[rev_slider_vc alias=”direct-cost”]

Your Direct Costs and Productivity KPIs

In an ideal world, our quest for profitability would start right here. Direct Costs, or Cost of Goods Sold (COGS), are your keys to establish profitability per clients and projects. They are also the measure of your staff’s productivity – the killer of professional services is excess capacity.

Your accounting reports don’t show Direct Costs accurately. Because accountants do not ask what it takes to deliver your service. Details are missing here as well because there is confusing information or not at all. In small businesses, everybody sells, delivers, does admin, manages others, and keeps a separate spreadsheet about the above. Establishing what really gets into your delivery process requires a call of judgement.

We will help you draw the line where it is realistic and useful for you to do it. Between those who actually deliver and those who are ‘back office’. Between costs that are key to deliver the services and those which are real overheads. Finally, we will establish the percentage of time and related cost to allocate here. It takes a while, but it pays off.


Percentage of Direct Cost out of Revenue

The reverse of this indicator is Gross Margin. This percentage will indicate progress in productivity and in ability to negotiate better delivery rates for your service. We want to see it decreasing or at least maintained at a steady rate year on year.

When to use it: constantly, especially when growing and needing to hire outside expertise.

When to ignore it: never.


Delivery Staff Utilisation Rate

Along with Revenue / Employee, this indicator alone provides a diagnostic for your internal efficiency and profitability. It checks the percentage of time your delivery staff spends in actually delivering to clients.  If your staff is busy with admin tasks, internal meetings or fixing glitches in the IT systems, you may be over-staffed, you are not very good at recruiting, or your systems are not functioning properly and waste your key staff’s time.

It takes a while to figure it out and it may require an introduction of project timesheets or other internal control checks.

When to use it: constantly, but especially when making hiring decisions .

When to ignore it: only when your delivery is fully outsourced.


Direct Cost per Billed Day

This indicator varies with utilisation rate and it can make or break your Gross Margin. The lower the percentage of staff utilisation staff, the higher their cost per billed day.  This indicator is your basis of developing a sound compensation and benefits scheme that encourages performance and creates a win-win situation with your key delivery staff.

When to use it: monitor it constantly, especially when you negotiate a salary raise, want to outsource delivery, price your services for a new client or negotiate your fees with existing clients.

When to ignore it: never .