Key Performance Indicators of the Management Consulting Industry
Management consulting firms provide professional services to other businesses. These services include information technology (IT), consulting, marketing and PR services and business planning assistance. A consulting firm can be as small as one or two individuals. Key performance indicators or KPIs are used to measure the firm’s progress toward the goals set in its business plan. The owner of a consulting firm seeks to identify and carefully track the most important KPIs -- those that have the greatest revenue or profit impact for the firm.
Consulting firms often charge an hourly fee for their services. The number of hours charged to clients is termed billable hours. An extremely important KPI is utilization, the number of billable hours during a specific period, such as a month, divided by all the available work hours of the staff. Increasing the utilization percentage translates into higher revenues. Utilization can be computed for the firm as a whole or for each staff member. The owner and senior partners’ optimal utilization percentage may be lower than that for the junior staff members because the senior partners have to devote some of their time to acquiring new clients for the firm and to the strategic planning function.
As with any business, the owner of a consulting firm has to determine a pricing strategy. He doesn’t want to charge more than the client is willing or accustomed to paying. He must also be careful to not undercharge just to obtain the client engagement. Various types of services the firm performs may be billed out at different rates, and senior partners may charge more on an hourly basis than junior staff members. Over time the business owner learns how to strike a balance between making sure the firm secures new clients and earns a profit on each project.
The firm’s business plan should include goals for the number of customer prospects generated through each of the marketing methods the firm employs, such as obtaining referrals from existing clients and inquiries through their website and networking at business events or through social media. If the number of leads generated begins to decline, the firm’s partners need to devote more time and energy to finding more client prospects. For the firm to grow, it must continually add new clients to its roster.
Also termed "closing rate," this KPI is calculated by dividing the number of new clients acquired during a period by the number of project proposals that were sent out. Because there is a cost involved in meeting with prospective clients and developing proposals for their projects, the business owner seeks to keep this percentage as high as possible. If he sees the closing rate declining over the course of the year, he may want to review his pricing structure. He may also review his strategies for finding new prospects -- the firm may not be targeting prospects that have a strong need for and can afford its services.
This KPI could also be termed "measuring customer satisfaction," because clients that are extremely satisfied with the consulting firm’s work are inclined to hire the firm for additional projects. Follow-on projects with existing clients are welcome because the client relationship is established. The consultants that work with the client have already invested the time to understand the business and the needs and personalities of the client’s management team.