3 Golden Metrics of Software Services: A Jeweller’s Approach to KPIs

Running a software services company is akin to managing a gold jewellery business. Just as a jeweller meticulously tracks the quality and quantity of gold, a software services company must diligently monitor its most valuable asset: time.

Regardless of the billing model, there are three critical Key Performance Indicators (KPIs) that every software services company should track to ensure operational efficiency and profitability.

1. Utilisation Rate

Definition: The utilisation rate is the total billable hours as a percentage of the total available hours.

Importance: This KPI measures how effectively your team is using their available time. A high utilisation rate indicates that your team is spending most of their time on billable work, which directly contributes to revenue. Conversely, a low utilisation rate may suggest inefficiencies or an imbalance between billable and non-billable activities.

Analogy: Imagine a jeweller who spends most of their time crafting exquisite pieces of jewellery rather than managing the shop or handling administrative tasks. The more time spent on creating jewellery, the higher the potential for sales and profit.

2. Realisation Rate

Definition: The realisation rate is the total billing divided by the billable hours.

Importance: This KPI reflects the effectiveness of your billing practices. It shows how much of the billable work is actually being billed to clients. A high realisation rate means that your company is successfully converting billable hours into revenue. A low realisation rate might indicate issues with billing processes or client negotiations.

Analogy: Consider the jeweller who not only crafts beautiful jewellery but also ensures that each piece is sold at a price that reflects its true value. The realisation rate is akin to the jeweller’s ability to sell their creations at a fair price, ensuring profitability.

3. Resource Efficiency Index

Definition: The resource efficiency index measures the team’s ability to generate revenue.

Importance: This KPI provides a holistic view of how efficiently your resources (i.e., your team) are being utilised to generate revenue. It takes into account both the utilisation and realisation rates, offering a comprehensive picture of operational efficiency.

Analogy: Think of the jeweller who not only creates and sells jewellery but also manages their resources (gold, tools, time) efficiently to maximise profit. The resource efficiency index is like the jeweller’s overall efficiency in turning raw materials into valuable products and revenue.

The Jeweller’s Perspective

Using the analogy of a gold jeweller, what a software services company is trading is “hours” at a rate appropriate to its experience and expertise. Just as a jeweller values and prices their gold based on its quality and craftsmanship, a software services company must value and price its time based on the skill and expertise of its team.

Tracking Time as an Asset

In non-services businesses, tracking assets and inventory is crucial for understanding the value and availability of resources. Similarly, in a software services company, tracking time is essential. Time is the primary asset, and its effective management can significantly impact the company’s bottom line.

By diligently monitoring these three KPIs—utilisation rate, realisation rate, and resource efficiency index—software services companies can ensure they are maximising their most valuable asset.

What are your views on this topic?

Do you concur or counter?

Comment here and let everyone know...

____

About CFOLogic:

CFOLogic is an international CFO and FinOps firm. We have been working with tech businesses to optimise finance costs and maximise their peace of mind. Acting as extended finance teams for our clients, we have been providing support to accelerate their sustained growth by ensuring alignment within the finance function. Our experience has been with wide ranging businesses across industries, size, geographies, and lifecycle — from start-up to fundraise to scaleup to exit.

More about us: CFOLogic.com