The Best and the Worst of Times

Technology service providers must negotiate mine fields
by Jeanne Urich and Dave Hofferberth, SPI Research

If 2007 was characterized as “the year of technology consolidation,” based on the unprecedented number of technology mergers and acquisitions, 2008 must go down in the technology service history books as “It was the best of times, and the worst of times.” For most of 2008, many technology firms and pure-play technology service providers experienced significant year-over-year professional service (PS) revenue and margin growth. But, as the entire market tumbled in the fourth quarter, technology service organizations were not immune to the ravages of the economic downturn.

The year ended with a bang as the technology service world recoiled from Satyam’s (Indian’s fourth largest technology firm) demise as Chairman Ramilinga Ragu resigned and admitted to “deliberately over-stating Satyam’s revenues and profits for a number of years.” In his letter of resignation, he admitted to overstating cash on hand by over $1 billion and overstating quarterly earnings by $128 million.

If that wasn’t bad enough, Forrester issued a warning in January 2009 that technology spending in 2009 would grow at 1.6 percent to $573 billion in the U.S. in 2009. This is the slowest rate of technology spending growth since 2002 and down from actual 4.1 percent spending growth in 2008 and 7 percent spending growth in 2007.

Also, in February 2009, BearingPoint, one of the world’s largest providers of management and technology consulting services, filed for Chapter 11 Bankruptcy protection and has begun a sale of international assets.

In today’s turbulent economy, even as technology product companies focus intensely on maintaining revenue and growing margin from professional services as a “recession-proofing” survival strategy, technology service providers are seeing deferred decisions and protracted sales cycles. Winning deals must demonstrate immediate cost savings or significant return on investment (ROI). Consulting has been harder hit than managed services and outsourcing because managed services and outsourcing can provide immediate cost reductions.

Technology professional service trends in 2009

Although the technology sector has held up better than most, the overall economic turmoil has started taking its toll on tech. Several of the issues affecting the PS industry include:

  • Pressure to do “more” with less – PS organizations are focusing on reducing overhead, non-billable travel and expense, training and reliance on subcontractors and offshore staff. Once all the “discretionary fat” has been removed, firms will face layoffs.
  • Potential Indian service provider meltdown – This is based on Satyam misstating revenue and profit for a number of years. With the huge economic downturn, U.S. and Europe, the Middle East and Africa (EMEA) firms will be wary of working with Indian firms and will start “in-sourcing” professional service work in-country to preserve jobs. Currently, the top Indian firms rely heavily on compromised financial service sector revenue.
  • The move to Software as a Service (SaaS) – Traditional software firms derive over 50 percent of revenues from services, but PS revenue and margin are not the objective for SaaS firms. The SaaS professional service objective is rapid, low-cost implementation to drive subscription revenue. This year will challenge SaaS revenue and profit growth because the recession will disproportionately hit the small to medium business space (the primary SaaS target).
  • Vendor consolidation – Cost-conscious clients continue to reduce the number of service providers to drive pricing economies. For service providers, this translates to the need to expand globally and add service lines with increased focus on solution creation, marketing and selling.
  • Skills imbalance – The downturn will reduce hiring pressures, but the new breed of consultants is unwilling to make the travel and lifestyle sacrifices of previous generations. This will increase pressures on service firms to deliver more services remotely and develop strong delivery methods and tools to reduce consultant burnout.
  • Hybrid on- and off-site delivery models – Outsourcing and hybrid professional service organization (PSO) on- and off-site delivery models have become the norm, which puts intense pressure on service firms to quickly and accurately develop detailed requirements so off-site teams can effectively configure, develop and integrate.
  • No initial public offerings (IPOs) – The only viable strategy for pre-public technology companies is to become profitable or be acquired. In the current market, smaller “strategic” technology acquisitions are a viable alternative to research and development spending. Software continues to attract venture capital funding ($5.4 billion in 2008), but the majority of funding focuses on profitable later stage companies.
  • The independent service provider market is alive and well – Industry consolidation has created a huge secondary “service provider” market where independent technology service providers have flourished. Oracle supports a network of over 4,000 independent service providers and Microsoft and Cisco continue to rely on their partner networks to perform the majority of professional services surrounding their products.

Despite the general gloom and doom, many technology companies remain “bullish” on the future of technology professional services. The optimism comes from companies adopting a PS maturity model who are starting to see real gains in PS profit.  Research shows that in January 2008, over 1,200 PSOs started to use a PS maturity model to assess and improve the maturity of their organizations.

The PS maturity model

The premise for a PS maturity model was to explore the critical dimensions of technology professional service organizational performance to determine which elements, and in what combination, produced the best overall results. Many successful organizations follow maturity models such as the Capability Maturity Model (CMM) and Six Sigma; each PSO needs to find its own model that leads to success.

The PS maturity model has become an important framework for assessing and improving all elements of a professional service organization. The model addresses these questions:

  • What are the most important focus areas for a PSO as business processes mature?
  • What is the optimum level of maturity or control at each phase of an organization’s lifecycle?
  • Can the PSO build diagnostic tools for assessing and determining the health of key business processes — depending on an organization’s level of maturity?
  • Do key business characteristics and behaviors spell the difference between success and failure? If so, do they change depending on the maturity of the company or industry?
  • How does the PS maturity model operate within the wider context of the technology maturity model?

Service performance pillars

Successful PSOs use a model to benchmark, segment and analyze their organization into five distinct areas of performance, both logical and functional. Five service performance pillars form the foundation of all service-oriented organizations (responsible parties appear in parenthesis):

  1. Vision, strategy and culture: (CEO) a unique view of the future and the role the service organization will play in shaping it.
  2. Finance and operations: (CFO) the ability to manage services profit and loss — to generate revenue and profit while developing repeatable operating processes, IT applications and management controls.
  3. Human capital alignment: (human resources) the ability to attract, hire, retain and motivate high-quality employees and subcontractors.
  4. Service execution: (engagement/delivery staff) the methodologies, processes and tools to effectively schedule, deploy and measure the quality of the service delivery process.
  5. Client relationships: (marketing and sales) the ability to communicate effectively with employees, partners and customers to generate and close business and win deals.

These dimensions are termed “pillars” because they provide the structural foundation for all service organizations, and the PSO will not survive without them. Each of these pillars defines core functions and operating processes within a billable professional services organization. For each service performance pillar, approximately 35 key performance measurements serve as the basis of the maturity model.

Most organizations operate at varying levels of maturity across these five dimensions. In fact, almost no organization achieves the same level of maturity for all five service performance pillars. The disparity in pillar maturity most likely comes from the charter of the organization, organization size, overall organization lifecycle stage, as well as leadership focus and competence.

Because a specific functional executive within the PSO owns each pillar, these leaders must strive to operate as efficiently and effectively as possible while supporting the overall goals of the organization. Like the pillars within a building, they represent separate, but inter-related and inter-dependent operating processes. If one pillar fails to mature so it can support the business, just like a building, eventually the entire structure will collapse.

Service maturity levels

Five maturity levels help determine the relative operational effectiveness of each pillar:

  • Level 1 — Initiated “Heroic”: The PSO is in its early stages; operating processes are ad hoc and fluid. The business environment is chaotic and opportunistic, and the focus for the PSO is primarily new client acquisition and reference building. Employees wear many hats and serve many roles. The primary goal is growth.
  • Level 2 — Piloted “Functional Excellence”: Core operating processes have become repeatable. The company can demonstrate best practices in separate functional areas or geographies, but staff has not documented and codified them yet for the entire organization.
  • Level 3 — Deployed “Project Excellence”: The PSO has created a set of standard processes and operating principles for all major service performance pillars, but renegades and “hold-outs” may still exist.
  • Level 4 — Institutionalized “Portfolio Excellence”: Management uses precise measurements, metrics and controls, to effectively manage the PSO. Each service-performance pillar contains a detailed set of operating principles, tools and measurements, with quantitative and qualitative goals for specific functions.
  • Level 5 — Optimized “Collaborative”: The PSO focuses on continual improvement of all elements of the five performance pillars. A disciplined, controlled process is in place to measure and optimize performance through both incremental and innovative technological improvements. Management has established quantitative process-improvement objectives, and continually revises them to reflect changing business objectives, and uses them as criteria in managing process improvement.

The maturity levels allow PS firms to discover areas where they are underperforming compared to their peers. In some cases, this performance may be a result of the organization’s strategy, for instance, de-emphasizing margin to help increase product sales. Regardless of the motives, understanding each pillar’s relative maturity can help PS executives implement an operational improvement strategy to move their organization forward.

Start with a fact base and create an annual improvement plan

One of the key benefits of a PS maturity model and benchmark is that it provides clear metrics and guidance on many key performance measurements. Running a service organization is a game of singles and doubles. Small percentage improvements in just a few key performance areas can have dramatic bottom-line results. PS executives often feel isolated and have a limited support base within their companies to rely on for advice. Adopting a benchmark and score-carding process takes the guesswork out of metrics.

By developing a measurable annual improvement plan and backing it up with clear improvement initiatives and goals, despite a tepid economy, the organization can create and institutionalize a continuous cycle of improvement and renewal.