Professional services firms typically rely on billable subject matter experts (SMEs) to provide support during sales cycles. Whether that support is in the way of scoping and estimating engagements, participating in pre-sales calls, drafting Statements of Work (SOWs), or serving as pursuit lead from a Delivery perspective, consultants are substituting non-billable hours for billable hours in support of sales.
The question is – how much is this impacting your organization? You may track the sales team’s salaries and commissions, but are you evaluating the impact of having a Delivery-supported sales function?
There are financial considerations to having billable consultants contribute to sales:
- Opportunity cost: how many hours that would otherwise be billable are being spent on non-billable sales support?
- Delivery cost of sales: how much are you spending on the sales efforts of your billable consultants?
This post focuses primarily on tracking the latter, but let’s take a quick look at the former…
Opportunity cost
Every non-billable hour a consultant spends supporting the sales team is a billable hour lost. Lost revenue. While you may be looking at the cost to the organization for a resource’s time, are you factoring in the lost billable hour? To calculate this opportunity cost, evaluate a consultant’s average bill rate against the number of non-billable sales support hours that consultant has logged.
The opportunity cost metric on its own can be a good thing to understand. Often, it takes a year to set a baseline, but your organization’s acceptable opportunity cost should be derived by looking at this metric in comparison to total sold revenue, average deal size (in $), and other sales metrics like sales cycle duration, opportunity volume, and profitability.
While opportunity cost stands out as its own metric, the Delivery cost of sales is one that can be tracked and reported on at multiple levels. Let’s take a look at how...
Cost of sales
In addition to looking at the salaries and commissions associated with your sales team, are you looking at the cost associated with billable resources contributing to sales efforts? This measure often goes untracked and unreported. Understanding what your business is spending to drive revenue to the Delivery organization is critical in understanding if your other measures are adequate to sustain the business: contribution margins, utilization targets, capacity of Delivery organization, average bill rates, etc. Establishing these KPIs for your business ties back to understanding the cost of obtaining delivered revenue.
To calculate cost of sales, you simply look at a consultant’s hourly cost times the number of hours spent in sales support efforts. Much like opportunity cost, calculating this metric is easy enough. However, the value of this metric lies in tracking it in ways that are informative and lead to good decision making. We are going to look at a few ways to track Delivery cost of sales that will give you meaningful, actionable insights.
Per client: How much money are you spending within a client each year to continuously drive business? What Return on Investment (ROI) are you seeing? Does the delivered revenue within that client justify the sales support that your Delivery team is providing?
Key, related metrics:
- Delivery Cost ($) of Client Revenue
- Delivery Cost as a % of Client Revenue
- Total Client Project Margin including Delivery Cost of Sales
Per engagement / project type: If you sell multiple types of engagements, how much spend are you dedicating to sell each type? Compared to the average deal size of these engagement types, how does the Delivery Cost of sales as a percentage of revenue stack up against other engagements?
Key, related metrics:
- Delivery Cost ($) of Sales for Project Type
- Delivery Cost of Sales as a % of Total Project Revenue by Project Type
- Total Project Margin across Project Type including Delivery Cost of Sales
Per project: Pretty simple here – how much did it cost to close the project that your team is delivering? When you look at this compared to the target project margin, is your target margin still healthy for the business?
Key, related metrics:
- Delivery Cost ($) of Project Sale
- Delivery Cost as a % of Total Project Revenue
- Total Project Margin including Delivery Cost of Sales
Per salesperson: How much sales support is a salesperson requiring to close business? Are some members of your sales team overly-reliant on members of the Delivery team to take opportunities from Qualification to Closed/Won? What return on investment is your sales team realizing from the amount of investment that the Delivery team is making to support them? If your top seller is consistently hitting his/her sales targets with a low-percentage ratio of Delivery cost of sales to sold revenue, should that be the standard for the rest of your sales team?
Key, related metrics:
- Delivery Cost ($) of a Salesperson’s Sold Revenue
- Delivery Cost as a % of Salesperson’s Sold Revenue
- Number of Sales Support Hours per Salesperson
- Delivery Cost of Sales per Salesperson
Ultimately, you track the cost of sales on your P&L as a Sales and Marketing function within SG&A, but typically not represented in the P&L is the cost of sales support as provided by the Delivery organization. In order to truly understand the investment your organization is making into sales, it is good practice to track the Delivery cost of sales and analyze that data in comparison to delivered revenue and project gross margins.
Much like you analyze your typical sales and marketing spend, take a look at the amount of sales support you require from your delivery organization and make educated decisions in managing that investment.
