As your consulting firm grows, so does revenue and consultant hours worked. The team is growing and billings are increasing – but at the same time,  you often see margins decreasing, which means decreased profitability.

There are three inter-related metrics consulting firms need to scale profitably and avoid the curse of “more work = less profit”:

1. Utilization vs. Realization: Utilization is a measure of how “busy” your consultants are, while Realization is a measure of how much revenue the consultants work is generating.
2. Budget Burn Rate: As a project progresses, you need a clear view into how much of the project’s budget has been consumed relative to the progress made. This is critical to prevent “scope creep”, which reduces your margins and profit.
3. Client Profitability: You need to see how profitable each client is for your firm so you can make informed decisions on who to upsell and who to renegotiate with.

Utilization vs. Realization: How Efficient Is Your Firm?

Utilization rate is a metric that tells you how much of a consultant's available time is spent on billable work. You can learn how to calculate your utilization rate here, but to summarize, you want to see the utilization rate at around 80% for maximum efficiency, without the risk of burnout.

Realization rate is the percentage of your consultant’s work that is billable.  It is calculated as: (total amount invoiced / (total hours worked *standard rate)) * 100

You want your realization rate to be as close to 100% as possible, which indicates perfect efficiency, meaning all of the work the consultants performed was billable. When realization rate is lower than 100%, it means that you have issues with scope creep, write-downs or other inefficiencies (like admin, skill gaps, etc.).

Monitoring Your Burn Rate

When your realization rate is less than 100%, the most common culprit is “scope creep” – hours worked consuming the project budget faster than the progress being made. Using a PSA tool for time tracking is essential to monitoring burn rate because spreadsheets can only surface the problem after it is too late to do anything about it.‍

Identifying Your Most Profitable Clients

To calculate your true profitability, you need to track not only your consultant's billable time (what goes on the invoice), but also all of the non-billable time spent on internal meetings, emails and rework. This is especially important with fixed-fee clients who may be “high-maintenance” (lots of revisions, questions and hand-holding); hours spent on those clients can quickly outpace the project budget before progress is complete.

If you are still relying on spreadsheets to track time worked, then the true cause of your loss in profitability is hidden. You can see clearly what hours you billed for on the invoice, but not what it cost you to get that invoice. Switching to an automated time tracking solution is a necessity to prevent your margins from collapsing.

If you are ready to start scaling your profit along with your revenue, you can start today with a free trial of Projectworks, or let us demo Projectworks for you,  and show you how accurate time tracking can give you the insights you need to grow a more profitable firm.