Leadership affects organizational performance
by Jeanne Urich and Dave Hofferberth of Service Performance Insight
According to our 2011 Professional Services Maturity Model Benchmark report, out of 214 participating organizations, 12 firms (5 percent) significantly outperformed the benchmark average by excelling in all five service performance dimensions of leadership, finance and operations, human capital alignment, service execution and client relationships.
The top 12 firms significantly outperformed their peers and the benchmark average with almost double the revenue growth and 258 percent higher net profit.
Best-of-the-best PSO comparison
The chart below provides a comparison of professional services organizations (PSOs), based on the data we received.
SPI Research interviewed the top firms to discover their best practices and reasons for their superlative performance. Although each firm has a different business model and operates in different industries, we discovered fascinating similarities in several key areas.
Professional services maturity excellence starts with leadership
The leaders of the top 12 firms had significant prior experience creating and running PSOs. Many of them started as consultants with the Big 5 or in professional services (PS) for large technology companies. Based on years of experience, they bring deep vertical industry business process and consulting domain knowledge to their current leadership role.
Almost all the leaders of the top organizations have been in their current role for many years. They were either responsible for creating the organization or turning it around. Every leader relentlessly focuses on client and employee satisfaction. They “lead from the front” by setting an example of the types of relationships they value with ingrained respect and support for their clients and employees. In smaller organizations, the leader is the chief rainmaker and may bill a considerable number of hours at the firm’s highest rate.
A clear differentiator between the “best” and the “rest” is that PS has a seat at the executive table. PS is an integral part of the company’s strategy, regardless whether the PS organization is embedded within a product company or run as an independent service business. In all cases, PS leaders operate at a peer level, not a subordinate level, with their sales counterparts. Furthermore, in every single situation, the primary product sales organization is compensated for selling PS.
SaaS PS organizations lead the way
In the 2010 benchmark report, independent firms significantly outperformed captive service organizations. However, embedded service organizations have come roaring back in the 2011 benchmark report!
A big change this year is that the best-performing embedded PSO is Workday, a fast-growing software as a service (SaaS) provider of human resource management solutions. Dave Duffield co-founded Workday. He’s also the legendary founder of PeopleSoft and widely known for his attention to the people-side of both his business and the industry.
But the bigger news is that the 19 embedded SaaS PS organizations in the benchmark produced the best overall earnings before income tax at 23.1 percent, compared to eight other industry segments (software, hardware and networking, IT consulting, management consulting, accounting, marketing and advertising, architects and engineers, and other PS) that have an average net profit of 6.4 percent. As we predicted, the shift to running PS as a profit center within SaaS organizations is well under way. It is only a matter of time before all SaaS PS organizations shift to a profit focus.
Leaders are very specialized
One of the most noticeable differences in the top 12 PS organizations is their deep vertical or business-process focus. The top performers focus on narrow and highly specialized vertical industries or business processes. Examples include research and publishing for architects and engineers, merger and acquisition analysis, enterprise portals and intranets, retail price optimization, supply chain asset management, professional service automation, higher education learning systems and financial service investment management solutions.
We believe this intense focus around specific vertical business processes and deep business domain knowledge is the wave of the future for PS organizations. Geographically-focused, horizontal solution providers will find their markets increasingly commoditized and will be forced to compete on price and staffing. Firms of all sizes should start thinking about vertical and business process specialization. Specialized firms offer highly differentiated services, which give them a market advantage. Specialization allows them to command the best rates.
Leaders take advantage of subcontractors and partners
Leaders use subcontractors to a slightly greater extent than the benchmark average (14.5 percent of total revenue versus 11.3 percent), but the big advantage is that they earn 42 percent compared to the average of 29 percent margin on their subs. These leaders have developed tight, mutually beneficial relationships with their subcontractors and partners by treating partner employees the same as their own and insisting on the same level of training and certification.
Leaders provide their methodologies and tools to partners to ensure they deliver every engagement with high quality. This symbiotic relationship results in delighted customers, loyal partners and the ability to quickly and profitably scale as demand increases. Leaders who use offshore resources insist on significant onshore customer-facing time to ensure their offshore resources are knowledgeable of and sensitive to client requirements.
IT investments pay big dividends
A clear differentiator for the top 12 organizations is their investment in IT applications to run their business. Every leading organization has invested in a PSA solution, and they are twice as likely to have integrated their PSA application with their core financial application. This level of integration between their PSA and core financial applications provides excellent visibility to resource scheduling and project profitability so they can quickly respond to changing requirements while delivering best-in-class margins.
In next month’s edition, we’ll discuss the four other performance pillars: finance and operations, human capital alignment, service execution and client relationships.