By Dave Hofferberth, Managing Director, Service Performance Insight
Get a Peek into How the Professional Services Market Is Performing
We’re currently collecting surveys for the 2015 Professional Services Maturity Benchmark. The early results are in, and professional services growth is slightly above 10 percent year-over-year. This preview is based on almost 40 completed surveys, a nice chunk of the 250 surveys expected by December.
While the results are not final, they shed some light into the overall health of the professional services market and what we might expect in 2015. Read on to get a glimpse into the future.
Five performance drivers
Before highlighting the latest findings, let’s review the key functional areas that we call pillars. Our hypothesis is that professional services organizations consist of five pillars or business functions, which drive organizational performance.
The core tenet of the model is professional services organizations achieve success by optimizing the following five Service Performance Pillars:
1. Leadership. Represents a unique view of the future and the role the services organization will play in shaping it. Leaders develop a clear and compelling strategy, providing a focus for the organization to spur action. They also set the tone and direction for the organization.
2. Client relationships. Includes sales, marketing and partner relationships and sales effectiveness.
3. Human capital alignment. Focuses on recruiting, hiring, retaining and motivating a high-quality consulting staff.
4. Service execution. Represents all aspects of project execution: resource management, project management, knowledge management and delivery methods and tools.
5. Finance and operations. The financial backbone of a services firm that addresses planning, revenue, margin, billing, collections and IT infrastructure.
Five levels of maturity are defined to show progression for each pillar. It starts with Level 1, where processes are immature and employee roles are broad, and progresses up to Level 5 where the organization, methodologies, tools and governance are synchronized and structured. Organizations at Level 5 optimize and align all elements of the PSO for continuous improvement. On average, only 5 percent of PS organizations achieve Level 5 performance.
Client relationships: New clients still drive the market forward
For the past five years, professional services organizations have averaged between 30 to 40 percent of total revenue from new clients. Unfortunately, that number currently hovers around 30 percent, well down from its high of almost 40 percent just a few years ago.
New client revenue as a percent of total revenue, is an excellent barometer of year-over-year growth, and is highlighted by the roughly 10 percent annual growth the market is currently experiencing. Although 10 percent growth is positive, we would prefer to see it average around 15 percent signifying significant market growth.
Human capital alignment: Billable utilization drops
Professional services organizations that have completed the survey average 67 percent billable utilization, which translates to 1,340 billable hours out of a 2,000-hour year. Ideally, they should average 75 percent (1,500 billable hours per year).
This difference of 160 annual billable hours reflects an approximate $32,000 loss in billings per consultant. Much of this comes from the low billable utilization of the embedded services organizations — primarily software and hardware providers — who average roughly 60 percent billable utilization.
Service execution: Larger projects, better on-time delivery
In terms of man-months, the organizations that have completed this year’s survey show longer project durations, with 24 man-months in 2014, up from 19 in 2013. The number of staff on a project has increased significantly, while the length of the projects is slightly down.
Also, 80 percent of the projects have been completed on time, the highest level we have seen in the past five years. This KPI bodes well for quality project delivery and ultimately project margins going forward.
Finance and operations: Financial success yet to be determined
With the exception of revenue per employee, which highlights the effectiveness of the overall organization, most of the financial key performance indicators are down from last year. However, there is one notable exception: organizational profitability. That’s gone up.
Our analysis of this area shows that organizations have reduced non-administrative costs and, thus, improved overall profitability. The surveys to date indicate a concern that margins are slightly lower, and therefore despite all the success in delivering projects, there’s room for improvement.
Finalize plans for 2015
As professional services organizations enter the final quarter of the calendar year, it is imperative they start the annual planning process to create an effective and executable business plan. It should highlight strengths and weakness, and enable everyone to focus on service areas where they can deliver the highest growth and profitability.
Many executives will use their services portfolio management — such as professional services automation or project portfolio management — solution to understand their most strategic services, along with their best strategies for growth and profit. Armed with this information, they can determine adequate staffing and support levels in order to meet their projections.
They should also create a budget highlighting the costs and revenues associated with the services they forecast to deliver. Obviously, change is continual, and this budget should be reevaluated on a quarterly basis, at a minimum. Leading firms use their IT infrastructure to continually monitor performance and make adjustments as necessary in real time, rather than waiting an additional month or quarter which may be too late.
Professional services performance to be continued …
The net result of the surveying so far has shown professional services organizations have weathered the uncertainty of the economy over the past year, but are still not out of the woods completely. It will take significant effort to improve operational efficiency and organizational productivity. Thus far, an emphasis should be placed on sales and new client penetration.
These organizations must also continue to deliver projects more efficiently and effectively, focused on on-time delivery and overall project margin. The year is not up yet, and we have surveys coming in every day. So far, the glimpse shows some promise for the following year.
We expect 2015 to be another solid year in the professional services market despite global uncertainty and the talent cliff negatively impacting the future growth for many PSOs with increasing attrition. Count on seeing changes in the next year with the need for mergers and acquisitions to grow firms. Stay tuned.
To receive a free copy of the detailed benchmark report when it’s completed, please take the PS benchmark survey now. (Valued at $995.) For seven years, PS executives have gained insight and comparative statistics into how PSOs operate. They use the groundbreaking research to chart their course to service excellence. Don’t let your organization fall behind. Complete the survey by December 1 to get a free copy of the results that will help you grow your business.