Objective Measures: Financial Performance

I’m starting this series with financial metrics under the theory that financial statistics are the easiest, most objective things to track and report.   Financial performance metrics address the entire suite of measures related to consulting activities as measured by hours, revenue, billings and cost.   The focus for this discussion is using these metrics to judge individual consultant performance, not overall practice health – we’ll discuss the broader picture of practice health at another time.  Also, this is not intended to be an exhaustive list – I picked the measures that I consider MOST important to evaluate.

When considering financial metrics, three things are important – what do you measure and what do you do with the measurement?

What to Measure?

1. Utilization: 

This is a labor efficiency metric showing the total number of hours you billed as a percentage of the total available to be billed.  Three total available hour calculations are available to you:

Full Year:  Easy, its 2080 hrs per year (52 weeks * 40 hours).  However, using this as the denominator means that some people are okay at 88% ute (like consultants) and some are okay at 30% (like directors).  Hence, I don’t use this.

Net Planned NC:  This is 2080 – PTO – Study/Admin – Sick.  If each of those components is 80 hours, that leaves you about 1840 hrs available time or about 88% of the fully loaded hours.  I’d expect a consultant to bill this, but a PM engaged in selling or a director would not be able to.

1600 Rule:  This is a good thumbnail for a low intensity practice.  Basically, everyone is expected to charge 32 hours, 50 weeks per year and spend a little less than one day per week making contributions to the the company knowledge base, recruiting and doing administrative work.  Practically speaking, if you factor in sick time, you’d need to bill about 33 or 34 hours per week to stay in range.

I keep the use of the above pretty simple:  “Total Available” for consulting staff (sole contributors) is based on Net Planned NC (1840).  For PM’s, I use the 1600 rule.  Directors, and other team contributors in similar capacity, are at 10-20% of the Net Planned NC target.  Don’t forget to adjust the denominator for the Hire Date if the person was hired inside the year being measured.

The target goal for Ute, in my opinion, is always 100% of an individually set number of totally available hours.  95% is bad, 100% is good, over 100% is best. 

2. Realization:

This is a revenue efficiency metric showing the total revenue captured out of the total available to be captured, expressed as a percentage (Revenue Billed / Total Available Revenue expressed as a percentage).  Like ute, the denominator in the Realization calculation is critical.  Generally, it is Total Available Hours x Budget Rate By Position.  The last two words are critical – like ute, you want to target 100% as the performance standard, so the rate by which you multiply the hours should be the rate at which that position is intended to bill.  Associates may bill at $140; Directors at $210.  Both would use these individual rates to rack up the total available revenue number.  Its up to you if you want to measure realization using budget rates or avg rates for a prior period – I prefer budget, but I actually look at both.

And, like ute, don’t forget to take into account hire date for employees hired inside the year under analysis.

3. Gross Mark Up:

This is the ratio of total earnings to total revenue.  The calculation is pretty easy:  take the total YTD salary + total YTD bonuses and incentive payments / total YTD revenue billed.  The resulting ratio shows you the the gross markup on the consultant cost.  In general, a practice needs to be above 2.5 as a group (including mgt), so the gross markup at an individual level should probably be higher.

With that said, the markup is going to be different for different levels of skill set.  Someone 1 or 2 years out of school, being used as a sole contributor should be close to 5.  Someone 15 years in the business, who does significant selling work, helps mentor, adds significantly to the ability of the firm to excel, etc may be at or just slightly above breakeven.

How do you use the measures?

First, don’t manage these metrics in isolation.  Managing solely to ute gets you high billed hours but not necessarily good collectible hours or high realization (as an old co-worker of mine once explained to the VC run board of my then current employer: “Hell, if ya’ll want ute I’ll sell our time on eBay at $1 an hour”).

Second, always look at all of this for the billing week, then MTD, QTD and YTD. Make certain you isolate the trend (up, down, stable) rather than making decisions on a single billing period.  It doesn’t hurt to look at a rolling 6 week average to flatten a bad week.

Third, always look at ute and realization together.  I don’t have high ute.  However, I usually bill at or above $200 / hr.  So, I don’t need a ton of billed time to nail my realization target.

Fourth, review Gross Markup monthly or quarterly and always look at YTD numbers.  Any period shorter than a month starts to get misleading.  If you don’t pay incentives monthly or quarterly, you probably need to start building in accruals to the analysis or your numbers will be too low.

Finally, don’t make any decisions about people based on the above.  Read the next few posts in the series and make decisions based on both financial and cultural perspectives.

And, lastly, how do you accumulate all this detail information?  Business Intelligence tools like SSAS really help, especially when combined with ERP time billing systems.  I’ll do another post a little later detailing how my company does it today because I can fill pages about techniques for doing this right.  However, don’t let a desire to automate stop the measurement process – if you system isn’t perfect, its still better than nothing.

Next post: Objective Measures – Client Satisfaction

Software is Plural

A short piece of advice for everyone, client and consultant.

"Softwares” is not a word.  Software is a mass noun and, therefore, always takes a singular verb (“The software is installed” vs. “The software are installed” and never, ever “The softwares are installed”).  It serves as both a singular and plural depending on context.

When you say “softwares”, you look ignorant.  Stop using it.

Consulting Excellence: Objective Internal Measures

In a previous post, I briefly mention performance and promised more discussion around objective targets.  So, I am going to write a four part series on how to objectively measure the performance of individual team members in a consultancy.  The four areas I will cover are:

1. Financial Performance
2. Client Satisfaction
3. Knowledge
4. Contribution to the Team

In my opinion, no other valid, meaningful measures exist outside of the above, with valid and meaningful being defined as those that create value for the client or the organization.

Each posting will address the definition of the measure group; provide specific calculations and benchmarks; and discuss methods for collecting and reporting on the data. 

Bad Client! Bad, Bad Client!

In a previous post, I came down hard on consultants who hide behind the phrase “I did my job” when, at the end of the day, we have a seriously damaged client relationship.  But, in that post, I ignored one precious and important fact of life:

Some people are assholes.  And some of them are your clients.

We all know the signs and behaviors. They never do anything wrong; its always your fault.  They never deliver anything of poor quality; you just didn’t explain it right. They are never late on deadlines; you just weren’t clear on when you needed it.  They don’t think your training was worth anything, but they didn’t pay attention in class.  They second guess every recommendation you make,  but never have any useful input.  The cancel meetings at the last minute, but won’t sign the change request to approve the cost overruns that causes.  They sign a contract with you, but then don’t abide by the terms.  They always want something for free.  They don’t pay bills on time, abuse you and your staff and generally make your work life a misery.

Well, here’s how you fix that problem:

Fire them. 

That’s right, fire them.  This is about the only time you’ll see me give advice that doesn’t entail some degree of “the consultant needs to up their game and do better”.  You can’t fix these people.  They have some kind of deep rooted need to make you feel like crap and, if you drill down on it, they probably do it to everyone else they work with.  Most likely, they have empty and lonely lives and leave work only to be greeted by a houseful of neurotic, asthmatic cats.  But, whatever the cause, you can’t fix them and life is too short to continue working with them NO MATTER what they generate in revenue.

So, give yourself a break, get rid of them, and spend your newly free, relaxing time finding someone who really gets the value you provide and who will be a good partner.

“I did my job” – “Yeah, but we suck”

It is inevitable that someone occupying my position is going to deal with escalated client issues from time to time.  To determine the root cause of the escalation, I spend a lot of time with staff, project management and their counterparts on the client’s side discussing what happened, when and why. I work very hard to be objective, non-threatening and non-defensive in these discussion.  But, what I notice is that I reach an inevitable stopping point where everyone gets to essentially the same comment, i.e.:  “I did my job”.  Maybe, but I’ve got a pissed off client who is not going to pay their bill.  Therefore, we didn’t get the job done and, therefore, we suck.

Here’s the most important things I think we can do to avoid this trap:

1. Relationship build:  As doctors can tell you, if your client likes you, you don’t get sued.  In our industry, having a strong personal relationship with a client almost guarantees a reduction in finger-pointing and a faster, quicker resolution to problems. At the end of the day, if you hit your targets (“I did my job”) but the client doesn’t like you, you’ll never see the client again (“You suck”).

2. Admit Mistakes, but Present Solutions:  Recently, I badly mis-scoped a BI project.  When it became apparent, I sat down with the two primary business owners for the project, admitted my mistake (“I suck”), told them how I was going to fix it, the financial ramification to them (in this case, none), and what I needed to help me hit the reset target.  Were they annoyed, yes.  Did we get the job done and are they a reference:  absolutely.  I didn’t say “Hey, I did my job”;  I admitted the mistake and told them how I’d fix it (“So we can suck less”).

2. The Scope, Only the Scope and Nothing But the Scope:  Immediately after taking over my current position, I had a conversation with two senior teammates about a significant client sat issue.  They told me that we had gone beyond the call of duty on multiple occasions to move the project along when the client wasn’t getting the work done. Therefore, we “did our job”.  Actually, what we did was enable continued poor delivery discipline for the client, spent their money in the form of project overruns without asking for permission, and stepped outside of our legal framework by delivering services for which they had not contracted (“We sucked”).  If you need to pick up a client’s slack, ALWAYS make certain you clearly advise them of the problem (“Your not getting things done”) and resolution (“I can do it for you for an extra $x”).

3. Don’t Hold the Grenade:  If you see something going wrong in a project, raise your hand.  If you are going to be late, let the team know.  If you don’t understand what you are doing, ask for help.   Whatever you do, don’t stay silent, burrow in or plow through since everyone around will assume everything is okay when its not.  Put simply, communicate, communicate, communicate.

4. Mistakes Don’t Mean You’re Bad, Just Human:  This is tough.  If the client is an ass, or your company’s culture doesn’t support learning from mistakes, admitting you made one can drop a world of hurt on your shoulders.  In the long run, acknowledging the mistake (or better, finding it and surfacing it yourself) then learning how not to make it in the future will increase your future performance (“10% less sucking this week and every week”).

5.  Lastly, Remember Why We Got Hired:  At the end of the day, the client doesn’t hire us because we know the technology.  The client hires us because they believe we will make their business life easier and more productive since they won’t need to worry about doing this project by themselves.  If, as consultants, we don’t constantly reinforce that feeling (and this is really what “Doing our job” means), then we will always suck.

Vertical focus only makes sense for Microsoft

Author:  Curtis Beebe

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Microsoft’s “verticalization” of their Dynamics channel makes all the sense in the world from a Microsoft channel management perspective.    The designation of vertical specialties gives Microsoft an objective approach to resolving channel conflict, assigning leads, and providing sales & marketing support.    At first glance, this is one of those “blinding flashes of the obvious” that will enable partners to sell better, reduce sales cycle time, reduce the cost of sales, and stay focused in a specific area of expertise.

 The problem is that it doesn’t work.  The first issue is that the Dynamics products, just like all of the Microsoft products, are horizontal by nature and design.  Sure there are some ISV’s that provide a bit of industry specialization, but ERP and CRM solutions are inherently NOT vertical solutions.  They are designed to provide processes and functionality across a range of business types.

 That brings us to the second problem.  Because they’ve been selling horizontal products, most partners have grown their businesses horizontally.   Some of the savvy partners have developed industry specific knowledge and terminology to help them sell, but the solutions remain fundamentally horizontal.   As a result of the horizontal approach, partners tend to look at their customer’s businesses based upon the business process groups that are being automated: process manufacturing, discrete manufacturing, professional services, wholesale distribution, depot management, etc.   

The big disconnect is that Microsoft is trying to define the customer’s business based upon SIC codes.   The SIC codes are focused on the type of product being manufactured, sold, or distributed, rather than the general business process group:  one business process could map to dozens of different SIC codes.  The result is that partners are trying to manipulate the lead distribution system by selecting all of the hot, unassigned SIC codes within their geographies rather than truly focusing their business.

This effort is doomed to become just lip service that partners pay to Microsoft in order to ensure they get their share of distributed leads.

Evaluation of Consulting Staff

The cornerstone of consulting excellence is the quality of the consulting staff.  So how do you make the decision on who is high quality and who isn’t?

Two factors come into play:  performance and cultural fit.

Performance is easily measured by utilization, realization, client satisfaction and revenue generation.  If you don’t already objectively target and measure the above, start.  More postings on this later.  A high performer will be at 100% of targets in almost any give 12 month rolling period.

Cultural fit assumes you have a culture to which being a fit is rewarding.  If you don’t place any effort on cultural excellence inside your firm, you should – see my previous post on mission as a foundation to culture.  I’ll write more on cultural excellence in later posts.  In the meantime, use observed teamwork, client sat and general “does this person get along well with others” as a proxy.

Using the above, everyone will fall into one of four categories, listed below by ease of corrective action.

High Performer, Gets the Culture

This is the easy one.  Do what you must to keep these people on the team and pay them plenty of attention.  The majority of your personnel management time should be focused on this group of people.

Low Performer, Doesn’t Get the Culture

Fire them.  They may have room for improvement, but you don’t have time to do it.  After you are done, review your hiring procedures to find out why they even got a job with you in the first place. 

Low Performer, Gets the Culture

This is a little harder.  This person will fit in extremely well with their teammates, do well with clients (at least in terms of personality) and be generally a good fit for all the cultural elements of the firm.  However, period over period, their performance will be below their peer group, their work will be substandard and you’ll find yourself always accepting or making up making up reasons for their poor performance.

Get them on a 90 day plan that specifically addresses the performance shortcomings.  Invest the time to make sure they have a more than fair chance.  The extra effort you invest, if they improve, will be more than paid off in loyalty, a strengthened corporate culture and improved performance.  If they don’t improve, you must fire them.  A consultancy is a meritocracy, not a remedial education program – consistent low performers have no long term role on the team.

High Performer, Doesn’t Get the Culture

This is the hardest category to manage.  Top performance on a consistent basis makes these people very valuable to the firm.  Poor cultural fit makes them very hard to work with.  So, you’ll find them to be top revenue producers, but will often find they work poorly on project teams, care little about the impact of their behaviors on those around them and on occasion will cause client satisfaction issues. 

What to do?  Counsel, counsel and more counsel – this is the group that should consume the second biggest amount of your personnel management time.   During performance management reviews, you’ll have to spend your time consistently coaching them on better behavior and matters of emotional intelligence.  Change will be slow – their cultural fit will only improve to the extent you can show them how it will make their lives easier or increase their personal performance.  Ultimately, this group is like Dennis Rodman – a top performer whose high-maintenance personality only makes them employable as long as the performance stays high.  When the performance slips, they give you no reason to continue their maintenance.

Whining, Complaining and Grousing

Its been a little over 4 months since my last post, mostly due to a) the birth of the newest member of the Specht clan and b) the management team and I practicing what I preached in the last three posts.  I can report, with great happiness, that our efforts (home and work) are paying off – my newest child is wonderful and our clients continue to be generous with work, even beyond my fondest hopes.

The stresses of the economy still exist. In both my own company and many for whom I consult, I’m hearing frequent and ongoing complaints about clients (who are cheap because they won’t buy), sales team (who are lazy because they can’t close business), consultants (who are prima donnas that don’t appreciate how hard it is to close business), managers (who are morons because they need to [fill in the blank] faster, better, more often etc.), and employees (who are ungrateful because they don’t appreciate how hard it is to make payroll and health insurance payments).  Put another way, everyone seems to be complaining about everyone else.   So, for those modest few that care about my opinion, I offer this:

First, everyone take a deep breath, relax and develop a sense of empathy.  Those around you are doing their best in tough times, just like you.  Our clients are afraid for their jobs and trying to save money when they can.  Our sales teams are hearing disheartening “no-s” more often then enthusiastic “yes-s”.  Out consultants feel extraordinary realization and utilization pressure AND get the onsite impact of the client’s fear. Our managers, god bless ‘em, are trying to do the best they can with short staff, short budgets and long hours.  And every employee in every consultancy is wondering when a layoff is going to take their job away. 

Second, strap on a pair and man up.  This is a hard business played out on a complex field of complex products, high expectations and difficult business problems.  If you can’t deal with that, get out and send your clients and best staff to us and I’ll see they are welcomed and well cared for. Until then, see the preceding paragraph.

Lastly, of my relatively small group of close friends, I am the only one still employed.  I see the effect of layoffs in a very direct and personal fashion.  Among my professional network, close to 1/3 are looking for new jobs.  As a result, I spend significant time doing referrals, networking and writing letters of recommendation.  So, if anyone reading this is looking for truly awesome Microsoft technology professionals almost anywhere in the country, please drop me a note with what skills you need and I’ll be happy to make introductions.

Managing in a Downturn – Part III – New Revenue Sources

If you followed this series of posts (Part I and Part II), you’ve read my opinions on creating better client attachment through a consistent client sales plan and creating a more cost efficient organization.  In this post, I want to address how to create new revenue sources from your existing intellectual capital and product mix.

Every day that I am selling to our clients, I see them do the same thing:  they take their scarce investment dollars and place them in the projects that create the most immediate impact on their revenue stream or cost reduction strategy.  Not the largest impact, not the most systemic impact, but the fastest, most immediate impact.  The philosophy seems to be “I need it now because I may not be here next month”.  As confirmation, recent discussions with Microsoft sales team members told of large projects getting iced, medium sized placed “under consideration” and smaller are getting done, but it takes more effort.  While fishing with some friends earlier late last week, a senior sales rep specializing on monster ERP deals said that he’s back to cold calling and talking to customers “that I wouldn’t have picked up the phone for” this time last year.

What do you need to do to meet this kind of customer demand?  Take a look at your core business and client base for new ways to deliver your services or new complementary products that add value quickly to the customer.  Some guidelines:

1. No New “Bet The Farm” Products Offerings:  This isn’t the time to bet the farm on something completely new that has no complementary value to your core business.  So, if you are a network security shop, don’t start selling CRM.  If you are a CRM shop, don’t suddenly start doing web site and content creation. I know the temptation will be to jump to a new market (“Hey, everyone’s doing MOSS well, we should do that”) but the folks that will survive that new market are the ones already there and already doing the work.
2. Make Your Services Bite Sized: If you can’t sell a complete network re-architecture engagement because the client is nervous about committing the funds, how about just focusing on moving them to Exchange 2007 to take advantage of its more robust mobile access functionality and higher performance from its native 64bit design?
3. Package Your Services:  Rather than creating a scenario where you have to discuss their needs, develop a custom quote, negotiate rate, etc instead use your experience in your customer base and the knowledge you glean from talking (often) with your customers and come up with packaged sets of services that are modestly priced, pre-quoted, and with ready to sign contracts for when they say yes.  At my current company, we defined an entry level BI solution (that includes significant internally developed IP coming from our years of experience in CRM and ERP) that we sell as a fixed price project to customers needing better information on their selling and financial activities.  Its priced for less than $10K, is delivered in 3 – 5 days, and has a clear, immediate value prop.
4. Expand into Complementary Services: This is the time to find better and different ways to serve your customers AND leverage existing organizational knowledge.  But, you have to do this incrementally, not by attacking a whole new product segment.  So, if you are a .Net dev shop, take a look at MOSS as a workflow automation platform so you can provide such functionality in your existing apps.  If you are a CRM or ERP shop, find ways (like BI)  to unlock years of accumulated data so your clients can better understand their businesses.  If you are a network integration shop, add better remote access systems and lower cost security appliances so hard working and time constrained remote staff can more easily get at corporate data. 

You will know much better than I what will work best for your consultancy and your customers.  Just make certain that its an incremental move with high-value to your customers and takes maximum advantage of your own intellectual capital.

Microsoft Changes BI Strategy

On January 23rd, Microsoft announced a change to its BI roadmap through discontinuing portions of Performance Point Server and downgrading other functionality into MOSS Enterprise.  Read my post on this subject at the IBIS ERP Blog.