Five approaches to drive up billings and revenue
by Jeanne Urich and Dave Hofferberth, SPI Research
As global economic conditions have deteriorated over the past two years, our research shows downward pressure on the billable professional services (PS) market. Annual revenues are still growing slightly, but they are not increasing at the double-digit rates of 2007.
Based on survey responses from 211 professional service organizations (PSOs)in October and November of 2009, 95 independent PSOs averaged meager year-over-year revenue growth of 1.5 percent. Their 116 embedded counterparts (PS organizations within product companies) fared a bit better with year-over-year revenue growth of 6.4 percent.
When the market tightens, professional service executives have two basic choices to increase profitability:
- Focus externally to improve sales and marketing effectiveness. Over the past two years, almost every PS firm we interviewed concentrated the majority of their efforts in this area. We expect this to continue for the foreseeable future. In most cases, working to improve sales is not enough.
- Turn inward and look for ways to reduce costs and increase profitability. Some have reduced discretionary spending and cut back on benefits, IT and facilities. Others have been forced to reduce staff, particularly in non-billable roles.
Cost cutting is an important short-term survival tactic, but a more effective long-term strategy is to focus on driving up billable utilization and revenue.
Improving billable utilization
To improve margins, PS executives must continually focus on increasing employee billable utilization, as well as increase the percentage of billable employees. This table shows the actual (not theoretical) benefits 211 firms have experienced from increasing employee utilization. The primary gain from increased utilization (in the second column) is a significant increase in revenue per employee.
Interestingly, companies with higher employee utilization also reported a larger percentage of billable employees. This dynamic combination (high utilization and a high percentage of billable employees) leads to incredible financial performance and expanded overall revenue, as shown in the last column.
Billable utilization challenges
In professional services, a dedicated focus on increasing billable utilization is paramount to success. There are four primary strategic and operational challenges to improving employee utilization:
- Employee attrition.
- Changing workforce dynamics.
- Greater distribution of the workforce.
- Changing client demands.
Employee attrition (yes, attrition hurts!)
Yearly attrition in the professional services sector has declined to the lowest level we have ever seen — currently at 6.2 percent. This reduction in attrition is primarily the result of the poor economy and lack of new job opportunities causing employees to “hang-on” to their current position, whether they are happy or not. As the economy starts to pick up, and new jobs open, we expect attrition to climb back to historic levels of 10 percent or higher.
Layoffs and general cost-cutting have reduced bench strength. It now takes management longer to approve positions, and to hire, train and deploy new employees. The current average length of time to hire is 59 days, and it takes an additional 67 days for a new hire to become productive — making it hard to increase revenue and margins when firms must backfill leaving employees.
The following chart shows the correlation between happy employees and satisfied clients.
This table shows the negative consequences of high attrition rates. As attrition rises, the probability of on-time project delivery decreases while average project overruns increase significantly. Remaining employees have to pick up the pieces from exiting workers and must quickly come up to speed and reestablish client relationships. Clients must back-track to reestablish previous decisions and vendor commitments.
Organizations with high levels of attrition often turn to third-party contractors to supplement lacking skills. While subcontractors can help keep costs down, too heavy a reliance on subcontractors has the potential negative consequence of reducing morale, overall productivity and quality — as contract workers have less loyalty to their temporary employers — and communication and collaboration can suffer.
Changing workforce dynamics
The second area of concern for high billable utilization is the changing workforce. Not only is the workforce becoming more global, but Generation X, Y and Z workers are less inclined to make the lifestyle compromises of past generations and are more attracted by “cool” new technology than remuneration and security. Although more technology-savvy, the new workforce is less specialized than in the past and may lack client and business acumen.
Twenty and thirty-year careers with the same firm are a relic of the past so young consultants must quickly learn new technologies and business processes on the fly without the benefit of classic on-the-job training. Increasingly, professional service consultants must work independently and be effective at communicating and collaborating remotely.
Consultants work best when they focus on the type of work they enjoy and have the right skills and personality to deliver quality services. Most consultants are continual learners who thrive on new challenges, so any effective resourcing strategy must support training, mentoring and access to experts and tools.
The third strategic and operational challenge impacting employee utilization is workforce distribution. Our research shows the new world of work is increasingly global, making remote service delivery, collaboration and communication tools critical for success. While over 80 percent of our most recent survey participants are North American-based PSOs, over 44 percent of the workforce is located overseas, and only 20 percent is based within the confines of corporate headquarters. Having workers in many locations worldwide can create serious issues in employee productivity and efficiency.
Over the past several years, the amount of work PS consultants deliver on the client’s site has reduced significantly. Based on client and service-provider desire to reduce the cost of travel and the availability of powerful remote service delivery tools, consultants are performing more and more PS work remotely. These changes have caused PS executives to reevaluate their hiring practices, globally sourcing employees with solid core skills and with the ability and attitude to work independently while rapidly “self-learning” new skills. Except for the most difficult technical problems, a “can do attitude” combined with a strong work ethic and great communication skills are the most-prized virtues of today’s consultants.
Changing client demand
The final area impacting utilization is client demand. There is no doubt PSOs are being asked to demonstrate the value they deliver in greater depth than in the past. Each year, clients are less willing to accept time and materials contracts and are shifting more risk and greater accountability for success to their suppliers through fixed-price and shared-risk contracts. This demand increases administrative effort and reduces billable hours, as consultants must spend more time in pre-sales, “proof of concepts” and documentation to prove the worthiness of their services.
To ensure projects meet their value and budget requirements, clients are starting to divide projects into sub-projects, which they can monitor more closely, using tools such as earned value analysis. Clients also demand the ability to cancel at a moment’s notice if the project fails to fulfill requirements.
Clients and professional service providers have moved to virtual project teams. The benefits of “virtual” projects are reduced travel costs and the ability to use the best available resources, regardless of location. The negative aspect of global project delivery is more hours spent on administration and communication. Often global projects require both an onshore and an offshore project manager. The onshore manager is responsible for client relationships, requirements, budget and timeline, while the offshore project manager keeps the offshore team on schedule and ensures the client requirements are translated into a detailed work plan.
More project overhead and management duality is a necessary component of ensuring offshore teams meet schedules, and client requirements are reflected in the work product. This area cannot be underestimated, as project management and administrative time account for a greater percentage of work-hours than ever before. Over the past year, we have seen the percentage of work monitored by a project management office (PMO) go from 37 percent to 42 percent.
What resource management strategy is best?
To improve utilization, executives must improve resource management effectiveness. As the following chart shows, there are pluses and minuses to all flavors of resource management strategies. Green shading indicates “Best in Class” and red shading indicates “Worst in class” based on responses from 195 firms.
Our recent research shows there may not be “one magic bullet” resourcing strategy that is clearly superior to all others. The five strategies that follow enable PSOs to manage talent and fulfill client demands. Although centralized resource management is the most prevalent strategy, each organization must create a resourcing strategy that works best for their business, with the ultimate goal of increasing utilization and client and employee satisfaction.
- Centrally-managed – Most resource management pundits favor “centralized” resource management. It appears to provide superior management visibility into the entire project backlog and level of skills required both today and in the future. Central control may be best for fast-growing organizations with large projects but may not produce the highest levels of billable utilization because a certain amount of churn and resource and client unhappiness can result from impersonal centralized staffing policies.
- Local resource management – Local resource management is the preferred form of resourcing for young organizations where the workforce is small enough to foster real esprit de corps, and employees wear many hats. Smaller organizations can’t afford the overhead of a dedicated resource management function, and relationships and roles are fluid, requiring more local control and finesse.
- By horizontal skill sets – Managing resources by horizontal skill sets is useful for developing best practices, repeatable processes and shared knowledge. For example, many firms have project and program managers report directly or indirectly to the PMO. By building affinity around “birds of a feather,” project managers or specialized consultants can more easily share best practices and standardize methodologies, templates, etc. As organizations grow, a horizontal or competency-based overlay reporting structure can help firms develop repeatable best practices and deep, shared expertise.
- Account-based – Resource management by account may be a good strategy for very large accounts where there is a strong backlog of projects, but account-based resourcing can cause big issues if account revenue dries up. A recent example was Electronic Data Systems’ (EDS) reliance on revenue from General Motors. As the relationship with General Motors soured, and its fortunes began to wane, Electronic Data Systems was left holding the bag.
- Centers of excellence – The current trend towards vertical Centers of Excellence (COE) was pioneered by Accenture over the last decade. The advantage of industry-specific “Centers of Excellence” is the development of deep business-domain knowledge. In theory, each Center of Excellence acts as a clearinghouse for specialized knowledge, expertise and solutions. Clients and prospects delight in seeing a “Vision of the Future” for their “oh, so special” unique industry. The downside of COE can be excessive overhead, the creation of an ivory tower mentality and the inability to learn from emerging new horizontal and vertical trends. Further, use of horizontal skills sets and technologies outside the COE can become cumbersome and inefficient.
And let’s not forget that professional service organizations are based on the unique knowledge, skills and personalities of a highly motivated and compensated workforce. So, erring too far in making resource management more science than art may not take best advantage of hard-to-find experts. Leading firms understand the skills required and available, and work toward providing additional training to improve employee performance.
Investment in people, process and systems allows these organizations to minimize employee attrition and drive utilization to extremely high levels. Our research shows PSOs that create standard job positions clarify the skills their workers must have. And providing additional training helps increase both productivity and morale, both of which improve organizational performance.
Given the economic downturn, and its negative impact on pricing and overall profitability, many PS executives have begun to look at areas to improve revenue and margins. While they have focused plenty of effort on improving sales, executives know they must also look inward at their workforce, and streamline operations wherever possible.
Reducing both billable and non-billable headcount has somewhat improved billable utilization, but going forward, professional service executives must take a proactive approach to their workforce strategy. Perhaps, this is why resource management has become a top priority for PSOs with widespread resources and a reduced bench.
The economy will pick up; the PSOs that have developed a comprehensive workforce strategy supported by a strong resource management infrastructure will be in a much better position to drive revenue and profits upward going forward.