2013 Professional Services Maturity Benchmark

What will it take to grow and succeed in the year ahead?
by Carey Bettencourt, Jeanne Urich and Dave Hofferberth, Service Performance Insight

Ruler SuccessIn February, we introduced our sixth annual Professional Services Maturity benchmark with cumulative results from 1,059 PS organizations. The results show the professional service market is experiencing high levels of growth across most market segments, including IT consulting, management consulting and managed services. The benchmark has yielded a few trends you should know about.

Growth is strong, but not as strong as in 2011

Accustomed to high levels of growth, the professional services market saw annual revenue growth rates of 15 to 20 percent in the early 2000s. As the global economy dipped into an extended recession, the PS market retrenched but not to the point of flat or negative growth.

In our six years of benchmarking, the average annual growth rate has never been negative. 2009 had the lowest point of year-over-year revenue growth, while 2007 was the most recent high point. Refer to Table 1 for a year-to-year comparison of key performance measurements.

201302 KPI TableThe 2012 survey showed an average growth rate that was almost 20 percent lower than 2011 growth, as shown in Figure 1. This decline from 2011 could be a reaction to the European sovereign debt crisis and worry over the implementation of increased U.S. regulatory costs in 2013. Regardless, double-digit growth rates signify the strength of the global professional services market, making it a dependable source of revenue and profit, particularly in technology and management consulting services.

YOY 5 yr PS RevStaff augmentation, at the bottom end of the market, is experiencing contraction and significant rate pressure. As for the upper end of the market, the demand for unique and specialized expertise is growing along with higher bill rates. Growth rates over 10 percent generally lead to hiring, while growth below that can be managed through efficiency gains, increased utilization and use of third-party contractors.

It’s no surprise that the greatest reported challenge for PS organizations is talent management, as skilled talent shortages have forced firms to revitalize college recruiting and invest significantly in employee development. With economic improvement, we have seen a steady increase in attrition, bringing it on par with pre-recession levels as the war for skilled talent intensifies.

Declining overhead personnel

One key performance indicator that has improved every year is the percentage of employees who are billable as compared to non-billable management, sales and administrative personnel. This metric was less than 70 percent in 2009, but it has risen every year since.

The percentage of billable staff is now more than 75 percent of total staff. While this might not sound significant, it bodes well for profitability because there are now three billable consultants to every non-billable employee. This ratio reduces the pressure for excessive billable utilization because the chargeable workforce has to carry fewer non-billable staff.

Increased reliance on powerful integrated accounting, sales and professional services automation solutions has resulted in significant productivity improvements and fewer administrative roles. However, as the percentage of senior management personnel continues to decline, it could cause operational and sales concerns for PS organizations.

With fewer sales and administrative personnel, sales and marketing efforts could suffer. Reductions in other supporting organizations such as human resources, finance, accounting, and service quality or engineering may compromise recruiting, employee development, financial management and quality. Monitoring this key performance indicator will help PS executives ensure that short-term profitability improvements don’t inhibit long-term growth and quality.

Profits continue to rise

The average organizational profitability in this year’s survey is impressive, as it nearly tripled that of just two years ago. The 2012 benchmark revealed average EBITDA to be 18 percent. Considering the 2011 benchmark showed average profit at 13.5 percent, this year’s survey shows the market is growing and profits are there for the taking.

Many PS organizations are taking the necessary steps to improve profitability. For instance, quarterly non-billable expense went from $1,600 per employee to less than $1,300. Annual non-billable administrative time per employee declined from 232 to 150 hours, giving each employee more than two weeks of additional time. Unfortunately, PS organizations squandered most of this improvement on non-billable project hours, which went up from 196 to 225 hours.

Bill rates also continued to rise, resulting in a higher revenue yield per consultant. Average revenue per consultant soared to $206,000, up from $197,000 in 2011.

Although client delight is always the number one PS priority, high profitability provides an excellent indicator of firm health. Many profitability levers, such as cutting administrative, facility and discretionary travel expenses, are sound business practices for the long-term. However, other profit levers such as staff, salary, bonus and training cuts may improve short-term profitability yet damage morale and growth over the long-term.

Sound management practices favoring long-term growth investments over short-term tactics will yield sustainable profits. For example, providing employee incentives helps drive performance improvements, revenue growth and profitability. Employee, quality and infrastructure investments will lead to greater financial performance over the long haul.

Metrics matter

Every year, we recognize the top 5 percent of benchmark participants with the annual “Best of the Best” award based on superlative overall maturity scores. Perennial winners share many common characteristics, with the main ones being constant management operational vigilance and respect for metrics.

The leaders of the best-of-the-best firms have real-time visibility into and control over all aspects of the business. They understand the impact of key metrics such as attrition, project overruns and excess overhead on bottom-line profitability.

The most mature organizations are more likely to have implemented integrated accounting, CRM and PSA backbones to give them the real-time visibility they need to catch problems and spot negative trends before they spiral out of control. Their key focus and investment are in finding, hiring and retaining top-quality staff, yet they’re frugal in other areas such as expensive facilities and perks that don’t affect client and employee satisfaction.

Looking ahead

A focus on greater efficiency and productivity were major reasons for growth and success in 2012. 2013 will require greater creativity as increased burdens such as health care costs and taxes could limit profitability and inhibit growth as PS organizations’ clients face similar challenges.

The growth and success of the professional services marketplace comes from the organizations offering innovative services to help clients manage change and improve performance. As market dynamics change, leading PS organizations have adapted to take advantage of new technologies to create innovative solutions to help their clients.

2013 will be no different in terms of the need for continuous improvement. But the headwinds will be slightly stronger, and the need for repeatable service offers and organizational efficiency and effectiveness is critical if professional organizations want to remain competitive and profitable.