How Does Your Service Organization Compare?

By Dave Hofferberth

Find out the latest trends in the professional services industry

figure-1SPI Research just completed the 2016 Professional Services Maturity Benchmark. This report is based on a survey of the professional services industry. More than 500 firms from around the world participated, representing virtually every PS vertical except legal. This year’s survey provides significant insight into the current state of the professional services market and gives a glimpse of what to expect in the upcoming year.

Market dynamics

In 2015, the professional services market was under pressure due to global economic conditions and the difficulties in finding and retaining talent. These factors led to modest growth, slightly higher than in 2014. Perhaps growth could have been higher, but the year proved to be a little more difficult in terms of finding and adding headcount — professional services’ most critical asset.

Because the professional service market tends to grow at least 10 percent annually, employee attrition, either voluntary or involuntary, is a critical factor in terms of growing revenue. In this year’s benchmark, SPI Research decided to divide attrition between voluntary and involuntary. The sum of these two was nearly 13 percent.

Survey results

2016psmb_cover
http://www.spiresearch.com/spi-research/reports/2016psmb.html

The organizations in the latest benchmark are more than twice the size they have been in the past five years. Professional services organizations have an average of 637 employees and approximately $81 million in annual PS revenue. These numbers are significant in helping analyze and compare the largest PSOs with those in the mid- and boutique-markets.

Interesting trends in sales and marketing processes have popped up. One is a downward trend in terms of winning new business. In 2015, firms won fewer than 50 percent of the bids they submitted. The time, expense and focus required to market and sell require organizations to improve this percentage to a minimum of 60 percent.

Likewise, because of the issues associated with sales, the deal pipeline — as related to the quarterly bookings forecast — was at its lowest level (172 percent) since the first year of the survey. This issue is worrisome as it may force professional services organizations to discount more in order to build the pipeline to an acceptable level of at least 200 percent. This isn’t acceptable as discounting negatively affects project margins, which lowers bottom-line profitability.

Service on-time delivery fell in 2015 compared to 2014 — 76.1 percent and 78.3 percent respectively — and the cancellation rate of projects rose significantly to 2.6 percent. In professional services, this figure is critical as it disrupts the organization. The average project overrun also increased to 10 percent, which is the highest in five years.

Much of these lower results could be attributed to a slight reduction in the use of standardized delivery methodologies. A standardized delivery methodology enables PSOs to more efficiently deliver services on time and on budget, and at a higher level of quality and client satisfaction. All of these factors have a strong correlation with revenue growth and profitability.

Many of the financial metrics are under pressure this year. However, the most important metric, profitability, showed a 17 percent relative increase from last year’s benchmark. SPI Research believes that this increase in profitability will yield greater results for professional services organizations in upcoming years as profit is the fuel for growth. This increase will allow them to invest more heavily in their workforce and global expansion.

Looking forward

The beginning of 2016 has been difficult for the economy, which puts pressure on professional services organizations to streamline operations and cut costs. While there are always performance demands in PSOs, an uncertain economy will make these demands more difficult.

The elections in the U.S., still the world’s largest economy, add to this uncertainty. Clearly, there’s frustration with government spending, but the winner of the 2016 elections will have an impact on the future of the economy on a global basis.

Despite the rough start of 2016, the professional services market remains upbeat. The demand for professional services continues to rise. And employees, whose salaries and bill rates have risen, will be excited about the challenges they face this year.

New technologies continue to transform the professional services market. Nowhere is this more evident than in the social, mobile, analytics and collaboration, or SMAC, space. These solutions, many of which are embedded in core business suites such as enterprise resource planning (ERP), client relationship management (CRM), professional services automation (PSA) and human capital management (HCM), are becoming increasingly critical to the success and growth in professional services.

Professional services is an employee-driven market. Providing employees with the best tools improves their ability to perform at a high level.

For more insights

PSOs that use the 2016 Professional Services Maturity Benchmark will see how they’re performing in comparison to their competitors. It can also guide them in their transformation and growth initiatives.

We wish everyone the best of luck for a successful and profitable 2016.

Professional Services Maturity™ Benchmark Reveals Stormy Seas Ahead

Find out the latest trends in the professional services industry

2016PSMB_CoverAccording to SPI Research, the leading independent technology services research firm, professional services organizations (PSOs) achieved strong growth in revenue and profits in 2015. The 2016 Professional Services Maturity™ Benchmark revealed industry revenue growth of more than 10 percent for the fifth consecutive year. However, most leading indicators — such as the size of the sales pipeline and backlog — portend stormy seas ahead.

In 2015, PS segment vitality was evidenced by strong job growth, with year-over-year headcount expanding by 7.8%. The 549 PS organizations represented in this benchmark employed over 350,000 consultants who each produced, on average, $198,000 in annual revenue. Collectively, these firms generated over $69 billion in PS revenue. Even better, these firms reported strong earnings, with average net profit of 15.5% in 2015, up from 13.2% in 2014.

On the horizon, PS headwinds signal trouble ahead. Major leading indicators — such as the size of the sales pipeline, win-to-bid ratios and backlog — were all down sharply in 2015. At the same time, voluntary and involuntary attrition rose to 12.9%, the highest level since the recession. The gap between the best performing and worst performing PSOs continued to widen. This past year, the 300 (55%) lowest-performing firms generated merely 2.1% in net profit while the top 100 (20%) generated 23.5% in net profit.

Market dynamics
In 2015, the professional services market was under pressure due to global economic conditions and the difficulties in finding and retaining talent. These factors led to modest growth, slightly higher than in 2014. Perhaps growth could have been higher, but the year proved to be a little more difficult in terms of finding and adding headcount — professional services’ most critical asset.

Because the professional service market tends to grow at least 10 percent annually, employee attrition, either voluntary or involuntary, is a critical factor in terms of revenue growth. In this year’s survey, SPI Research analyzed both voluntary and involuntary attrition. Attrition rose to 12.9% and is bound to continue to increase with consulting demand outstripping the talent supply.

Survey results
The 549 professional services organizations who participated in the benchmark, averaged 637 employees with approximately $81 million in annual PS revenue. These numbers are significant in helping analyze and compare the largest PSOs with those in the mid- and boutique-markets.

Interesting trends in sales and marketing have popped up. One is a downward trend in terms of winning new business. Firms won fewer than 50 percent of the bids they submitted. The time, expense and focus required to market and sell requires organizations to improve this percentage to a minimum of 60 percent.
Likewise, because of the issues associated with sales, the sales deal pipeline — as related to the quarterly bookings forecast — was at its lowest level at 172 percent. This is the lowest level we have seen over the past nine years of benchmarking. This issue is worrisome as it may force professional services organizations to discount more in order to build the pipeline to an acceptable level of at least 200 percent of forecast. If the deal pipeline remains at these anemic levels, firms will be forced to curtail hiring and may even have to consider staff reductions.

On-time service delivery fell in 2015 compared to 2014 — 76.1 percent and 78.3 percent respectively — and the project cancellation rate rose significantly to 2.6 percent. In professional services, any project cancelled, for whatever reason, disrupts the organization. The average project overrun also increased to 10 percent, which is the highest in five years.

Poor service execution results could be attributed to a slight reduction in the use of standardized delivery methodologies. A standardized delivery methodology serves as a blueprint which enables PSOs to more efficiently deliver services on time and on budget. Standardized delivery methods typically result in better project quality and client satisfaction. All of these factors have a strong correlation with revenue growth and profitability.

Many of the financial metrics are under pressure this year. However, the most important metric, profitability, showed a 17 percent increase relative to last year’s benchmark. Average net profit improved from 13.2% to 15.5% primarily due to reduced overhead and administration costs.

Looking forward
The beginning of 2016 has been difficult for the economy, which puts pressure on professional services organizations to streamline operations and cut costs. While there are always performance demands in PSOs, an uncertain economy will make them more difficult.

The elections in the U.S., still the world’s largest economy, add to this uncertainty. Clearly, there is frustration with government spending and the role of government, but the winner of the 2016 presidential election will have an impact on the future of the global economy.

Despite the rough start of 2016, the professional services market remains upbeat. The demand for professional services continues to rise. And employees, whose salaries and bill rates have risen, will be excited about the challenges they face this year.

New technologies continue to transform the professional services market. Nowhere is this more evident than in the social, mobile, analytics and collaboration (SMAC). These solutions, many of which are embedded in core business suites such as enterprise resource planning (ERP), client relationship management (CRM), professional services automation (PSA) and human capital management (HCM), are becoming increasingly critical to the success and growth in professional services.

Professional services is an employee-driven market. Providing the best tools that offer the best insight to employees improves their ability to perform at a high level.

For more insights
PSOs that use the 2016 Professional Services Maturity Benchmark will see how they’re performing in comparison to their competitors. It can also guide them on their transformation and growth initiatives.
We wish everyone the best of luck for a successful and profitable 2016.

Service Delivery Excellence

By Dave Hofferberth

5 KPIs that matter most

picture-1This is the second article in a two-part series on performance improvement in the delivery of services, based on measuring and monitoring five critical key performance indicators. Part one provided insight into why professional services organizations should specifically focus on five performance indicators in order to improve service delivery performance. This article digs more deeply into the KPIs and the value of improving each one.

KPI 1. Project duration
The average project duration in months depicts the effectiveness, or lack thereof, of selling longer-term projects. The average project duration is important in that it shows the average length and scale of today’s projects. Although easier to staff, longer projects are not necessarily more profitable because longer and larger projects may involve significantly more risk and complexity. However, extended projects with large project staffs can yield significant revenue and stability to the organization because there is less consultant churn from project to project.
table-1
Table 1 shows the majority of projects take between one and nine months. Clearly, revenue per project increases as project duration increases; billable utilization also rises as the duration increases. But what is perhaps most important about this table is that organizations with the largest projects tend to grow at a much higher rate than those organizations focused on very small projects.

KPI 2. Standardized delivery methodology
Consistency of service delivery is imperative in order to improve quality and instantiate best practices. While not all work can follow a standardized or structured service delivery methodology, the higher the percentage, the better the firm typically operates.
Mature firms invest significant time and attention to methodology development as a means of standardizing project processes, defining expectations and institutionalizing quality. Using a standardized delivery methodology is a critical component of a services productization strategy. It helps improve project forecasting and resource management by lowering costs while enhancing predictability. PSOs that can accurately plan and execute services in a structured way are more productive and more likely to deliver quality results.
There is significant effort involved in developing, implementing and adhering to standardized delivery methodologies, but the net impact for PSOs is beneficial.

table-2Table 2 compares the percentage of time standardized delivery methodologies are used to other key performance indicators. It shows that PSOs using a standardized delivery methodology have improved on-time project completion, higher revenue per employee and are more likely to achieve their annual revenue targets.

KPI 3. Billable utilization
Employee billable utilization is one of the most heavily tracked and scrutinized KPIs. While there are many definitions of billable utilization, the benchmark’s definition is based on a 2,000 hour per year basis. Employee utilization is calculated by dividing the total annual billable hours by 2,000. This key performance indicator is central to organizational profitability.

To be meaningful, utilization must be examined in conjunction with overall revenue and profit per person along with other leading indicators like backlog and size of the sales pipeline. It is a major indicator of opportunity and workload balance as well as a signal to expand or contract the workforce.

To improve margins, PS executives must continually focus on increasing employee billable utilization, as well as increasing the percentage of billable employees. The primary gain from increased utilization is a significant increase in revenue per employee. Interestingly, PSOs with higher employee utilization also reported more revenue growth, more revenue per consultant, more revenue per employee and larger projects. The dynamic combination of high utilization and a high percentage of billable employees leads to better financial performance.

table-3Table 3 shows the actual benefits this year’s firms experienced from increasing employee utilization. As you might expect, billable utilization is critical in terms of meeting deadlines and profit margin targets. High billable utilization is directly tied to the percentage of employees who are billable. This chart shows that firms with very high utilization are much more likely to meet their margin targets.

KPI 4. On-time delivery

table-4The percentage of projects delivered on time is a measurement determined by dividing the number of projects completed on time by the total number of projects. This KPI is critical for billable services organizations because when it decreases, both profitability and client satisfaction also decreased. The bad news is that the average on-time project delivery rate tends to be less than 80 percent for PSOs.

On-time delivery is an important key performance indicator as it affects client satisfaction and the ability to take on new projects. When projects are delivered late, client satisfaction suffers. It also causes new projects to be delayed. When planned resources are still working on the late project, they are unable to start another project. PS executives strive to keep employees utilized. However, when they cannot start work because prior projects are late, it affects everyone. The effectiveness of quality and knowledge management processes correlate highly with on-time delivery and, ultimately, help drive revenue per employee upward.

KPI 5. Project overruns
table-5Project overrun is the percentage that actual costs exceed budgeted costs or it is the percentage actual effort (time) exceeds the budgeted time. Project overruns may be expressed in actual time versus plan, actual cost versus plan or both. PSOs want to track this KPI because whenever a project goes over budget in either time or cost, it cuts directly into profitability.

Project overruns, like projects not delivered on time, limit future work and client satisfaction. In many instances, project overruns indicate a lack of project governance, which hurts project quality. Table 5 highlights how average project overruns influence on-time completion, annual revenue and margin target attainment. Obviously, project overruns are negatively correlated with on-time completion, as one increases while the other decreases.

What’s most important — as shown in the table — is that PSOs with high levels of project overruns yield poorer revenue and margin performance. Focusing on why projects run over is a critical step in performance and profitability improvement.

Using information wisely

These key performance indicators for services delivery, and many more like them, can be tracked through an organization’s Professional Services Automation (PSA). PSA is used specifically for improving services delivery and all five of these key performance indicators. PSA helps PS executives plan, sell, deliver and collect for work that meets targeted delivery dates and margins.

PSA solutions manage resources and projects, which helps improve billable utilization and bottom-line results. Twenty years of research have shown that those using PSA see a 5 to 7 percent improvement in billable utilization. That translates into an additional 100 to 140 hours billed annually per consultant. As you can imagine, the dollar value and profit associated with these hours are significant.

How these KPIs can help PS firms grow
To compete successfully today, professional services executives need to optimize every aspect of their organization – from the creation of a solid strategy and accompanying business plan to the sale of services that offer the greatest potential for growth and profit. It also requires a staff of high-quality talent.

Regardless of all of the other areas of the PSO, delivering services is where money is made in professional services. Achieving organizational growth and profit begins with project profit margin. Therefore, for PSOs to grow and prosper, they must be astute in terms of how they deliver services. The five key performance indicators discussed here are a good place to start.

Five KPIs for Service Delivery Excellence

By Dave Hofferberth

Valuable insights from the latest professional services benchmark

This is the first article in a two-part series on performance improvement in service delivery based on measuring and monitoring five critical key performance indicators. It provides background to this initiative, highlighting early results from the 2016 Professional Services Maturity™ Benchmark study. Part two will provide more details regarding why these five key performance indicators should be measured and monitored and the impact of poor performance.
kpis

What the latest benchmark reveals about professional services

With the economy still showing sluggish growth and competition growing, professional services executives must double-down their efforts to improve service delivery effectiveness. Otherwise, they won’t attain high quality, high levels of client satisfaction and high project profit margins. Service delivery excellence is imperative in order to achieve these goals.

Each year, market dynamics change, new technology is introduced, new regulations are enacted, and business priorities shift. As a result, professional services executives must continue to monitor the business environment to make the best investments possible to grow and prosper.

While the results of SPI Research’s 2016 Professional Services Maturity™ Benchmark have yet to be published, more than 550 professional services organizations have completed the survey, yielding tremendous insight into the market. For instance, professional services year-over-year revenue growth stands at 10.2 percent, up slightly from last year’s 10 percent. This indicates that the market continues to improve. Much of this growth has been fueled through new client acquisition, whether it is new logo clients or additional services offered to different departments within the existing client base.

However, the size of the sales pipeline in comparison to the quarterly forecast is down to 172 percent compared to 199 percent last year. This translates to fewer available deals, making it increasingly difficult to sell services. PSOs have had to increase discounts in order to win more work. Also, employee satisfaction is down, which is probably a result of higher levels of attrition due to pressure to work more hours than ever before.

Perhaps the most disturbing early result is that both project margin and organizational net profit are down from last year’s benchmark. SPI Research believes profit is the fuel for growth in professional services. And if there is so much pressure to discount services — especially at very low rates — the growth of the market could suffer.

Every professional services executive knows there are good times and bad. SPI Research expects a bright future in the professional services market. To achieve their desired financial goals, PS executives must continually evaluate all aspects of their organization, from their personnel to the services developed and to target markets and clients. SPI’s Professional Services Maturity Model™ is designed to help PSOs improve organizational performance, beginning with those areas with substandard performance.

To help organizations focus on service delivery excellence, the following highlights some of the key performance indicators that should be continually monitored and measured.

Why focus on KPIs?

Understanding when and how to start a performance improvement initiative can be difficult in any organization. Some key questions include:
• Are we achieving high levels of client satisfaction?
• Is our work delivered on time and on budget?
• Does each project meet its desired margin and completion goals?
• Based on the current project, will the client continue to buy and refer our solution?

Most executives have a solid understanding of their areas of weakness but too many and conflicting priorities get in the way. A good place to start is by focusing on key performance indicators, how they are trending, how they compare to peers and the steps required to improve them.

SPI Research tracks over 200 KPIs across professional services organizations. Each KPI is important by itself. However, tracking too many can be a burden. Many PS executives have neither the time nor the resources to track them all. Yet department heads might be required to focus on 10 to 20 key measurements. The point is to track those relevant to your organization and understand how they impact overall growth, client satisfaction and profit.

Five KPIs to measure and improve service delivery

Service delivery is where PSOs plan, estimate, propose, staff, execute and invoice for work. Service delivery is where money is made in professional services as people and projects are the revenue-generating and profit machines of the organization.

Professional services executives, project managers and engagement managers have more than 30 service delivery metrics they use to measure service execution. These five above are among the most important when considering organizational improvements:

1. Project duration in months. The length of time it takes to deliver projects.
2. Methodology use. The use of standardized or structured delivery methodologies.
3. Employee billable utilization. The percentage of available employee work hours that are billable.
4. On-time, on-budget project delivery. The percentage of projects delivered on time and within budget.
5. Project overrun. Overruns in terms of costs or hours compared to the estimate and budget.

Why these five? Stay tuned for part two to see an analysis of these five KPIs and how to quantify their value for your organization. Over the past nine years of benchmarking nearly 2,500 professional services organizations, SPI Research has found these metrics are critical for performance and profit improvement.