Outsourcing

How to measure revenue stream in your IT organization

Although most IT departments are cost centers, some actually have revenue-generation responsibilities. Here is a look at the key metrics that IT managers should use to track and measure IT revenue.

Although most IT departments are cost centers, some actually have revenue-generation responsibilities. In the latter case, the IT organization is either selling a product or a service. Here are some key measurements for tracking revenue in each case.

Product sales
If your IT organization is charged with selling and supporting technology products, you will want to track several key indicator trends to monitor the business. Trends will be key to understanding the dynamics of how and when the revenues are generated.

Key indicators and information to track include the following:
  • Total revenue by product trend—This is the total sales of each product by month. If it helps your analysis, group similar products together for reporting, but be sure to track the numbers for individual products as well.
  • Net revenue by product—Reduce the total sales number by direct product costs tied to generating the sale (i.e., advertising that can be directly related to a single product, labor required to package and ship the product, etc.).
  • Net profit by product—Reduce the net revenue number by expenses that should be applied to the product. For example, a company might apply a fixed percentage of each sale to cover labor, rent, utilities, etc., for expenses that are associated with multiple products and/or services.
  • Total clients—Keep track of the clients you have and keep a running total.
  • New clients—Trend the new clients added each month. Look for seasonality, results from advertising campaigns, new functionality announcements, etc.
  • Maintenance revenue—Trend the revenue generated from ongoing support maintenance. Over time, this number should climb. Maintenance revenue is a source of ongoing recurring revenue that will be important to pay for support and new development in the future.
  • Source of sale—Whenever possible, you want to tie new sales to the source of the sale to help you understand what works and what doesn’t. The source might be an advertising campaign, a particular sales representative, client referrals, your Web site, etc.
  • New prospects—Trending the new prospects you gain in a month will tell you if your ad campaigns are working.
  • Prospect database—Handle your prospect information with care and keep good records. Even if they do not buy your product today, they may in the future. When you develop a new product, every prospect, along with your current client base, becomes a new sale possibility. Track total new prospects gained each month and the total of the prospect database.
  • Revenue per client—Keep track of how much your clients buy from you. You always want to know who spends money with you. Track this in two ways: monthly trends and total purchases.

Professional services
Services of this type include custom programming, consulting, training, and other fees that your IT organization might charge out to a client over and above a normal maintenance fee that is tied to a product sale.

Unlike product sales, professional services can vary by contract and are more dependent on having staff with certain expertise available to deliver the services. Because staff expenses are typically your higher costs in the company, failure to monitor this segment of your business can have devastating effects on your financial plan.

Key indicator trends you will want to monitor and measure for professional services include the following:
  • Revenue—Total monthly revenue trend.
  • Average revenue per billable employee—Average revenue per month that a billable employee generates.
  • Revenue per employee—Monthly revenue contribution per billable employee.
  • Billable hour percentage—For those employees that are billed by the hour you will want to track the percentage of billable time your organization is performing. As you understand this number better, you will want to set targets for the percent of time each employee type should be billable.
  • Prospect needs and timeframe—Keep a running list of prospects and quantify the amount of resource needs they will have per the expected contract engagement and the timeframe the engagement is expected to last.
  • Bench availability—Who is on the bench now and who is coming to the bench. One key objective is to keep the bench empty. If resources are on the bench, those resources are not billing. Another use of this is to plan resource bench availability in order to coordinate additional training for those resources.
  • Employee referral—Often, additional revenue can be generated by an employee who is working with a client.
  • Rework time—Fixing things for free is no fun. If you have this situation, monitor the level of rework activity per month and the person responsible for it.
  • Billing and accounts receivable—You have to stay on top of billing your clients and collecting the A/R.

Two monitoring methods
In one project management consulting company, we had about 130 consultants. All were billable resources, which was the company’s sole source of revenue. No billing meant no revenue. We had approximately 12 vice presidents in the company that were charged with several responsibilities:
  • Billing for our time
  • Selling new business
  • Mentoring younger, less experienced consultants
  • Monitoring and managing the business

At our weekly meetings, we always discussed two aspects that were critical to our business:
  • Who is on the bench (not billing) or is about to come to the bench?
  • Who are our prospects, when will they close a contract, and what resource is needed?

This company maintained high profitability because it was focused on monitoring key indicators of the business.

In another company many years ago, I managed a programming support organization of about 100 people. We supported approximately 100 hospitals across the country. One of the support programs we offered involved dedicating a programmer to work on a single hospital for customized reports and capabilities. For that service, we charged the hospital a fixed fee every month. It was a very effective program that became a real “win-win” for the client and our company.

I developed a chart of my resources and the current hospital candidates for the dedicated resource program. By anticipating who might be closing a contract and needing a resource, we were always analyzing situations to ensure we could fulfill the contract with the right fit. Not every resource would be successful in every hospital due to personalities and needs.

Staying on top of your business is important in all areas. The better you track and monitor your business to understand it, the better it usually operates. Doing a quality job is much more than simply completing the technical aspect. That’s often the easy part. Client service, administration, and focus on the parts of the business that help it grow and maintain a professional presence are just as important as providing the technical skills.

Do you track your revenue?
Does your IT organization sell a product or service? If so, how do you measure your revenue requirements?

Mike Sisco is president of MDE Enterprises, an IT management training and consulting company. As a former CIO of 20 years, he is committed to the improvement of IT management skills and has developed an extensive set of resources that are available from the MDE Web site.

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