Trickle Down Metrics© and Why Companies MUST use Data to Drive Growth
by Trilogy Partners on Sep 6, 2017 11:59 AM
How do you stay competitive and manage growth? Trilogy Partners encourages its clients to rely upon data to analyze business trends. The purpose of data is to create an ongoing analysis of intelligence and the outcomes can provide impactful insights for decision making. I maintain that the key for any owner is to be able to clearly identify which Trickle Down Metrics© are the most critical drivers for their business and to focus their limited resources on monitoring these for the best outcomes.
The Trickle Down Metrics© of a company are the key performance indicators that permeate throughout all aspects of a business and drive the company towards the ultimate goals of the CEO and the organization.
Consider ABC Company, an application development company that creates custom software and applications for small-to-medium businesses at a fixed fee rate. The CEO built the company up to $2MM in revenue and $200K in annual net income within a few short years with grit, direct sales, and gut calls. His goal is to expand his team and diversify product offering within two years by increasing revenue, maintaining or increasing profitability, and reinvesting those profits into the new revenue channels.
Before acting, ABC Company identified its Trickle Down Metrics©, the data that would be used to drive decision-making:
- Utilization Rate of Direct Labor – the percentage of a person’s total hours used to generate revenue and how much money is lost via unutilized hours
- Booked Sales – total value of contracts closed within a given period, more pertinent to long term business health and long-term cash flows
- Gross Profitability by Project – the gross profit of each project available to satisfy overhead expenses (total billed per project less all direct costs)
- Billed Sales – total of value of contracts billed within a given period, more pertinent to short term cash flow
The CEO analyzed billable versus non-billable labor hours and found that his Utilization Rate of Direct Labor was around 90%, higher than industry average and an indicator that they would soon be overwhelmed. The CEO used this knowledge to confirm his decision to hire new direct employees.
The CEO then hired a VP of Sales and a Sales Administrator to ensure that his new employees would have consistent work. The two new hires spent six months closing an acceptable number and revenue of Booked Sales, however they mistakenly miscalculated the fixed fee contract.
This pricing error began to eat into Gross Profitability of Projects and some of the smaller projects weren’t profitable at all! However, by monitoring the issue over time, the CEO could isolate the issue and act before it worsened. The CEO hired a project manager sooner than originally planned to handle the estimation duties and keep labor costs down.
Billed Sales had increased 40% to $2.8MM, but ABC lost slight profitability in the short-term due to the estimation issues. Outside this slight bump, they are on track towards their goal of maintaining profitability and reinvesting cash into new revenue channels.
At Trilogy Partners, we believe that with data, decision making is focused and deliberate rather than subjective and arbitrary. If you’d like to like to learn more about using Trickle Down Metrics© to drive growth in your business, contact me at firstname.lastname@example.org or (609) 688-0428.