Why Tracking Realized Rate Should Be A Top Priority
February 6, 2020
It’s been said that “you can’t manage what you can’t measure.” However, the challenge that many project-based companies face is deciding which key performance indicators (KPIs) they should track. The right set of metrics to monitor will vary based on the type of work your firm does, the kinds of clients you work with, and other factors. But one number that we have found to be important to our success and easy to measure and communicate is realized rate.
Realized rate is total revenue divided by the number hours of work performed to generate it. The simplicity of that calculation and the positive impact that increasing the figure can have are two reasons it can be so valuable in helping you increase your firm’s financial performance.
A Meaningful and Actionable Metric for Your Teams
At a high level, your executive team is surely watching metrics like overall revenue and profit percentage. But, in order to improve those figures, managers and salespeople need to be focused on a number that is more within their control. That’s where realized rate comes in. Raising it by as little as a few dollars per hour can increase your profit percentage by several points. And, it’s a number that is simple to understand and easy to act on.
"When it comes to achieving our profitability goals, we've found realized rate to be a strong influencer. We've also learned that teams tasked with increasing that figure rise to the challenge and help make our company more profitable."
8 Tips for Increasing Realized Rate
When we turned our attention to increasing realized rate, we found there were many actions we could take to move it in a positive direction. For example, you can:
- Charge more for your services. Billing more for projects while the hours needed to complete them remains the same will improve your realized rate. Of course, this can be a delicate situation with existing clients, especially if they have recently come onboard with an agreed-upon rate. Long-time clients who have enjoyed the same rate for years will likely be more open to an increase, and you can quote the higher rate as you pursue new business.
- Review your pricing method. Depending on the type of work you do and your target market, it may be advantageous to use a fixed rate over an hourly rate or vice versa, or even to use some other billing method.
- Write off less time. How are your teams determining whether or not a task should be billable? Taking a closer look at your business processes and clarifying the kinds of work and the specific scenarios where work should be written off can improve realized rate.
- Keep Work in Progress (WIP) current. If your teams are not recording WIP and write-offs promptly, projects may be billed at a lower realized rate because managers do not have an opportunity to take corrective action.
- Quote projects more accurately. The better your salespeople and project managers are at accurately gauging how much work a project will entail, the less you’ll have to write off.
- Improve internal and and client communication. Things like getting a full understanding of project requirements from a client upfront and being clear about the financial impact of scope changes are critical to achieving and maintaining your target realized rate. So is clear and complete communication among your internal departments.
- Review and revise your processes. From quality assurance to final product delivery, if you can make your processes more efficient and effective, that will have a positive impact on realized rate.
- Use a metrics-first firm management software package. It’s important that your firm management software gives you all the tools you need to handle the operational aspects of your business, from project management and resource scheduling, to time tracking and invoicing. But, across all those features and others, it should also make it easy to measure and track KPIs.
Ask Us About Our Experience With Realized Rate
When it comes to achieving our profitability goals, we’ve found realized rate to be a strong influencer. We’ve also learned that teams tasked with increasing that figure rise to the challenge and help make our company more profitable. If you have questions about our experience in this area, or how Factor helps project-based firms manage their projects and their business as a whole more effectively, please get in touch.
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