Early results from the 2010 PS Maturity Benchmark
by Jeanne Urich and Dave Hofferberth, SPI Research
Service Performance Insight is collecting surveys for the 2010 PS Maturity Benchmark report to be published in January. Early results from over 130 participating organizations already hint at the wild ride professional services organizations (PSO) have encountered this year.
The leading indicators for growth — annual revenue and headcount growth and percentage of revenue in backlog — are all down sharply. So are the indicators for achievement of this year’s business plan — PSOs reported dismal numbers for percentage achievement of 2009 annual revenue and margin targets. (PSOs reported revenue and margin attainment at 85 percent this year compared to 95 percent achievement of annual revenue target and 89 percent achievement of annual margin target this time last year.)
The following sections highlight some of the preliminary yet noteworthy results:
PS revenue continues to grow, at a slower pace
PS executives can do things their manufacturing counterparts cannot, namely cut costs quickly. Within product-driven organizations, a majority of costs are associated with facilities and capital equipment. In professional services, almost all costs are based on direct and subcontractor headcount; therefore, PSOs can reduce headcount and cut discretionary spending quickly.
The 2008 benchmark saw the industry at the tail end of the growth curve. Last year, participants showed annual revenue growth rates in excess of 17 percent. Our research indicates growth has slowed to an anemic 6 percent, better than the overall economy but much less than PS executives planned for earlier this year. Many of the PSOs surveyed showed negative growth rates, and this phenomenon translated into layoffs and a large number of mergers and acquisitions as the strong have eaten the weak. A few of the most notable acquisitions were EDS by HP; Perot by Dell; and ACS by Xerox, as traditional product vendors grasp for service gold.
While revenue growth is greater than revenue contraction, even in a market as hot as professional services, executives must modify hiring and other retention policies to keep the best employees productive and profitable. They must do this while looking to downsize where a skill-engagement mismatch exists. As in each of the past three surveys, PS firms reported slightly higher revenue growth compared to headcount growth, which means consultants are billing more hours and delivering higher billable utilization while firms reduce the number of non-billable employees. Each year, the PS productivity bar and goals get set higher. This year saw dramatically higher revenue yield per billable employee ($222K in 2009 compared to $190K in 2008). Higher revenues per person result in dramatically improved gross project margins (43 percent for time and materials projects compared to 36 percent in 2008).
Employees take the brunt of spending cuts
Employee discretionary spending has been cut by approximately 10 percent, from slightly over $3,000 per quarter to just over $2,700. This “tightening of the belt” came at the expense of employee training and investments in employee skill and career building. We saw the already miserly annual employee training budget slashed from $2,800 to $2,300, and annual training days were cut from five to three days. This short-sighted de-investment in employee growth may help keep companies afloat during a difficult time, but it is not a practice that PSOs should follow forever.
Although reported U.S. annual attrition declined again this year to an unheard of low of 7 percent, PSOs cannot continually ask employees to bill more hours at higher bill rates without a commensurate investment in their personal growth. As soon as permanent signs of economic recovery translate into hiring plans, over-used and under-invested employees will start to jump ship in search of greener pastures.
Keep an eye on the cookie jar
When times get tough, PS executives more closely monitor everything — especially finances. So far, survey results have shown PSOs are doing a much better job of managing forecasted workload. This statistic is crucial for improving employee turnover, which tends to rise significantly when the PSO does not have a handle on backlog or a pipeline to let employees know what to expect in future assignments.
Two positive areas for PSOs are in reductions in the number of invoices requiring rework due to client rejections (3 percent compared to 4 percent last year) and reductions in the amount of written-off work (3 percent compared to 5 percent last year). These dramatic improvements in financial hygiene translate into direct margin improvement. Typically PSOs consider 3 to 5 percent normal for written-off work.
The survey confirms organizations are doing a much better job of capturing project data and presenting it accurately to clients. Normally, this scenario would result in a lower days sales outstanding (DSO), but given clients’ desire to hold on to cash through slow payments, the survey does not show this improvement.
Taking the leisurely approach to payments
While PS executives can and do control internal finances, most have little control over timely client invoice payment. The 2010 benchmark shows DSO creeping up by more than 10 percent over the past year, moving from 42 days to over 50 on average. This increase in DSO negatively impacts cash flow, which results in higher financing costs and lower profit margins. Some executives have implemented policies to reduce DSO by penalizing clients for late payments, but most realize client retention could suffer if they are too rigid in payment policies.
Remain vigilant over finances
Our research shows the economy is improving, slowly. In the technology sector, PSOs were the last to be affected by the recession and may be the first to recover. The past two years have reminded PS executives of the importance of strong financial management, and the proof lies in improving governance over financial and operating controls. While many of the PS executives we’ve interviewed see a gradual improvement in economic conditions, they realize constant financial vigilance is required to maintain predictable revenue and margins.
The focus continues to be on client acquisition and retention. Universally, our clients are asking for sales and marketing support to streamline their offers and focus their sales efforts. At the same time, they are watching every penny and ratcheting up utilization and billable hours per person. PS is a tough but rewarding business … only the strong should apply.