The dollars and cents add up
by Jeanne Urich and Dave Hofferberth, SPI Research
Most professional services (PS) executives monitor a handful of key performance indicators (KPIs) to determine the success of their organization. Some of these metrics include growth rates, earnings before income taxes, depreciation and amortization (EBITDA) or contribution margins, days sales outstanding (DSO) and client satisfaction. However, these indicators are the tip of the iceberg — they are a result of successful planning, development, sales, service delivery and invoice management. If done well, client satisfaction will also be at an acceptable level.
Popular KPIs are easy to see
To make sure that these, and many other high-level KPIs, meet organizational goals, PS executives must look at the details behind these indicators for the root cause of their success or failure. Across professional service organization (PSOs), indicators appear in each of the five Service Performance Pillars:
- Vision and Strategy: A unique view of the future and the role the service organization will play in shaping it. A clear and compelling strategy provides a focus for the organization and galvanizes action.
- Finance and Operations: (CFO) The ability to manage services profit and loss — to generate revenue and profit while developing repeatable operating processes. Elements of this pillar provide long-term financial stability.
- Human Capital Alignment: The ability to attract, hire, retain and motivate employees. With changing workforce demographics, human capital strategy has increased in importance.
- Service Execution: The methodologies, processes and tools to effectively schedule, deploy and measure the quality of the service delivery process.
- Client Relationships: The ability to effectively communicate with employees, partners and customers to generate and close business and win deals.
By doing things “right” in each performance pillar, firms can measure PSO success. The impact of activities in one pillar can positively or negatively impact the activities in another. Successful PS executives understand the balance required to achieve their ultimate success.
Profits matter, and they start with people
One of the more interesting aspects of research focused on billable PSOs is the importance of an integrated human capital strategy. Finding, hiring and retaining key employees are just the beginning.
SPI Research has analyzed over 160 performance indicators and correlated them with the leading KPIs used by many PS executives to determine success or failure. The model we built segments organizational maturity into five levels, where Level 1 is the base level for beginning firms or those that do not operate efficiently or effectively. Level 2 is for average performance, and increasing performance continues on to Level 5, where less than 5 percent of the PSOs surveyed meet the stringent criteria to be market leaders. Most of the performance indicators in this study trended up or down, depending on their positive or at negative impact on performance.
We have found that the number of performance indicators with extremely strong correlations to success are within the human capital alignment pillar — meaning, the employees, and how they perform once onboard in the firm (Table 1) dictate ultimate success or failure. The problem is that there are many KPIs associated with human capital. So which ones should PS executives consider?
We have learned that some of the more notable performance indicators include:
- Non-billable project hours: Leading PSOs (Level 5 performers) averaged only 80 hours per year per consultant of non-billable time. Contrast this figure with less mature PSOs that averaged over 300 hours annually! At bill rates of $150/hour this difference is over $33,000 in reduced billings per consultant per year. Therefore, PS executives should strongly encourage non-billable project hours stay under 2 percent.
- Standard job descriptions exist for all positions: 100 percent of the Level 5 performers had standard job descriptions versus 62.2 percent of Level 1 performing PSOs. The leading performers keep the descriptions “standard,” which makes it easier to recruit and hire. Reducing the hiring and ramping time also shows up in increased financial performance. PS executives should mandate that HR create standard job descriptions to provide clarity in job positions.
- Skill profiles exist for all employees: Our research shows 100 percent for Level 5 versus 43.2 percent for Level 1. The leading PSOs have skill profiles for their employees and make them visible to other practices within the company. This visibility increases the overall consultant utilization rates and shows executives around the organization which skills are most in demand, and what their appropriate pricing might be. PS executives should mandate that HR create skill profiles to provide individual clarity to keep employees visible and billable.
- Performance reviews tied to industry benchmarks: 100 percent of the leading firms tied performance reviews to industry benchmarks versus 25.1 percent of Level 1 performing PSOs. Employees who can see what is expected of them compared to their peer group (inside and outside of the organization) perform better knowing they are treated in accordance with industry standards. Obviously, they must believe the standards are unbiased or performance and satisfaction would suffer. PSOs should maintain a database of industry benchmarks and show it to employees when appropriate.
- A well-understood career path for all employees: The difference here is quite large, 100 percent for Level 5 versus 26.4 percent for Level 1. It makes sense in that employees who lack a clear understanding of their potential within an organization feel less sense of loyalty and therefore will not perform as well as highly motivated individuals. PS executives should mandate a potential career path guide for employees, which shows where people in their position could end up in the next one, two and five years.
It should be noted that these performance indicators are not overly expensive to implement, and leading PSOs consider this necessary in successfully maintaining a high-quality workforce.
Other performance indicators have a strong correlation with organizational performance, these just happen to be in the Human Capital Alignment pillar. Some of the KPIs don’t necessarily optimize success when they grow too large or too small. For instance, information technology spending as a percentage of revenue tends to show the best results when it’s approximately 4 to 6 percent. Obviously, no spending on information technology would severely, negatively impact performance, as would excessive spending, anywhere over 10 to 15 percent.
Consider programs that improve human capital alignment
We recommend PS executives work with their human resource teams to develop a human capital alignment strategy both visible and understandable by the workforce. Employees should understand management’s expectations and how those expectations will drive compensation, promotions and other areas that impact performance.
When employees understand their performance goals, they can work with their managers to make sure they attain them. For instance, most PSOs have utilization targets. The calculation of utilization is usually clear to the employees, and therefore, they understand how they are performing. Employees will meet with greater success if they come into the job with a clear understanding of these requirements and a skill profile that helps them become more visible and billable.
Employees must come into the job with a clear understanding of what their career path could potentially be if they successfully remain with the organization over several years. To keep these employees motivated and challenged, the PSO must offer various education and training programs to keep employees up-to-date on the latest skills required for them to succeed.
“World class” relies on human capital
Many factors go into creating a world-class professional services organization. Fluctuating economic cycles and changing client needs can cause stress and poor performance on the workforce, resulting in turnover and reduced profitability. These external factors can make life difficult in the highly charged and competitive professional services sector.
Greater clarity of expectations for the workforce provides for a work environment that helps reduce many of the issues related to external factors. PS executives must ensure the organizational strategy and directives are clear to the workforce and that their workers understand management’s expectations.
With this type of clarity, workers will feel a greater empowerment to operate in a manner consistent with the needs of their organization. In professional services, it always starts with the workforce. It ends there, too.