"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
