A Smarter Way to Create the Annual PS Business Plan and Budget

A proven way to effectively build your business plan

Planning Pyramid
As 2016 approaches, it is time for professional services executives to begin the planning process. This process typically takes one to two months and sets the tone for the year to come. It’s a great time to assess overall corporate strategy in order to determine whether the organization should continue on its current course or make changes to grow faster and more profitably.

Certain components of a strategy generally do not change from year to year, such as the organizational vision, mission, values and culture. Still, professional services organizations should review their charter and associated business model each year to determine whether they align with changing market conditions, competition and employee capabilities. The best PSOs take both a top-down and a bottom-up approach to business planning, and to developing the budget.

Plan by department, build up to organization

Departmental planning allows each group to set its strategy to ensure it meets overall strategic priorities and goals. Here is a list of questions each group needs to address:

Executive (Leadership)
Leaders in successful PSOs first develop and then communicate the charter and vision throughout the organization. Target markets and go-to market strategies help define a portfolio of services that align to achieve financial objectives. And then — by aligning the workforce around its strategy — PS executives can ensure everyone on board is focused to deliver solid financial results.
Questions for executive leadership:
• Do we have the right strategy, and if not, how should we change it to capitalize on our markets?
• How is our strategy going to change over the next year?
• What types of services, geographies and clients should we concentrate on?

Marketing and sales (Client relationships)
Embedded in the business plan will be a strategy that differentiates the services sold from those of the competition. The less they are differentiated, the more susceptible they are to pricing pressure. To be effective, people responsible for selling services need to be able to communicate the value the organization provides to potential clients. Proper expectation setting through requirements and contracts ensures prospects become satisfied clients.
Questions for sales and marketing:
• What services should we sell that generate the highest growth and profit potential?
• Do we have the right marketing and sales personnel to achieve our corporate goals?
• What other services do we see being offered in the field that we could also begin to sell, and how should we price them?
• Will we focus more on new client acquisition or selling services within our current client base?

Human resources (Human capital alignment)
Employee cost is typically the single largest line item in a professional services budget. Research has shown that it is increasingly difficult for PSOs to find, hire and retain talent. If the PSO is well-aligned, it will know what skills are required to meet growth and profit objectives. The organization will also be in a better position to compensate employees for the value they deliver.
And don’t forget training! It makes the workforce more valuable, and employees appreciate the investment in them. As a result, it leads to lower voluntary attrition rates.
Questions for HR:
• What skill sets will be important in the upcoming year, and do we have the necessary personnel in house?
• How much and what types of investments will we make in recruiting?
• What type of training should we offer in order to prepare our employees for the work ahead as well as ensure they stay with our firm?
• How has compensation changed over the past year, and what should we do to motivate and retain a highly qualified workforce?
• Do we need to consider third-party resources, and how much do they cost?
• How do we measure and improve employee engagement?

Service delivery (Service execution)
When it comes time to service delivery, PSOs need to pay attention to service delivery costs. Furthermore, they need to check for quality and ability to deliver the value clients expect.
Since service delivery is where money is made in professional services, the ability to balance project margin with client satisfaction will go a long way to helping the PSO grow and prosper.
Questions for service delivery:
• How can we improve our estimates and on-time, on-budget delivery?
• Do we have the right resources available to meet the plan?
• What tools and investments do we need to meet our plan?
• How can we deliver with higher levels of quality and at higher margins?

Finance and operations
Professional services organizations pay close attention to the margins of the services they deliver. Executives are responsible for figuring out how to deliver higher-quality services at higher margins. They also need to continually analyze the entire organization to find ways to improve operational capabilities that will result in higher levels of profit.
Questions for finance and operations:
• What are our revenue objectives, and how do they tie in with the sales plan?
• What profit do we want to achieve by geography, by line of business, by consultant?
• How will we manage cash flow?

Uncertainty exists
The fact is, there are many things occurring in the marketplace that are beyond a PSO’s control. Issues such as global growth, competition, new technologies, government intervention and even mergers and acquisitions among the competition or internally can alter the strategy going forward.

And as it happens every year, PS executives should consider new service offerings to take advantage of changing industry dynamics. A host of internal and external factors impact the business plan and the budget.

Your five-step process to build a budgetbudget
SPI Research has created the following five-step process for PSOs to follow in building a budget:
1. Review last year’s successes and failures to figure out where to start.
2. Analyze where revenue and profits came from last year and get into specific details. Are these growth areas for the following year?
3. Identify the key assets and look to see what is needed to round out the organization.
4. Define the service portfolio, which helps determine what areas to invest in that will generate both the best short- and long-term growth and profitability.
5. Determine the key performance indicators that show how the organization is performing.
Review past successes and failures

The first step is to review last year’s budget and analyze the successes and failures of the organization. Of course, no one wants to repeat last year’s mistakes. A frank assessment helps refocus on strengths while shoring up weaknesses. What type of expansion is planned? Services, regions, clients?

Analyze last year’s revenues and profits
Look at the organization and dig deep into the details to identify organizational costs. This requires analyzing the cost structure in four different areas:
1. Core costs focus more on service delivery, what it takes to deliver services, what tools are required, what the service portfolio looks like and what it might cost to add more services.
2. What types of skills are required, and where are they located? How much do they cost? Based on our current rate and cost structure, can we operate at acceptable margins? This area in conjunction with core costs represent all of the field costs necessary to efficiently and effectively deliver services.
3. Here, analyze supporting costs. Everything associated with marketing and sales, facilities, IT, overhead and all other costs necessary to make sufficient profit.
4. Analyze capital costs, the costs necessary to build and grow the organization.
Identify assets

Once the four areas of cost have been identified, take stock of your assets. What are the key assets of your organization?
1. First and foremost, it’s people. While manufacturing organizations have all types of equipment and materials, the success of PSOs ultimately depends on the caliber of people they hire. Executives should identify people who generate the most revenue and profit and also have the highest billable utilization levels. This will help executives clone them by hiring or training similar superior talent.
2. Second is the service portfolio. What services are offered and where? Are they strategic to growth or tactical? How do we harvest the maximum profit from our cash cows to invest in new growth areas?
3. Third is clients. Who are they, and where are they? Are they happy with the services offered and delivered? Do they want more types of services? And if so, will these services be profitable? What are their payment policies?
4. Finally, finances. What capital is required to expand? What is the projected cash flow and profit? These must be compared to the budget. At the end of the day, the PSO is probably in business to make money, so it is critical finances are managed closely.
The secret is to capitalize on information within the core business solutions to better understand the true value of each of your assets.

Define the service portfolio
The next step is to look at the service portfolio. This exercise enables PS executives to look at the long-term future of the organization. There may be very profitable services, but they may have a limited time horizon. For instance, at the end of the last century, Y2K initiatives were all the rage. But they were not going to last past the year 2000.

Therefore, analyze the service offerings to determine which ones are more strategic and provide long-term benefit to the organization as opposed to short-term tactical solutions. Both are important, but the long-term strategic initiatives will help the PSO build its brand.

Determine the key performance indicators
Finally, which key performance indicators should the PSO monitor? Every department should have three to five major KPIs to monitor in real time and watch for positive and negative trends. Real-time monitoring allows them to make modifications to help maintain positive growth and profitability.

Common causes of a failed business plan
These are the most common reasons business plans fail:
• Leadership team’s inability to effectively confront the reality of the current business environment with a realistic fact base and competitive benchmarks.
• Focused on too many — sometimes competing and overlapping — priorities.
• Lack of alignment across all parts of the organization around a core set of measurable improvement initiatives.
• Inability to rapidly engage the entire organization in translating improvement plans into operational tactics and job-level objectives.
• No follow-through to accelerate the learning and performing cycle while creating committed leaders at all levels of the organization.

Bringing it all together
Most executives probably have their vision, mission and values in place, and have had them for several years now. Before a PSO can prepare a budget, it needs a business plan to provide organizational direction. The business plan will guide the budget.

Most organizations conduct planning and budgeting on an annual basis. While modifying the strategic vision might be a yearly process, organizational planning and budgeting are living documents, which should be evaluated quarterly, at the very least. Economic conditions change as do competition, technologies and regulations.
The plan and budget put together a few months ago may not be relevant today. Therefore, PS executives need to stay current with economic changes as new developments could change the organization’s focus.
Lastly, and most importantly, focus on growth!

There is still time to complete the PS Maturity benchmark survey! Participants will receive a FREE copy of the 2016 PS Maturity Benchmark when it is published in February, 2016. Cover2015PSMB