Customer. Without this information you can not make intelligent data driven decisions to improve your business.
Utilization is a measure of how much of your billable time actually gets billed. This is especially important for companies that have salaried consultants. You have to pay them whether they are working or ‘on the bench’. On the flip side, if your Utilization is too high, then you are working them too hard and may have issues with retention. This is a very basic measure that any business owner should be on top of, both on an individual basis and company wide.
Related to Utilization is Profitability by Consultant. Really what we are measuring is Revenue, Profit, and Margin for each consultant. I asked the management team of a customer of mine who their top 5 most profitable consultants were. Each manager came up with a list which was similar, but not the same as their peers. On average, they all got about 3 out of 5 correct. What was especially interesting was that the #2 consultant was missed by the entire management team. She was a contractor, but she was killing it. It makes you ask yourself, how well do you know your business if you don’t know who your number #2 revenue generator is?
Similarly, you want to know who your good customers are and which ones are not so good. It’s a common pitfall for a company to spend the most time on their worst customers. Usually they are the noisy ones. Then you have your great customer who gets ignored. What ends up happening is that the good ones leave for neglect, and the bad ones leave because they will never be happy. Your efforts were in vain. What you should be doing is lavishing your attention on the best customers and kicking the bad ones to the curb. Well, all and good, but you need to know who they are. You need a report for that and you need to watch it because sometimes good customers go bad and bad ones get their act together.
Business, when you boil it down, is all about allocating your limited resources in the best way to ensure short and long term profitability. Without the above reports you are just feeling around in the dark and opining on anecdotes. Everyone is going to a data analytic driver business decision-making model. The old way of the industry expert making decisions with their gut isn’t going to win against actual data. That worked to an extent when the data wasn’t available, but in this century you need to arm yourself or be left behind.