"The purpose of a services organization in a SaaS company is to maximize ARR without losing money."
Dave Kellogg
Executive in Residence, Balderton Capital
Former CEO Host Analytics
Professional services key performance indicators (KPIs) play an important role in helping a SaaS company make better decisions on behalf of its people, the company, and its customers. These metrics are used to measure the success of delivery, track the productivity of their services team, and monitor the financial performance of the work they deliver.
From financial metrics to operational and client measures, there are a wide variety of KPIs to monitor as a professional services team. As well as considering the shifting role of professional services – and what this means for the metrics we track – this guide explores a range of different measures across the following categories:
On the move but still want to discover our metrics?Watch our video on the 20 professional metrics you should be following below:
WHAT IS THE ROLE OF PROFESSIONAL SERVICES IN A SAAS COMPANY?
The role of professional services in a modern SaaS company continues to change and evolve. Traditional professional services is often thought of as the technical expertise required to stand up a solution. Some software companies look at professional services through the lens of services revenue and margin. This is not to say that this revenue stream is not unimportant but it isn’t the primary driver of valuation in SaaS, subscription software revenues are. Therefore in the Modern SaaS economy, "success-led services" are orientated to helping the customer achieve their outcomes with a focus on time-to-value, adoption and maximizing ARR.
Professional Services forms part of the broader Customer Organization alongside teams such as Customer Success, Support, Managed Services, Value Engineering, Training and Enablement. The mindset of this organization has shifted from "we implement software" to "we continuously drive value throughout the customer lifecycle”. Forward-thinking SaaS companies view professional services as a key component to increasing ARR via delivering customer outcomes and creating brand advocates. The mission for services in the current economic climate is how to maximize ARR, without losing money.
FINANCIAL METRICS FOR PROFESSIONAL SERVICES: ARR, SERVICES REVENUE AND MARGIN
1. Annual Recurring Revenue (ARR)
ARR is the #1 metric for SaaS companies and professional services can influence ARR growth but is not always measured on it. Professional services should be a key differentiator for sales as they help you win new business through their expertise and building confidence in the customer.
Precursive’s Chief Customer Officer, Graham Gill reflects on the value of an hour of professional services:
“Professional Services is the customer team that can connect the customer with the product in a way that no other team can. They have the ability to make things operational and can run workshops and design solutions that show your customer how things could be. When the customer says “Yes that’s what I want, that vision you showed me - make that happen!” Services can be the bridge to value and in turn customer retention and growth.”
How to Calculate ARR
When calculating ARR, only the recurring revenue part is used, and any one-time or variable fees are omitted.
ARR = Total Contract Value / No. of Years in Contract
Advanced ARR metrics for professional services
More sophisticated companies also track the relationship between professional services and ARR. Examples of more progressive metrics here are:
Services Consumption: ARR Growth Rate
This is the ratio between the amount of professional services purchased and the ARR Growth rate for that customer over time.
Services Attach Rate: Renewal Rate
This is calculating the value of services purchased with the renewal rate which can be measured across your customers and on a cohort basis.
2. Services Revenue
Services revenue is the revenue generated by a professional services team within a given period. This figure is usually shown at the top of an income statement (see example in our intro section of this blog) and is added to the revenue from product earnings to give you the total revenue.
Increasingly the best SaaS companies are able to create additional value for customers through services offerings and success packages. These are typically bundles of services combining consulting, support and enablement expertise. Companies that are successfully able to monetize these renewable packages are thus able to move revenue from the one time column to the recurring column.
In addition, professional services can be billed in different ways including fixed price engagements where the cost of the engagement is agreed with the customer up front based on the scope of work. Alternatively, services teams may bill based on time and materials (T&M) where you will bill the customer for time spent on the engagement.
How to calculate services revenue
Fixed Price Revenue = Fixed Fee per project x Total # of fixed price projects
T&M Revenue = # of hours x billable hourly rate
3. Services Gross Margin
Services gross margin is another vital professional services metric to track – it represents the profit generated by professional services. Services gross margin contributes towards the cost of your marketing and sales teams, office space, and infrastructure. The higher your gross margin, the more money you will have to invest in your organization and achieve growth. Please note that in SaaS, many companies choose to run services at a loss because their focus is on maximizing ARR.
How to calculate services gross margin
When trying to calculate this metric, you need to be aware of some important terms connected to services gross margin:
Total Services Revenue is all of the revenue your services team delivers in its entirety. This can include implementations and managed services revenue. Different margins can be calculated per service type.
Cost of Services is the total sum of direct costs associated with services delivery, which is inclusive of salaries, incentives and expenses.
There is only one formula to calculate Gross Margin. What is sometimes debated is what type of costs are included in the direct costs.
Services Gross Margin = (Total Services Revenue - Cost of Services) / Total Services Revenue
4. Project Margin
Tracking the margin of a project provides a better understanding about whether or not a project has been a success financially. This is an important metric to monitor but not always one that services teams can see in real-time. If your project team isn’t tracking their time accurately or on time then your data will be incorrect. Understanding the performance of individual projects aligned to product lines or customer segments allows you to unpack which elements of your delivery organization are profitable vs. those that may be underperforming. This can allow you to make decisions on how you wish to scope and price such engagements in the future to ensure you drive better margins.
Forecasting margin as projects unfold is challenging because it can be difficult to predict additional requirements or shifting timelines and their impact on the financial performance of the overall project compared with its original budget.
How to calculate project margin
Project margin is the remaining profit or loss after the project is completed inclusive of all labor costs and expenses incurred. Therefore to calculate the project margin, you must deduct all costs from total project revenue.
Project Margin = (Total Project Revenue - Total Project Cost) / Total Project Revenue
PROFESSIONAL SERVICES OPERATIONAL METRICS: UTILIZATION AND REALIZATION
For any professional services organization, maximizing profitability is heavily influenced by staff utilization. Operational efficiency and resource management play a key role in helping services teams to maximize utilization. Utilization rates also help you to forecast profitability and future cash coming into the business hence the importance of this metric to services and finance teams.
Beyond profitability, being able to understand where employees are overworked or under utilized helps improve productivity and reduce staff attrition. Utilization data on which skills or services have the highest demand help to inform services sales strategies and are a key input for building services offerings.
5. Billable Utilization
Billable utilization measures the percentage of hours available that employees spend generating revenue for project-based services.
Billable hours will include the time your staff spends on the billable activities, which are those that you will charge your customer for. The SOW will summarize the deliverables and billable hours should tie back to this.
Non-billable work can be a mixture of time spent on projects that you do not charge for by choice or alternatively additional effort you put into an engagement to get it back on track that you can not charge for - in effect “eating the cost”.
How to calculate billable utilization
Billable Utilization % = (No. of billable hours / No. of available hours) x 100
6. Billable Realization
Billable realization rate is a key measure for your services team because it shows your effectiveness at translating services utilization into billable hours which are actually charged to customers. It is the proportion of these billable hours at normal billing rates to the figure that will eventually be billed.
How to calculate billable realization
Billable Realization = Billed Hours / Billable Hours
A low realization rate can be caused by poor scoping or delivery leading to the vendor needing to do additional work to solve issues.
7. Productive Utilization
This is not always a common utilization metric for SaaS companies. Productive utilization is used to describe the number of billable hours as well as time spent that drives value for the customer, improves the relationship and business development activities that all contribute to growth.
How to calculate productive utilization
The productive utilization rate is calculated by this formula:
Productive Utilization = Billable hours + Business Development + Relationship Building Time / Standard Available Hours
8. Forecast vs. Actual Utilization
Operational efficiency is important in professional services. Understanding the variance between forecast utilization and actual utilization allows PS teams to see how much of their planned work is actually delivered in the time period originally forecast. If your forecast is higher than your actual utilization, then this can impact your billing both for T&M and fixed price work. Discrepancies in forecast vs. actual utilization might also indicate that some of your forecasting is inaccurate or over optimistic, making it a key professional services operational metric to track.
Unpacking why this variation exists is a key responsibility for operations and resource management teams. If actual utilization is higher than your forecast, then it is also important to understand the underlying reasons. Does this mean that people are overworked? Are your effort estimates wrong and need adjusting? Is the maturity of your team and the way they work improving because they are getting through deliverables faster than in the past?
How to calculate forecast vs. actual utilization
Forecast vs. Actual Utilization = Actual Utilization - Forecast Utilization
PROFESSIONAL SERVICES KPI'S FOR CAPACITY PLANNING
Professional Services teams often field questions on their capacity to deliver project work. How much capacity do we have? Where have we got white space? When can we take on new work? What is our lead time to start this project? All of these questions are linked to your ability to understand, measure and forecast our services capacity and availability.
9. Total Capacity
This is the amount of available time that our services team has to take on work. As a metric it gives us a snapshot of the availability of our services organization and whether we will face a capacity crunch and therefore have a lead time for starting new projects.
How to calculate total capacity
Total Standard Available Hours across all delivery staff
10. Available Capacity per Role
The available time for work or tasks, rolled up and segmented by role or title.
How to calculate available capacity per role
Standard Available Hours grouped by role
11. Available Capacity per Person
Resource managers need to understand the availability of individuals to take on tasks or new projects. This availability can be measured on a daily, weekly or monthly basis. By understanding your team’s capacity, you can make decisions on what projects are assigned to which resources more quickly. If availability is unclear, then you may assign work to someone who is already over utilized.
How to calculate available capacity per person
Standard Available Hours per person (per day, week, month)
12. Forecast Demand Total
The forecast demand total is recognized as the aggregate amount of work due.
This is based on a number of factors including the sales pipeline, expansion and any inflight work which has follow-on effort required. For planning purposes, it helps to have as much information as possible on the expected demand for work.
Anticipating demand means you will know when to increase staff and other resources to ensure operations run as smoothly as possible during peak periods. This is all part of a wider procurement strategy to guarantee that your supply matches customer demand.
How to calculate forecast demand total
Forecast Demand Total = Total Expected Hours
Forecast demand will inform a services organization of the need to hire or replan services engagements depending on the upcoming volume.
There are valuable subsets of the forecast demand total that you can also calculate, such as:
Forecast demand by role - Looking at the total volume of project work organized by each job role, e.g. project manager, technical consultant.
Forecast demand by skill - This looks at the total volume of project tasks to be completed that align to skills or technical knowledge.
SUCCESS-LED PROFESSIONAL SERVICES METRICS
The modern professional services organization understands the importance of internal metrics related to operational efficiency and productivity alongside performance indicators that drive customer success. Being able to measure how quickly your customers realize value and whether they would recommend you should inform your forecasting of renewals and expansion revenue, as well as those companies that are likely to provide you a case study including the quality of your implementation services.
13. Time-to-launch
Time-to-launch measures the amount of time it takes you to reach the initial ‘go-live’ date with your customer. Usually in SaaS the higher the ACV, the longer the deployment and so the best services team are focused on faster delivery times. Delayed implementations are an indicator of higher churn risk.
How to calculate time-to-launch
Services teams can calculate this one of two ways:
i) Number of days between “Closed Won” and “Go-Live”
ii) Number of days between “Kick-off” and “Go-Live”
Customers often think in terms of the first one!
14. Time-to-First Value
Time-to-first value (TTFV) is a popular customer engagement metric which can give you a better idea of the efficiency of your organization’s onboarding process. In short, it is the amount of time between the closing of a sale and when the customer is onboarded and they are seeing value from the product.
This is one of the most important for customers themselves as it describes how fast the product solved their issues and delivered a positive return on investment. Simply put, the faster a service solves a problem, the better the customer experience and the greater the likelihood of additional revenue generating opportunities.
How to calculate time-to-first value
The number of days from the initial sale closure to the first customer value moment.
Be aware that customers must define their first value parameters and they need to acknowledge that value has been received.
15. Implementation Net Promoter Score (NPS)
The implementation net promoter score (NPS) is a way of measuring customer sentiment at various points of a services engagement and their likelihood to recommend your services.
Some professional services teams like to track NPS at kickoff, at go-live and at project closure.
How to calculate implementation NPS
Respondents will give ratings between 0 and 10. This can be phrased as ‘how likely are you to recommend us to others based on this implementation?’
(with 0 signifying not likely at all up to 10 for very likely).
Based on responses, customers can be separated into one of three categories to establish an NPS score:
Promoters return a score of 9 or 10 and are the ideal loyal customers.
Passives return a score of 7 or 8, and are usually happy with your service but not enough to be considered brand advocates.
Detractors return a score of 0 to 6. These customers are not happy and will unlikely buy from you again. They may even try to discourage others from using your services.
To calculate your ultimate NPS score, simply subtract the percentage of detractors from the percentage of promoters.
16. Customer Satisfaction (CSAT) Score
CSAT can be used to quantify how satisfied your customers are with your product and/or services delivery.
How to calculate CSAT
Ask customers to rate their experience of your product or service on a scale of 1-5. CSAT is the % of respondents that rate 4 or 5 only. Studies have shown that using the two highest values on feedback questions gives us the most accurate prediction of customer retention.
% of Satisfied Customers = (No. of Satisfied Customers ( 4 & 5) / Number of Survey Responses) x 100
17. Red, Yellow and Green Accounts
This is a way for the services team to identify customers who may require additional engagement based on how much value they are generating from your product.
Green are generating value on a continuous basis and renewing or expanding
Amber need help and may require services to support adoption or fix issues
Red are at severe risk of churn and it is important to know if services will be needed for retention.
Benchmark Your Services KPIs
Over the course of this pretty extensive guide, we’ve looked at a broad range of professional services metrics that modern SaaS companies use to track the health of their business.
Want to see our research into what the best PS teams are tracking? Get in touch with our team to organize a benchmark report on the modern approach to services delivery and the metrics that matter - or, if it's Professional Services Automation you're after, discover our cutting edge PSA software.
