The current state of professional services pricing
by David Hofferberth and Jeanne Urich, SPI Research
If professional services bill rates are rising, the economy must be improving, right? Service Performance Insight (SPI) has drawn this conclusion in the first two weeks of surveying more than 50 global professional service organizations for our third annual consulting bill-rate study.
Based on history, SPI expects more than 200 firms to participate. Please visit www.spiresearch.com in September to purchase a copy of the report. Early analysis shows significant improvement in realized hourly bill rates from the 2010 survey.
Why are bill rates important?
Professional services organization (PSO) executives continue to ask about bill rates. They need this information to understand how their organization is positioned from a pricing perspective relative to the market, and to make decisions on how much more or less they should charge, depending on their own and their clients’ perception of how they are viewed in the market. They need bill-rate information to push back on their sales and finance counterparts when asked for price concessions or professional services margin improvement.
Pricing information also provides insight into the health of the overall service market and a gauge for expansion or contraction. And finally, pricing is one of the most visible and controllable levers service organizations have when seeking to improve profitability.
In the past three years, as the market suffered from global economic doldrums, companies experienced significant pressure on bill rates, causing many firms to discount heavily and make pricing concessions to win business. The economy appears to be growing again, although in the early stages, and SPI Research expects bill rates will also rise.
In fact, the greatest challenge reported from recent client phone interviews is growth. After two years of layoffs, headcount cuts and salary freezes, many firms have switched the hiring spigot back on but find few qualified resources available to fill new positions. Firms are reinvigorating their recruiting pipelines and reinvesting in new-hire training and ramping programs.
Increasingly, firms are expanding their recruiting horizons to include recent college graduates, home-based consultants, subcontractors, and offshore and near-shore resources. The war for talent is driving increased resource management and pricing complexity, which means firms must constantly re-evaluate their pricing and staffing strategies.
Is the market recovering?
SPI Research is receiving positive feedback from around the world. PSOs, especially those in IT consulting and management consulting, have experienced significant growth over the past 12 months.
While executives interviewed by SPI Research remain cautiously optimistic, most feel the difficult times are behind them, and they predict a period of sustainable growth lies ahead.
Key bill-rate findings in the North American market
Initial research shows bill rates rising across the board. In North America, current rates are approximately 5 to 15 percent higher than a year ago. Interviews with several survey respondents have shown their greatest concern is hiring well-qualified consultants, not finding more work. This scenario allows them to adjust rates upward as the demand for their services starts to outstrip supply.
The only area where SPI Research found year-over-year bill-rate erosion is in that of managers and executives. Apparently, client organizations are less apt to pay high rates for executives than in the past. However, for those managers primarily in a billable client-facing role, rates have risen somewhat.
Interestingly, few managers and executives are no longer nonbillable. On average, today’s managers not only run the business, but also bill about one-third of their time. The recession caused both big and small PSOs to re-evaluate their nonbillable headcount and shift many managerial roles to at least partial billability. SPI expects this trend to quickly reverse as management focus shifts from cost-cutting to expansion.
Published vs. realized rates
This study compares PSOs’ published bill rates versus realized bill rates. In other words, the actual hourly bill rate firms receive. In general, realized rates are approximately 80 to 90 percent of published list rates. This difference between published and realized rates reflects both discounts and written-off consulting hours.
The report looks at four primary job categories (business consulting, management, project management and technical consulting), with three corresponding experience levels per job family. For the 12 titles SPI Research analyzes in this survey, executives achieved the highest percentage of realized rates, closely followed by technical consultants, with each having a realized rate of more than 90 percent of the published rate. SPI Research found the greatest disparity between published and realized rates for business consultants with a published rate of $200 per hour but with an average realized rate slightly above $160 per hour.
The survey also shows independent PSOs, such as those in IT and management consulting, have both higher published rates and higher realized rates than their peers within embedded service organizations (i.e., services divisions of hardware and software organizations).
Embedded service organizations are being forced to discount more, as well as write-off more of their billable hours for presales and client concessions. The survey results to date show embedded service organizations achieved a realized rate of 81 percent of their published rate, whereas independents averaged 90 percent of their published rate.
More off-site work
For the past several years, SPI Research has seen a noticeable increase in off-site consulting delivery. For instance, the survey results thus far show business consultants average slightly more than 50 percent of billable work on-site, while project managers average slightly less than 50 percent on-site.
Technical consultants spend the most time on-site (more than 60 percent), while managers spend the least (33 percent). The trend toward more off-site service delivery is important because it offers a host of benefits for both service providers and their clients. By definition, on-site work requires significant nonbillable wasted travel time.
Excessive travel has consistently been the primary reason for consulting employee dissatisfaction and burnout. Combined with the trend toward greater specialization, the probability that the most qualified consultants are conveniently located near their clients is low.
SPI research also shows on-site consultants are less productive than off-site consultants, due to interruptions and not being able to multitask. On-site presence is still required to establish rapport, develop client requirements and model client business processes. However, if consultants clearly understand client requirements, expectations and deliverables, much of the actual work can be performed off-site.
Finally, both service providers and clients benefit from taking advantage of the best available resources, regardless of location. This trend means more consultants work from home, which translates to lower facility costs. Furthermore, more service providers are taking advantage of subcontractors and offshore resources, which results in a positive margin impact from labor arbitrage.
Targeted utilization rates much lower than expected
One of the biggest surprises — so far — in the survey is that the 50 organizations surveyed are targeting fewer than 1,400 billable hours annually per role, which equates to less than a 70 percent utilization rate (on the basis of a 2,000-hour work year). On average, executives and other management have billability targets of less than 50 percent, but with the exception of senior business consultants — who average slightly more than 1,400 hours annually — every other consultant type is targeted to bill fewer than 1,400 hours annually.
Also shocking is the small difference between billing targets for juniors compared to the most senior resources. In past surveys, junior technical resources typically had higher billability targets while senior project managers and solution architects had lower targets. As more survey responses come in, it will be interesting to see if billability targets increase and a greater gap appears between junior and senior resources.
Consultant resource mix is changing
Another big revelation is that the percentage of resources in business consulting roles (31 percent) is equal to the percentage of technical resources (31 percent). Across the technology consulting industry, this represents a sizable change and reflects the underlying technology shift to easy-to-use-and-configure products. Resources can spend more time analyzing and improving their clients’ business problems and processes as opposed to writing code.
Also unexpected is that the remaining job categories of management (19 percent) and project management (21 percent) are almost equal. Before beginning this survey, SPI expected that technical resources would represent a significant majority, followed by business consultants and project managers, while management would represent less than 10 percent of the workforce. To date, the staff associated with all other roles (69 percent) outnumbers technical resource staff (31 percent).
The near future expectations for bill rates and opportunities
Signs point to an improving economy, but bill rates are certainly not uniform around the world. Across the board, global consulting bill rates are on the rise, while target utilization rates appear to have plummeted.
In general, this is a good trend for service providers and consultants because it signifies a greater demand for their most valuable services and people, while the pressure to work excruciating hours may be subsiding. However, as the reality of increased consulting demand outstrips available supply, expect to see average billable hours to increase far beyond the low targets that appear to have been set.
Around the world, there is a significant price disparity for the same job categories within the same industry segments. Service providers should price for what the market will bear. If an organization can establish its brand and reputation as the highest-quality supplier in its market space, it will be able to command the best prices.
Conversely, for service providers stuck in a commoditizing space, the only viable strategy is to head for higher ground by expanding into a more lucrative market. For example, low-end enterprise resource planning providers will find new opportunities and premium rates if they add vertical expertise or take on new cloud services. SPI’s research indicates the unlimited possibilities for establishing new, exciting and profitable service lines will require significant leadership, vision and courage.
Currently, most industries are planning for expansion, and therefore, consultants who can help them grow will be in demand. The use of a global workforce is not constrained to the largest service providers as small boutique consultancies start to take advantage of labor arbitrage. Firms that offer management consulting (strategy, IT, etc.) along with implementation (new applications, business process re-engineering, etc.) are in greater demand and can charge higher rates.
The bottom line is that the consulting industry is thriving and improving every day. Expect not only increased bill rates, but also significant labor shortages ahead. Best-performing firms will focus on both recruiting and retaining top talent while making sure they have ample increases in bill rates to make these investments.