Success in a professional services firm hinges on carefully balancing a few crucial performance metrics and aligning them with the organization’s unique strategy. One often overlooked or misunderstood metric is leverage and its ratio. In this article, we’ll be covering the basics of leverage, including how to measure it in your own organization. For even more insight and tips on improving your leverage ratio for sustainable growth, read our guide, Unpacking Billing Rate Distribution: Introducing Leverage Ratio: a Simple Explanation to a Complex KPI.
What is leverage?
Leverage is about the organization relying on entry-level, junior staff versus seasoned, experienced, or specialized talent for its delivery capabilities. This procedure-based practice thrives by having senior staff formalize their knowledge into reusable tools and frameworks, enabling less experienced staff to carry out and deliver the work effectively.
How do you measure leverage?
Measuring leverage can be tricky. It requires accurate raw data and consistent statistical methods for reliable analysis. Organizations using informal processes like email or ad-hoc systems, like Excel, might face issues with data detail, consistency, and cleanliness.
Fortunately, the widespread adoption of Professional Services Automation (PSA) software facilitates the efficient collection, aggregation, and analysis of operational and financial data essential for leverage analysis. This analysis focuses on hours invested in delivering all billable work and the corresponding realized bill rates per hour. Despite its simplicity, many services organizations lack the necessary systems and processes for detailed and accurate measurement.
Keeping measurements accurate is critical. This includes recording all billable hours, even those not directly invoiced, and evaluating the value of each hour, even in fixed-price contracts or retainer agreements. Accurately distinguishing contributions from junior and senior staff requires effective management of bill rates and/or labor cost rates. Tracking how leverage changes over time requires precise monitoring of related inputs, and applying statistical analysis helps avoid relying on vague qualifiers.
What is leverage ratio?
Leverage ratio is the percentage of total billable hours delivered by more junior staff. Organizations with a low leverage ratio rely heavily on senior staff for direct work. In contrast, those with high leverage ratios redirect senior staff toward activities promoting scalability, such as knowledge transfer, mentoring, and building organizational identity.
Why is leverage ratio important?
Monitoring leverage and its ratio is crucial for professional services firms because of its impact on organizational dynamics.
By carefully managing delegation and achieving an appropriate leverage ratio, firms can effectively assign tasks based on individual expertise, avoiding inefficiencies of senior-level staff handling routine junior-level tasks. This strategic approach enables senior staff to focus on high-value strategic initiatives, fostering innovation and enhancing the firm’s competitive edge.
Emphasizing delegation not only enhances efficiency but also nurtures a growth-oriented culture. Empowering junior staff with learning opportunities and increased responsibilities builds a resilient and skilled workforce, ensuring long-term viability and adaptability. Optimizing the time of the most experienced professionals maximizes productivity, highlighting the crucial role leverage plays in the success and sustainability of professional services firms, even in times of economic uncertainty.
Want to learn more about leverage?
To dive deeper into leverage and leverage ratio, download our guide, Unpacking Billing Rate Distribution: Introducing Leverage Ratio: a Simple Explanation to a Complex KPI.
What you can find inside our guide:
- Four main types of services firms and the key profit drivers
- How to measure leverage and leverage ratio (in-depth)
- Leverage ratio in real life
- How leverage ratio relates to KPIs
- + more!
About BigTime Software
BigTime takes the guesswork out of utilization, capacity planning, and project profitability. Our award-winning PSA software provides project planning, budgeting, time- and expense-tracking, and invoicing, all backed by uber-cool reporting and analytics. We help accountants, architects, engineers, IT-services firms, and consultants budget, track, and bill their most important asset: time. Curious to see PSA software in action? Join one of our group product walk-through webinars, hosted every Wednesday at 12pm CT.