What to track to enhance results, value and buyer appetite
Key Performance Indicators (KPIs) are an important and well-trodden method of managing a business; making sure those elements of your business which drive performance are consistently tracked will inevitably result in improved outcomes. With Technology Services businesses, KPIs are also a vital tool for those on the outside to understand the essence of a business. In particular, when there is a variety of services on offer, a well-structured set of KPIs will give a very clear sense of where and how the business is offering value to its customers. Effectively answering the seemingly basic question we always start by asking our clients: “what does the business actually do?”
We have helped to maximise value of, and attract buyers and investors for, many businesses across the whole spectrum of Technology Services. What we consistently hear from our clients is that they wish they had prepared and tracked the right KPIs much earlier.
There is a seemingly endless list of performance indicators that could be tracked. Some will be more applicable to your business model than others, and some are certainly more ‘key’ than others! In the table below are some of most broadly applicable KPIs, along with relevant benchmarks of ‘what good looks like’ from our experience of both Project Services and Managed Services businesses.
These KPIs prove out four key areas: the defensibility of your revenue streams via Visibility; the benefits and capability of the business to grow rapidly in Scalability; the right of the business to thrive (and command a premium valuation) in Differentiation; and ultimately the goal for all businesses in the space: cash generation in Return.
For project services, it will generally be accepted that the majority of revenue will not be recurring in nature. That said, being able to prove a route to managed services through an end-to-end service offering (consultancy, delivery, support) with a portion of revenue that is recurring (30%+) will be seen very favourably. Of course, the expectations will be much higher for a managed services provider (80%+).
What really matters for project services business is the portion of revenue that comes from your base (repeat customers). If you can prove that this is 80%+ and in absolute terms growing consistently every year, you are telling prospective buyers that you are a highly relevant and embedded strategic partner to your clients, increasing wallet share every year, and that long-term revenue visibility is very strong. This underpinning of forecast growth might even enable you to get buyers looking at run-rate and forward-looking numbers when valuing your business.
A diversified client portfolio is important as well with too much dependency on one or few clients seen as risky. Therefore, don’t just rely on your base, and make sure you focus enough time and energy on winning new business.
It goes without saying that most buyers will have certain size thresholds, below which they will not consider your business big enough to move the needle – as a rule of thumb this is typically £10m+ revenue and 100+ people but there are of course always exceptions. The reality is that exactly how big and how much expected growth will very much depend on the stage of maturity of your particular service proposition, and that is why specific metrics on this have been excluded from the table above. Nevertheless, it will always be true that the more growth the better with this a strong indicator of market demand and the quality of your offering.
Employee retention will always be a key focus area and even more pronounced in technology services – we have seen deals structured in a certain way because of perceived risks of employee churn. 85%+ retention will be seen as very positive, indicating a strong culture, that you are hiring the right people and that there is emphasis on training, development and career progression – all key requirements to scale! If you have a retention rate less than 80% you will need to prove that some of this churn was wanted!
A truly scalable business will typically be targeting utilisation of around 85% (based on available hours so excluding holiday etc.). Much lower than this, your margins and profitability will quickly start to look unattractive. Much higher you are leaving no room for research and innovation, key requirements in making sure that your services business continues to stay ahead of the competition, and you will no doubt quickly start to experience more employee churn as well.
Proving differentiation and your right to thrive in your market will always be a hurdle for most buyers with commoditisation seen as a race to the bottom. For technology services businesses, the financial metrics, and in particular the gross margin, will go some way to proving this very point. A gross margin of 50%+ will quickly indicate a business that is able to command high day rates and premium pricing. Less might suggest otherwise.
In people-based businesses, buyers are going to want to know how technical the team is and how long they are likely to stick around. Often what will be driving buyer decisions is the need for scarce talent in the “right” technical skill set. Therefore, being able to demonstrate the number of data scientists, AI experts, highly sought-after software accreditations etc. will be important and will help to prove differentiation – if you don’t have this data to hand, it’s worth starting to collect it.
Profitability is always going to be important – most technology services trade buyers are valued off EBITDA and tend to have margins in the mid-teens so anything less than this would be dilutive. If your margins are less than 15%, you will need to explain why (invested ahead of the curve, compressed utilisation rate etc.) and what your pathway to greater profitability is.
The Golden Rule
Finally, make sure you prepare your information in advance. Develop a system to track your KPIs and be disciplined in producing and reviewing them, automating reporting where possible. These metrics should become part of your monthly operations meetings and board meetings, and they should evolve over time. If you succeed in doing this, it will go a long way to helping you achieve the best possible value and finding the best possible home for your technology services business.