Billable utilization is a broken KPI for individual consultants.  Here’s how to replace it.

Billable utilization is a broken KPI for individual consultants. Here’s how to replace it.

Eighteen months ago, we changed one of our primary Key Performance Indicators (KPIs) from Billable Utilization to the Net Promoter Score (NPS) at my company’s embedded Professional Services Organization (PSO).  Billable utilization is a common KPI for PSOs and is considered a reliable indicator of financial health.  After all, if your consultants are working lots of billable hours, it stands to reason that your firm is doing well. Individual consultants and contributors at PSOs often have utilization goals and those goals figure heavily in annual staff reviews and compensation plans.

The model of basing staff reviews and compensation on billable utilization is broken and does not work at an embedded PSO.  At an embedded PSO, consultants are responsible for service delivery, but not service sales.  The billable utilization KPI makes sense at a dedicated professional services firm where senior partners ‘eat what they kill’ and work the deals for the clients that they have landed.  The partners can see a direct correlation between their sales efforts and the resulting billable utilization numbers.

Consider two examples. A senior partner at a marketing firm leads the sales process for a significant contract for their team to produce an advertising campaign for a new client. During the sales process, the senior partner brings in their team of experts to craft the best proposal and impresses the client. After the deal closes, the senior partner can see the effects of having worked the sale. The individuals supporting the senior partner who are assigned to that new contract can similarly appreciate their contributions to pre-sales activities. Causality exists – the team worked the sale, and so now they work on the project. If they had not worked on the deal, they would not have billable hours. The billable utilization KPI is a motivator.

By comparison, consider a Software-As-A-Service (SaaS) company. A client purchases a subscription to a SaaS product, and also purchases some consulting services to integrate with their CRM system. After the contracts are signed, a resource manager at the PSO assigns one or more people to work on this client’s contract. The individuals at the PSO assigned to work on the contract never participated in the pre-sales activities and had minimal say in their assignment of that contract. They just happened to have free time on their calendars when the consulting manager set up the resource allocations, and they have no other initial connection to the client or deal. There’s no causality here, and as the consultants do not participate in the sales process, no way for them to influence the billable utilization KPI.

Evaluating the performance of individual consultants at an embedded PSO on how many billable hours they have delivered in a quarter provides no significant incentive to most consultants. Someone else, like a project manager or resource manager, assigns them client projects and functionally controls their ceiling for billable hours in any quarter.  The billable utilization KPI measure rewards people for doing their jobs, which are delivering consulting services.  Perversely, it punishes them when work dries up even if they bear little responsibility for the underlying lack of sales or scheduling issues between the PSO’s project manager and their clientele. 

The other problem with billable utilization is that there are many ways to deliver an hour of consulting. Most PSOs have staff that can show up and throw up in a workmanlike manner while being utterly dull and uninspiring.  Some PSOs have personnel on staff who will unintentionally offend the client during an engagement, reducing the likelihood of repeat business and referrals.  Timesheet stuffing – the process of willfully misrepresenting the total number of hours worked for a client – is an ethical risk for individual consultants if there’s enough of a financial benefit to them. Unfortunately, the billable utilization KPI treats all hours the same for performance evaluations – if the client was bored, offended, or the hour was not delivered is not relevant data. 

Boring or offending customers, or charging them for imaginary hours is not a good way to run a successful PSO, particularly if you’d like to preserve your margins and earn repeat customers based on a favorable reputation. 

By comparison, the Net Promoter Score (NPS) asks clients a simple question, “Would you recommend us to your colleagues or friends”?  There are variants of the question, but the point is to ask the client in simple terms if they’d make positive, neutral, or negative remarks about your PSO to other prospects.

Tying staff performance goals to NPS changes the way consultants approach their client interactions. Having a meaningful portion of their compensation directly related to whether or not a customer would recommend your PSO requires consultants to strive to impress clients.  This mentality is different from turn and burn consulting because it creates relationships.  Consultants are motivated to be memorable in a good way, and to focus on customer satisfaction.

After eighteen months of this experiment, our preliminary finding has been that using NPS as a KPI has substantial value for an embedded experience or expertise-based PSO.  Personnel reviews are simpler and include the direct voice of the client.  Consultants also understand the evaluation criteria, and we developed a standard set of NPS goals for individual contributors.

This KPI has also forced some hard conversations and decisions, as we have a minimum NPS goal for consultants.  Consultants who do not meet the goal might be able to get the work done, but that is not good enough if they leave clients feeling frustrated or uninterested.  In those cases, a PSO that adopts NPS as a KPI needs to be ready to provide appropriate resources and a plan to help the individual either improve their client interactions or find a path out of the PSO. 

No single KPI should form the basis of personnel reviews or compensation plans. The NPS KPI is a reliable indicator of staff performance, particularly when blended with other KPIs that an individual consultant can influence. Replacing billable utilization with NPS is a good first step towards improving staff morale and also repeat business for your PSO.

Webinar results from February sessions

Webinar results from February sessions

Going under the couch cushions, my favorite audience question from the Vancouver IEEE Consultants Network

Going under the couch cushions, my favorite audience question from the Vancouver IEEE Consultants Network