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What Should You Really Measure Running a Project

When you run an IT company and manage a team of developers, tracking key performance measures or KPIs is important. If you want to increase the profit of your IT business, you need to set goals and track the progress. In this post, we will update your KPI understanding, and draw some real-life examples of the most relevant web development niche metrics.

What is KPI

In simple words, KPI is a system of measurements that helps to understand how well is your team/company/enterprise performing.

KPI's aim is to make it clear to the team whether they are moving in the right direction to achieve corporate strategic objectives in time. Here are some of the characteristics of effective KPI:

  • It is clear-cut and measurable.

  • Shared within the team and company.

  • Essential for reaching your goal.

  • Relevant to your department or Line of Business (LOB).

Because of the large number of KPIs, choosing the ones that are relevant to your IT company can be hard. When you miss choosing the correct KPIs you start measuring metrics that are not consistent with your objectives. A clear understanding of the different metrics that are important for the IT industry is the best way to decide what to measure.

Strategic Reasons to Measure & Analyze KPI

There are many compelling reasons for evaluating the IT company's KPI. However, we can't list all of them, here's a sample of some that have strategic significance.

  1. When your KPIs show stable growth in the company, you can make a decision to speed it up and move forward with confidence and without risk.

  2. When deciding between market segments you can base your investment choices on a calculation of KPIs. The available data allows making robust, candid choices between product lines and geographies as well.

  3. KPIs help to detect problems within your development process and address them on time. Nobody is perfect, we all make mistakes, analyze them and introduce necessary improvements. However, this is only possible when you know where you're falling short.

What KPIs Do IT Companies Usually Measure?

We promised you to give some industry-specific examples of KPIs measured by IT companies. Here are a few lists for you to consider.

Possible KPIs for a Software Product and Software Services companies.

  • Annual/Average Contract Value
  • Churn Rate
  • Leads per Month
  • Orders Booked per Quarter
  • Monthly Run Rate
  • Days of Sales Outstandings
  • Utilization Rate
  • Bench Strength
  • Revenue Per Employee
  • Manpower Attrition Rate
  • Defects per Thousand Lines of Code, etc.

IT companies also frequently measure Team Velocity, which shows the number of story points in each sprint, Schedule Variance which tells if a team delivers on time, every time, Bugs Introduced showing if your team develops quality code, Application Crash Rate displaying the frequency of instances when your application crashes, Backlog Burn Rate, pointing out the speed of work through the backlog.

Introducing KPIs Step-by-step

To choose efficient KPIs, walk through the following steps and answer the questions for each block.
#1. Figure out what to measure

  • By looking at what metrics you can judge how healthy is your IT business?
  • When you analyze the weekly progress of your team what metrics do you look at?
  • What particular challenge do you need to overcome?
#2. What are the criteria for success?

  • How do you know whether you failed or were successful?
    What is the goal you're trying to achieve?
  • How do you know if you are having a problem?
#3. Data standards should be the same for all

All team members should report the same way.

  • All people in your team should measure results the same way.
  • Agree on a quarterly, monthly or weekly time horizon.
  • Set a deadline status update to get reports from team members.
#4. Review the introduced KPIs

  • They should have both leading and lagging indicators.
  • What is your blindside according to quarterly reports?
  • Do you discuss essential things during your weekly meetups?

Types of KPIs

These measurements show if your employees are engaged, productive, whether they deliver results, and if they are excited about the future.
Employee KPIs

These measurements show if your employees are engaged, productive, whether they deliver results, and if they are excited about the future.

For instance: retention of key employees, engagement of employees, health score.
Customer KPIs

These measurements show if your customers love, value and refer to your IT firm.

For instance: customer referrals, engagement, retention, number of customer support requests.
Process KPIs

These measurements show which of your operations and disciplines can be scaled for the future.

For instance: time of handling a ticket, MTTR, expenses, on-time delivery, margin, profit.
Revenue KPIs

These measurements show if your software products/services and marketing/sales strategies are good enough to support your current and future targeted revenue.

For instance: CAC, expansion of the existing customer, new customer sales, close/ratio cycle, recurring revenue.

The Most Important KPI Metrics for Software Companies

You've already learned multiple elements of KPIs metrics. Now let's pick the most important ones, the metrics which every software, hardware, technology and IT company should measure.

RGR or Revenue Growth Rate

We guess no manger is going to question the importance of the company's revenue growth rate. Revenue predefines the life of your software development business. If you don't earn money, there's no point in all the other metrics, so you certainly want to prevent a negative RGR.

Your weekly, quarterly or annual RGR can be measured. The periods can differ from business to business depending on its maturity and market volatility. A startup company, for example, might want to evaluate RGR month over month. A public enterprise may want to measure it quarter by quarter. IT firms more generally measure RGR on a year-over-year basis.

How to measure the IT company's annual RGR
To measure a rate of revenue growth you need to deduct the revenue of the prior year from the revenue of the current year, then divide this amount by the revenue of the past year and multiply by 100.

For example, if your previous year's revenue was $3 M and the current year's revenue is $5 M, then your RGR would be:

5M – 3M/3M x 100 = 49.9%

If your RGR continues to rise, you may expect a significant increase in net profit for the company.

CAC or Customer Acquisition Costs

Here is CAC formula:

Average marketing and sales costs over a given period of time / number of customers gained over that particular period.

CAC KPI metric will be really huge for software startups. You don't have to stress about that, though, it doesn't mean you don't have to keep an eye on it. When CAC slowly declines as your IT business gains some traction in the market, the marketing strategy works fine. If your acquisition costs continue to be high as you attract more customers, that is a symptom of a problem. The identified problem requires immediate attention and action.

Note that the key metric for IT startups is CAC.

Burn Rate

Burn Rate is another KPI critical to IT startups, particularly for subscription-based businesses like SaaS. That tells you how much time you have before one of the following things happens: improving efficiency, raising extra money, failing your business.

It's really straightforward to calculate the burn rate - this is the amount of cash used each month. For example, if the software development company has $300 K in total operating expenses per month and $100 K in sales revenue, the firm has a $200K / month burn rate.

And if your company has $800 K in the bank, it has 4 months to boost efficiency or collect cash dramatically at this burn rate. You're going to get out of business otherwise.

CRR or Customer Retention Rate

CRR metric measures how many of the customers gained remain with you over a given period of time.

Here is a CRR formula:
CRR = ((E- N)/S) x 100

Where

S = Number of clients at the start of a cycle
E= Number of clients at the end of a cycle
N = Number of new clients gained over a period

CRR is the primary Customer Service Indicator. It is tightly linked to the image of the brand.

LTV or Life Time Value of Customers

The lifetime value of a customer makes you know how much you can spend on ads, inventories and costs per consumer while still generating revenue. For a SaaS startup, LTV doesn't matter much, but as you collect more data over time, it can become a very useful KPI metric for monitoring your company.

Here's one of the simplest ways to measure LTV that the IT business can replicate.

LTV = Average Annual Contract Value / Churn Rate

If you want a more reliable LTV figure, subtract the Gross Profit Margin percentage of the average annual contract value.

ARR (Annual Recurring Revenue) and MRR (Monthly Recurring Revenue)

ARR and MRR both are basic calculations. Only add up all the recurring sales you have earned over a year (or one month for MRR). For a SaaS organization to calculate this KPI metric you would need to deduct the average annual (or monthly) contract value by the total number of active users over that period.

ARR is primarily used by SaaS companies that offer annual or multi-year subscription packages. MRR is better suited for consumer SaaS and low-cost B2B SaaS businesses, with monthly subscription plans.

Conclusion

You now have a clear understanding of KPIs, and you know what metrics are really worth calculating for your IT business. What you need to do now is get going. You will get proper insights as soon as you start calculating selected KPIs, thus pushing the right discussions.

Check them and make appropriate changes to the KPI list. If you don't get good feedback from any KPI or don't know what action to take when you're off track, stop calculating it and replace it with another metric. Choosing your best KPIs can take some time, maybe a few quarters.

Of course, our list of KPI metrics is not exhaustive, however, they will be helpful for managing your IT business. Want to add some items? You are welcome to do it in the comments.