The 2012 Professional Services Maturity Benchmark

What have we learned in five years?
by Dave Hofferberth and Jeanne Urich, SPI Research

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SPI Research will release our fifth annual Professional Services Maturity Model™ benchmark this month. Over the past five years, we have surveyed 850 firms and reported results on an annual basis. The past five years were hopefully not normal as the global economy experienced one of the greatest financial meltdowns and recessions in history. Professional service organizations (PSOs) went from torrid growth in 2007, to near chaos in 2009, and now begin to revert to double-digit year over year growth.

The professional services (PS) market is unique, not only because it is people and knowledge-based, but also due to the high-caliber of the individuals who are attracted to it. PS practitioners spot the trends, create the strategies and help their clients change business processes and behaviors to be able to capitalize on them.

PS includes research, management and IT consulting, architecture, accounting and advertising. PS constituents are at the forefront of developing new strategies for improving productivity by helping their clients apply the right blend of people, process and technology. Thus, they pave the way to a brighter and more dynamic 21st century business model.

Given the economic uncertainty of the past five years, professional services executives have had to peer inward to reduce costs and overhead, and at the same time, look outward to ensure they focused on the right markets and services. In general, people and knowledge-based businesses lack the expensive capital-intensive assets that can create havoc on the balance sheet in a downturn. The real assets are people and know-how so it’s easy to cut personnel in order to remain profitable.

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However, because the professional service market is human capital-based, people are different from machines and buildings. Their productivity and value-add can be severely impacted by uncertainty and fear. Our research shows PS firms who primarily used layoffs to keep profits in check, now struggle to attract and retain a talented and loyal workforce. Those who used layoffs as the tactic of last resort have been rewarded by retaining the necessary staff to capitalize on the economic upturn.

Higher ratios of billable staff

One thing the 2012 benchmark has taught us is that PS executives have worked hard to improve efficiency by eliminating overhead and waste. The percentage of billable staff compared to total staff has risen every year from 67% in 2007 to 73% in 2011. Technology has propelled this shift to a higher ratio of billable employees. Today even the smallest firms have replaced PS administrators with powerful cloud-based applications to manage time capture and billing, client relationships and resource, project and knowledge management.

Along with the decrease in non-billable staff, we have seen a drop in the number of firms that use “None, other or homegrown” as their core enterprise resource planning (ERP), customer relationship management (CRM) and professional services automation (PSA) applications. This indicates more and more firms are investing in commercial applications to run the business. The productivity enhancements these applications provide are undeniable as they show up in a smaller non-billable staff ratio, fewer lost hours and improved on-plan project delivery. The question is, how long can this productivity improvement trend continue?

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Investments in training

The recession has also affected employee training. In 2007, PSOs offered roughly 4.5 days of training annually for each of their employees. In order to save money, this figure dropped to 3.5 days in 2009. Another sign that the economy is growing again is that in 2011, PSOs offered more training (5.2 days) than they ever have in the five-year history of the benchmark.

Training is a good indicator of economic growth because it serves as an employee incentive to enhance skills and an inducement for attracting and ramping new hires. Training has become a critical component to support growth as highly skilled baby boomers leave the consulting profession and are replaced by tech-savvy millennials who lack experience. It also belies a shift in the type of work sold with a growing emphasis on vertical industry and business process knowledge and less reliance on deep technical skills.

Growing pipelines

Another sign that the economy is improving appears in the PSO deal pipeline and increased sales and marketing spending. Ideally, organizations strive to have a pipeline that’s two to two and a half times their quarterly bookings forecast. In 2007, we saw average pipelines at almost this level.

However, as the economy retrenched pipelines decreased. This means organizations had to offer bigger discounts and incentives to close business while considering additional cost-cutting measures in order to meet profit goals. From its lowest level in 2009 (160%), we have seen the size of the deal pipeline increase again, albeit only to 200%. In other words, the economy still has a way to go to reach pre-recession levels.

More competition

One area highlighting potential difficulties and increased competition over the next few years is that of the bid-to-win ratio, an important measure of sales and marketing effectiveness. Our research shows that in 2007, this ratio was approximately 5.7 wins for every 10 bids submitted.

Since that time, it has dropped to approximately 5.1 wins. Essentially, this key performance indicator (KPI) shows that PSOs are only winning about half of the bids they submit. As a result, they’re spending a lot of time, effort and money on potential prospects that will not bear fruit.

Length of the sales cycle

While a majority of the KPIs behaved like we would expect in a declining economy, one KPI performed unexpectedly. We found that the length of the sales cycle — defined by the number of days required to move a qualified lead to a signed contract — actually went down while the economy tanked, and has since gone up while the economy has shown new signs of life.

Normally, the sales cycle lengthens as companies worry about money. This counterintuitive KPI might highlight that with fewer available deals, PSOs did a much better job of qualifying leads as the economy began to slow, thereby closing them faster. As the economy improved, these organizations added new marketing programs and business development resources most likely resulting in a more shotgun approach to sales, which reduces the quality of their leads and elongates the sales cycle.

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What lies ahead

Similar to 2011, the 2012 benchmark highlights an economy in growth mode, but with many potential pitfalls ahead. PS executives must cautiously plan their growth strategy, consider the varying economic conditions around the world, and how the conditions might affect their target markets.

To attract, ramp and retain a top-quality consulting workforce, PSOs must provide new benefits including support for personal technology, social networking and easy-to-use tools as well as flexible work options. With an improving economy and new technologies, many new entrants are challenging the PS status quo by offering guaranteed time-to-benefit contracts. The good news is that there’s plenty of consulting work available for those sharp enough and agile enough to grasp it.