Decoding Why Average Revenue per Person Steals the KPI Spotlight
Tired of talking about hours, rates, and timekeeping? Every professional is screaming YES!
For far too long, professional services KPI’s have revolved around the same figures that were focused on decades prior, and I’ll argue less and less effectively so.
The one metric that stands out like a beacon of insight and guidance is "Average Revenue per Person." In this blog post, we'll delve into why that is one to focus on.
Defining Average Revenue per Person (ARPP): A straightforward metric that calculates the total revenue generated by the firm divided by the number of employees.
Why ARPP is an effective KPI:
Holistic Performance Measurement: ARPP encapsulates the entire firm's performance in a single figure. It is quick and easy to calculate while providing a quick benchmark for those above and beyond the average.
Hour and Rate Differentials Don’t Matter: For years, focusing on hours meant some people recorded high volumes only to write them off; others had few hours but argued high rates. ARPP eliminates these variants and considers each individual’s contribution regardless of input measures - solely output.
Focus on Value Delivery: Revenue per Person encourages firms to focus on delivering high-value services. It prompts questions about service quality, pricing strategies, and how effectively the firm meets client needs.
Comparative Analysis: This KPI allows for relatively easy benchmarking against industry peers. Firms can compare their ARPP ratio with similar-sized competitors to assess their competitive positioning.
Adaptation to Market Trends: As market trends change, so do client demands. Revenue per Person helps firms track whether they are adapting to these shifts effectively by measuring their revenue output relative to workforce size.
Where are the “Gotcha’s”?
Strategic Growth Measurement: Monitoring changes in ARPP over time provides valuable insights into the firm's growth trajectory. However, an increase in ARPP may or may not indicate a healthy expansion. For example, if the firm mix or leverage model changed recently, a shift in ARPP may be more reflecting of that change rather than a strategic measurement.
Insights Into Profitability: This KPI directly ties revenue generation to the size of the team. A high ARPP does not necessarily indicate that each team member is contributing significantly to the firm's bottom line. Say for example, some new, high rate team members joined the team and consequently ARPP increased substantially. However, as these colleagues were strategic talent, they came at a significant salary cost to the business. As a result, profitability actually may decrease as ARPP increases. That is why it’s imperative for a business to monitor a few complimentary measures that are aligned with its short and long term objectives.
How to Action ARPP to Improve the Firm?
Efficiency and Streamlining: Optimize internal processes to ensure that employees spend their time on productive activities rather than administrative tasks.
Pricing Strategy: Regularly evaluate pricing models to ensure they reflect the value you provide. Pricing strategies should be aligned with clients and market trends.
Training and Upskilling: Invest in employee development to enhance their skills and capabilities, enabling them to contribute more effectively to revenue generation.
Client Relationship Management: Strengthen client relationships to increase repeat business and referrals, both of which contribute positively to the ARPP ratio.
As with any KPI, it is absolutely critical to have the appropriate training and expertise to interpret the data appropriately. The best KPIs are at best useless and at worst harmful if they are not relevant, interpreted and contextualized appropriately.
The "Average Revenue per Person" KPI serves as a compass; its simplicity and relevance make it a standout metric that encapsulates the firm's performance, efficiency, and potential for success. There are additional variations of ARPP that are useful to professional services firms which can be aligned to specific strategic objectives and as part of a performance measurement map. For more information or to discuss your firm’s strategy and performance contact us.