How many Average Bill Rates do you track?
Average bill rate is one of the key metrics to managing your services organization. With this metric, you can plan out revenue and staffing needs, measure your effectiveness of delivery, determine the impact on discounts, and forecast how your revenue looks again your overall budget. Typically the average bill rate metric is computed by dividing hours worked by revenue which can be done at an engagement or project level or at an overall client level depending on how your organization contracts work with your clients. It can also be computed based on service lines if your organization has a variety of services offerings that each command a bill rate.
How can the average bill rate metric help you plan out revenue and staffing needs? This is done via capacity planning. By using another metric – billable utilization – you can determine the number of billable hours planned. Multiply the billable hours by the average bill rate (or target bill rate in this case) and you get an expected revenue plan. Here is where you can start to plan out staffing needs, factor in ramp-up time for new hires, and plug in subcontractors as necessary to have the head count match your revenue targets for the year. Throughout the year, you can then measure the current average bill rate to compare how your revenue forecast looks against your plan and target bill rate.
Discounts are usually one of the challenges in a services organization that requires a tradeoff of selling services and growing the client base vs. maintaining the average bill rate. Sometimes this is done on a case by case basis. Including revenue from discounted deals in the average bill rate provides an overall bill rate for tracking against the fiscal year plan. Tracking discounted deals with some type of indicator, however, provides another unique metric that may aid in the tradeoff determination of when to discount. By tracking discount deals separately, you can measure the opportunity lost metric based on the target bill rate used for the fiscal year plan. By reviewing opportunity lost revenue against actual and forecasted revenue, your sales team and your management team will gain visibility into the impact of discounts on the services business.
Measuring the effectiveness of delivery, however, is a good metric for those engagements that are fixed price. A fixed price project that is delivered within budget should fall within the expected average bill rate and, in some cases, increase the average bill rate, if it is delivered under budget. I find that many fixed price projects unfortunately overrun the budget which has the negative impact of lowering the average bill rate. Here, once again, it is worthwhile to track engagement by contract type so you can see the impact of delivery effectiveness on the average bill rate. If fixed price engagements consistently come in with a very low average bill rate, then you may need to revisit your estimation process or consider increasing the contingency percentage when quoting to the customer. By using the target bill rate against all the hours worked on the fixed price engagement, you can gain insight into the value of the engagement if it was price as a Time & Materials project. Although you may view this also as an opportunity lost metric, I view it as a productivity loss metric. More effort was required than was estimated, instead of the opportunity lost being contributed to discounted rates. There are a wide variety of reasons the estimate may have been inaccurate: not enough information to determine accurate effort estimates, key resources being unavailable, assumptions being made that were not valid, etc.
Average bill rate is a key metric but there are quite a few different ways to track and view this metric to provide a more robust story behind your services organization….I’m just sayin’.
