Professional Service Profit and Loss Made Easy

By Jeanne Urich, Managing Director, Service Performance Insight, LLC

Step 2: Analyze revenue and costs

profit and lossThis is the second article in a three-part series examining the metrics that matter for running a professional services business. Part one looks at key metrics, typical targets and the incremental impact of small improvements. In this one, we provide descriptions and industry averages for the critical components of the professional services income statement — both revenue and expense. The third article will reveal the best practices and profit and loss statements of the top PS firms.

Based on eight years of benchmarking more than 2,000 professional service organizations, by far the most important questions and variances come from our income statement analysis. Both revenues and costs show enormous variability — not just for embedded versus independent services providers — wide variances are also seen across professional services verticals and different size organizations. There are no definitive right or wrong answers as services-based businesses are comprised of many different business models with varying sources of revenues and costs.

The secret success formula is based on maximizing the productivity and profit of each business line while limiting unwarranted overhead. Our research continually shows that the most successful services businesses are also the fastest growing. Early-stage service organizations are typically very decentralized while more mature organizations move to centralize critical overhead functions such as finance and operations, IT, PMO and resource management. Centralized overhead activities are typically less costly than decentralized.

Flat or negative growth in a services business is deadly because of the high cost of finding and retaining talented consultants. Without enough new and interesting work and clients, high-priced consultants will start looking elsewhere for new opportunities where they will be able to grow their skills and income.

Analyze your income statement
We recommend PS executives begin the process of profit improvement by analyzing their income statement, and comparing it to the 2015 Professional Services Maturity Benchmark. This comparison provides insights into where they can increase revenues or reduce costs to improve profitability. The following sections highlight the various components of the PS income statement.

Revenue sources
• Direct gross PS revenue – Directly delivered PS revenue that does not include re-billable travel.
• Reimbursable travel and expense revenue – The revenue recognized from re-billable travel and business expense.
• Indirect gross revenue – Revenue from subcontractors and other outside resources.
• Pass-through revenue – Revenue from hardware, software, materials, etc.

Costs
• Direct Labor expense – The cost of direct billable labor, not including fringe benefits, vacation, sick time or overhead. Non-billable labor expense for sales, marketing, IT, general and administrative, etc. should be shown in those categories.
• Fringe benefit expense -Typically this expense is based on a percentage of direct labor cost. It is the cost of employer-provided healthcare, pensions, vacation and sick pay for billable personnel.
• Billable travel and business expense – The cost of travel and business expense that can be billed. These costs may be equal to the revenue from rebilling travel and business expense. Most firms are not able to charge a mark-up on re-billable travel and business expense. They may however charge consultant time spent while travelling. Billings for consultant travel time should be shown in direct gross revenue. If the consultant is not engaged in billable work while travelling, travel time is typically charged at a lower bill rate.
• Non-billable travel and business expense – The cost of travel and business expense which cannot be billed to clients. Non-billable travel and business expense for business development should be included in the cost of sales. Costs shown here are typically for non-client related business travel for training, company meetings, etc.
• Subcontractor and outside consultant expense – The cost for non-employee contractors and outside consultants. This cost is offset by indirect gross revenue. Typically firms target 25 percent or more markup on subcontractors.
• Pass-through expense – Expense for hardware, software, materials, etc. that can be rebilled to clients. Typically firms mark up the cost of re-billable hardware, software and supplies to cover their procurement, handling and shipping costs. Typical target markup is 15 percent or more.
• Sales expense – This comprises the cost of sales headcount, bonuses and non-reimbursable sales expenses.
• Marketing expense: This includes the cost of direct and indirect marketing headcount, bonuses and marketing program expenses.
• Education, training and certification expense – The cost of education, training and certification expense across the organization.
• PS IT expense – All IT expense both capital and depreciation for the IT infrastructure including personnel, equipment, software, networking, etc.
• Recruiting expense – Direct and indirect headcount, costs and fees for recruiting.
• All other general and administration – The cost of all non-billable headcount not already shown in sales, marketing, IT or recruiting. Includes facilities, general and administration overhead.

Expense targets
We have found typical overhead expenses — as a percent of total PS revenue — should fall into the following ranges. If your expenses exceed the benchmark averages, your organization is most likely spending too much, which lowers profit.
• Direct labor expense (40 to 50 percent). Direct labor cost as a percent of total revenue.
• Fringe benefit expense (6 to 10 percent). Fringe benefit expense as a percent of total revenue.
• Subcontractor expense (7 to 15 percent). Subcontractor cost as a percent of total revenue. This number varies depending on the percentage of total revenue generated by subcontractors. In the 2015 PS Maturity Benchmark, subcontractor-generated revenue averaged 13 percent of top line revenue.
• Sales (2 to 20 percent).Includes all direct sales headcount and fringe benefits plus non-billable business development travel and expenses, commissions, incentives and sales training. Sales expenses are typically low for embedded PSOs because they rely on the product sales force to generate PS opportunities. Embedded PSOs are typically not allocated a corporate sales charge. There is tremendous variability in the cost of sales as many organizations rely on their consulting staff to develop business. In many cases, PSOs do not capture the true cost of business development; it may be represented as non-billable time for consulting staff.
• Engineering and project management organization (1 to 2 percent).This includes all PS engineering and PMO headcount; fringe benefits and expenses such as labs, tools, delivery training and project reviews. This expense should include the cost of non-billable time for consulting staff spent on improving tools, methods and infrastructure.
• Marketing (1 to 2 percent).This encompasses all services marketing headcount and marketing expenses, such as website, PR, advertising, trade shows, sales training, customer satisfaction survey, references and services packaging.
• IT (1 to 2 percent).Comprises all IT capital expense, depreciation and headcount costs. Embedded PSOs may receive a corporate per headcount IT allocation.
• Recruiting (1 to 2 percent). In today’s talent-constrained market, both recruiting costs and time to find and hire consultants are growing at an alarming rate. Most PSOs use a combination on in-house HR and external recruiters.
• General and administrative (5 to 20 percent).This includes PS corporate management, facilities and non-billable travel.

2015 PS Maturity Benchmark income statement

2014 was a good year for PS profitability. Profit for both embedded and independent services organizations increased as did the profit reported by all geographies. Average net PS profit for the entire benchmark increased to 13.2 percent in 2014 as compared to 11.4 percent in 2013. Embedded service organization (ESO) net profit increased to 19 percent from 15.4 percent in 2013. Independents saw profit increase slightly from 10 to 10.8 percent.

Table 1 compares the income statements of the 2015 Professional Services Maturity Benchmark for 220 professional services organizations. Sixty-seven are from embedded services organizations (ESO) and 153 are from independent professional services organization (PSO).

Table 1: PS Income Statement for Embedded and Independent Consultancies in Percentage
PS Income Statement Source: Service Performance Insight, September 2015

Although still not yet at pre-recession levels, most key financial metrics improved from 2013 to 2014. The bottom line is that profit improved almost across the board for professional services organizations in 2014. The benchmark shows strengthening demand, utilization and bill rates which led to higher revenue yield by consultant and employee.

With improved demand, PSOs did a good job of limiting non-billable overhead and discretionary spending. The overall PS market grew revenues at 10 percent, unchanged from the prior year but firms did a much better job of balancing supply and demand, leading to bottom-line profit improvements.

Focus on both revenues and costs
Above the line, revenue is driven by revenue by account, client or project. Revenue generated is typically based on the number of hours worked at an average bill rate. These are fairly easy numbers to get and report. Below the line, revenue is offset by labor cost and overhead. Yes, your organization can improve revenues while reducing costs.

Here are activities you might consider to improve revenue and cut costs:
• Focus on improving sales and marketing effectiveness to capture more installed base business while keeping a lid on sales and marketing expense.
• Add more strategic services that command higher rates. Focus on selling and delivering larger projects.
• Develop repeatable services packages to demonstrate client value and reduce the cost of sales and marketing.
• Create dedicated consulting sales and delivery roles. Excellence comes from specialization. Immature organizations may be spending more and getting less by employing a jack of all trades model in which everyone sells and delivers.
• Invest in superior talent. Winning and keeping top clients is based on providing top consultants with unique insights. Arm them with proprietary tools, methods and knowledge that enhance client success and ROI.
• Tightly measure and manage consultant billable utilization and bill rates to drive high productivity.
• Provide rewards and recognition to enhance employee engagement.
• Keep a tight lid on overhead and fixed costs by reducing facility costs and limiting non-billable roles while investing in systems and tools to automate time capture and billing.
• Ensure clients are satisfied and willing to be a reference.

Professional services organizations that focus on understanding and improving their income statement generally perform at higher levels and grow faster and more profitably than those that do not. They invest in services that offer both growth and profit potential, as well as in the talent who will ultimately deliver superior results.

How IT Applications help Professional Services Firms Maximize Profits

By David Hofferberth, Managing Director Service Performance, LLC
Earlier, we discussed the importance of information visibility in professional services for driving profitability. The importance of information visibility cannot be understated. Information visibility comes from your information infrastructure, which can be both comprehensive and complex. Most of the firms we’ve surveyed in the past eight years use core business applications — either as an integrated suite or as best-of-breed — to capture and access timely information for decision-making. We published a report on project-based ERP for professional services in 2014, which highlights the major solutions and some of the key benefits.

Five business applications that support professional services
We’ve identified and tracked five business applications or solutions used in professional services. They include the following:

5FO1. Financial management or enterprise resource planning. This fundamental solution is required to accurately collect and report financial transactions. Approximately 88 percent of the firms surveyed use a financial management application. Clearly, every organization must track its finances. However, some of the embedded service organizations, such as software and hardware providers, use the corporate financial management or ERP solution as opposed to owning and maintaining a departmental PSA or accounting system.

 

 

2CR2. Client relationship management. The automation of client relationship processes improves sales and marketing efficiency and effectiveness. Of the organizations we’ve surveyed, 83 percent use CRM. It’s almost as important in professional services organizations as ERP is.

 

 

4SE3. Professional services automation. PSA helps PSOs with initiation, planning, execution, close and control of projects and services through the management and scheduling of resources that include people (both internal and partners), materials and equipment. Approximately 63 percent of surveyed organizations use PSA. It’s a critical application because it manages the resources and work done, which ultimately is the PSO’s revenue and profit generator.

 

3HC4. Human capital management. Talent management solutions help with recruiting, hiring, compensation, goal-setting and career and performance management. Such solutions need to be integrated with the employee database. About 47 percent of the organizations use HCM especially PSOs with more than 200 employees.

 

1LE5. Business intelligence. With 36 percent of the surveyed firms using BI, it’s an up-and-coming application. Its job is to assemble and use information to improve decision-making. Like HCM, as PSOs grow in size, so does the need for a BI solution.

No doubt, other applications such as social, knowledge management and remote service delivery tools have grown in importance in such a collaborative environment. However, the five primary applications focus on automating core PS business processes. Our numbers might be slightly higher than the true industry averages, as surveyed firms tend to be more technology-savvy, and have a greater appreciation for the value of using such applications to better run the business.

Diving deeper into the applications

Financial management or enterprise resource planning (ERP) is the primary accounting solution required to accurately collect, bill, and report financial transactions. ERP provides the master general ledger database for accounts payable, billing, revenue and cash management. It sets the foundation for budgeting, revenue planning and forecasting by collecting and managing both revenue and cost information.

The ERP system provisions PSA and HCM applications with client, employee and cost information. Billing can occur either within the PSA or the ERP application. Once bills are generated, collection and revenue accounting occurs within the ERP.

Client relationship management supports the management of client relationships to improve sales and marketing effectiveness. Based on a master client database, it records and manages the client opportunity lifecycle. CRM automates lead, contact and campaign management, sales pipeline forecasting and territory management. Opportunities are tracked through sales stages in which leads are converted into closed deals.
CRM may include marketing automation software to capture and automate customer touch points from inbound marketing activities and outbound lead generation campaigns. Organizations can track clients throughout the sales lifecycle, and target specific customer segments by understanding details of the relationship. Table 1 shows that the value of a CRM investment is multiplied when it’s integrated with the core ERP application.

Table 1Professional service automation manages the initiation, planning, resource management, scheduling, execution, close and control of projects and services. PSA includes a resource and project dashboard and demand forecast. It helps manage service delivery by overseeing opportunities, staffing, project management and collaboration, combined with accurate and timely expense and time capture.

PSA manages all aspects of service and project delivery and resource management based on project data. Table 2 shows the value of a PSA investment is amplified when integrated with the core ERP application.
Table 2
Human capital management, also known as talent management solutions, give employers the tools to effectively recruit, manage, evaluate and compensate employees. By tracking performance, skills and career progression, HCM helps companies develop and maintain a high-performance workforce. Software modules may include the employee database or employee database extract, payroll, benefits, recruiting, employee learning, skills, compensation, performance management, career and succession planning. HCM helps organizations manage personnel growth and development.

Table 3 shows the value of HCM solutions burgeons when the HCM solution is integrated with ERP. Management span of control expands. The time it takes to staff projects decreases due to better visibility to in-demand skills, allowing firms to synchronize their recruiting based on demand.
Table 3Business Intelligence, also known as reporting and analysis, aggregates information from primary business applications to improve reporting and analysis, demand and capacity planning, budgeting, forecasting and financial planning. Adoption of BI solutions continues to grow with the advent of powerful graphical reporting and analysis tools.

As organizations mature, BI becomes a more critical tool to provide real-time visibility to all aspects of the operation allowing executives to spot trends and take corrective action early. Trend and what-if analysis, and scenario and capacity planning help increase the accuracy of forecasting, planning and budgeting. Refer to Table 4 to see the effectiveness of integrating BI with ERP.
Table 4
The movement to software-as-a-service applications

The evidence shows that SaaS solutions have taken over in services organizations. Cloud-based applications are a natural fit for the virtual, mobile world of professional services. Some of the pure SaaS application providers no longer support an on-premise offering. Yet many of the more mature application providers still offer both SaaS and on-premise solutions. But make no mistake about it: SaaS solutions outsell on-premise applications by a factor of roughly five to one.

The winner: Integration

Departments purchase applications to fulfill the need to improve internal operations. The process to speed time between quote and money in the bank is the most important business process in professional services. It requires integrated information across the core CRM, PSA, ERP and sometimes HCM solutions. With this information, sales and marketing better understand the resources available, while service delivery understands the time and cost required to deliver services.

The information helps leaders better price engagements that meet margin and time requirements, which in-turn improve client satisfaction because expectations are properly set and deliverables and timelines are met. Human resources can access this information in the HCM solution to ensure the organization has the correct mix of personnel to meet current and future requirements. For a market like professional services, this real-time information is critical as it could take up to six months to find, hire and train the right resources.

As employees deliver the work, the integration of PSA and ERP provides leaders with the visibility to ensure resources are highly utilized, work is completed on-time and on-budget, revenue and profit goals are maximized, and the organization meets its cash flow needs.
In the past eight years of surveying professional services, we’ve seen a gradual rise in the adoption of information-based tools for real-time visibility and better decision-making.

Because these tools have shown proof that integration pays dividends, the integration of these tools also continues to rise.

Merely purchasing these tools is not enough. PSOs must use the tools extensively to maximize benefits. The time and effort to deploy, train and use the information is worth it. The numbers reveal that professional services organizations using these tools almost always improve performance and profit.

How to Speed up the time between Quote and Money in the Bank

By Jeanne Urich, Managing Director, Service Performance Insight

Drive profitability for your professional service firm

This is the second of a two-part series. Part one of this two-part series explores breakdowns in the quote-to-cash process for service organizations. This article provides recommendations for integrated business applications to streamline and automate the quote-to-cash process.

moneyIn today’s economy, cash flow rules. Every organization must focus on cash flow to maintain a solid financial position and maximize profitability and liquidity. In professional service organizations, this process begins with a client quote and ends when payment is received and the money is in the bank. This macro process of converting sales opportunities into paying customers is often referred to as quote-to-cash. Its optimization is essential for financial well-being.

Application integration improves cash flow
To improve the quote-to-cash process, PS executives turn to core business application integration to provide visibility, transparency and control. The three primary business applications used to improve and automate the quote-to-cash process include the following:

• Client relationship management supports the management of client relationships with improved visibility to lead generation, contact management, deal capture and pipeline management with the goal of enhancing sales and marketing effectiveness. CRM allows PSOs to track clients throughout the sales lifecycle, and to specifically target customer segments and offers by understanding details of the relationship.

• Professional service automation solutions provide the systems basis for initiation, planning, execution, close and control of projects, resources and services. PSA improves service delivery, resource management, project management and collaboration. It ensures accurate and timely time and expense capture. Over the past decade, PSA solutions have become more popular as a means for improving resource management and service delivery effectiveness, while the applications have matured to become easy to use and implement.

• Financial management is the primary solution required to accurately capture, bill and report financial transactions. It collects and manages all financial information — time and expense, invoices, procurement, etc. — to provide visibility and determine service cost and profitability. Every firm surveyed uses some financial management solution.

Benefits of integrated service resource planning

All three primary business applications improve financial performance. Although each individual application is critical to organizational success, it is their integration that offers the greatest benefit.

Figure 1: System Integration Improves Visibility, Productivity and Profits
Figure 1

Source: Service Performance Insight, October 2014

Services delivery and the front office

With this integration, sales and service delivery are aligned, and a smooth hand-off is assured as opportunities are closed and projects are initiated. Trust and cooperation are enhanced when all functions — sales, service delivery and finance — have access to the same single source of customer information.
PS executives can better plan and staff projects within PSA based on a detailed understanding of the time and costs involved, and can accurately forecast resource requirements based on up-to-date sales pipeline information. Cost and revenue data is brought together to show project, resource and client profitability. Visibility, transparency and control are all enhanced through management reporting and real-time dashboards.

The important workflow elements of CRM applications track the progress of leads into prospects, into proposals and into orders, ensuring timely reviews, approvals and hand-offs. CRM applications are typically set up as a single source of the truth for all client-related correspondence, proposals and contracts. Tight integration between PSA, where the project is managed, and CRM, where the client is managed, is critical for keeping the sales and service delivery teams in alignment.

Once a bid is accepted, the order is passed to the PSA solution to build the project and resource plan. Staffing and hiring decisions are expedited while ensuring the best available resources are assigned. The integration of CRM and PSA provides the PSO with visibility into the sales process and client contracts and commitments and allows the PSO to forecast resource and project requirements based on expected deal close dates.

Once work is initiated, PSA provides the necessary visibility to assure schedule and cost compliance. In the event of project changes, the combination of PSA and CRM facilitates sales and services delivery collaboration to generate and secure change orders.

Services delivery and the back office
Tight integration between PSA and the ERP application ensures accurate and timely invoices are generated and sent to the client containing all the necessary detail to expedite payment. Integration between PSA and ERP ensures employee details and costs are continually updated and reflected in the resource management application to guarantee the best, most cost-effective resources are assigned.

PSA and ERP integration virtually eliminates manual data re-entry and associated costly manual errors. Integrated systems provide a better understanding of and visibility into a PSO’s actual costs, project margins and revenues. And as with any automation, administrative overhead is decreased and accuracy is increased across the board. Table 1 depicts the reported 2014 PS Maturity Benchmark level of integration between the core applications used by PSOs and the financial system.

Table 1: Business Applications Integrated with Core Financials
Table 1

Source: Service Performance Insight, October 2014
More than 78 percent of the 238 organizations surveyed use a commercial PSA solution, 89 percent use a commercial CRM solution, and 90 percent use a commercial financial application. CRM and PSA have become increasingly important for success in the professional services sector, and many PS executives now realize that integration adds to potential benefits.

Table 2 highlights the benefits of services resource planning based on integrating PSA and CRM with the core financial application. These results show that in every phase of the quote-to-cash process both operational and financial performance improve because information flows seamlessly from one application to another, empowering executives to make faster and more accurate decisions that ultimately improve project profitability, increase personal productivity and increase bottom-line profit and cash flow.

Table 2: The Benefits of PSA and CRM Integrated with Financials
Table 2

Source: Service Performance Insight, October 2014

Ensure your professional services firm’s highest profitability
To drive profitability levels higher, PS executives are taking a more holistic approach to the quote-to-cash process, perhaps the most critical of all PS processes. Delivering services efficiently and effectively is just one area of importance in improving profit margins. Ensuring the organization is focused from the beginning on selling, delivering and collecting from the best clients who buy and use the most profitable services is paramount to success.

While there are many collaborative tools organizations can use to inform and educate their employees on which clients to target, what services to sell and at what level of expected return, the use of client relationship management in conjunction with professional services automation, each integrated with the core financial solution, offers the best chance of improving profitability.
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Get a Free Copy of the 2015 PS Maturity Benchmark Report!
Take the survey!
It’s that time of year again — time for the 8th annual Professional Services Maturity Benchmark! More than 1,500 professional services organizations have participated in this important research in the past eight years.

If you are running a service organization:
• Do you know how your organization stacks up against industry metrics?
• Do you have the industry data you need to support your strategy?
• Can you objectively quantify your organization’s strengths and weaknesses to create an actionable business plan?
• Do you know where you should invest to yield the highest impact?

The 2015 report promises more insight and analysis into the market with a view of the key success factors that drive exceptional performance.

Click here to take the survey.

Complete the survey by Dec. 1, 2014 to get a free copy of the 2015 PS Maturity Benchmark Report ($995 retail) when it is published in February 2015.

About Service Performance Insight
Over the past seven years, more than 10,000 PSOs have used the concepts and KPIs from SPI’s PS Maturity Model to pinpoint their organizations’ current maturity and develop improvement plans to advance in lagging areas.
SPI Research works with PS firms to create a maturity scorecard to compare to the benchmark maturity definitions. It analyzes current performance and helps prioritize future improvement initiatives. At the end of the project, leaders not only understand the maturity model, but also have the tools to identify, frame and prioritize strategic improvement priorities required to accelerate performance.

To learn more about SPI Research services and how SPI can help your company, please contact Jeanne Urich at jeanne.urich@spiresearch.com or phone (650) 342-4690.

Real-time Visibility is the Secret Sauce for Professional Service organizations

Data proves real-time visibility works
by David Hofferberth, Service Performance Insight

For decades, information technology providers have touted the benefits of how their solutions improve real-time visibility. They say their solutions access data faster to improve decision-making. But talk is cheap. While few would argue with this construct, the question is, “How much more efficiency does real-time visibility provide?” We’ve explored this question for the past seven years in our annual Professional Services Maturity Benchmark. Now we can quantify the advantages of real-time visibility.

Cover_2014PSMB_smIn the latest benchmark, 238 professional services executives shared the level of information visibility they had across their organization. The figure shows that approximately 10 percent said they had complete information visibility for making decisions in real time. Still, what does this do to improve the bottom line in professional services?  Level of visibilityWe decided to consider only those 10 percent of the organizations (about 30 firms) who said they had complete information visibility and compare them to the rest. Table 1 highlights a few differences.

The data shows that organizations with high levels of visibility grew and expanded their client base much faster. They accomplished this feat by having a better win-to-bid ratio. This means that for every 10 bids they submitted, they won about one more bid because of a more efficient and effective bidding process.

Real-time visibility comparisonWhen an organization grows and expands the client base faster, it also improves in other aspects. Employees want to work for fast-growing organizations because they feel secure in their jobs, and they should be able to take on more responsibility, learn more and get paid more as they move up within a growing organization. Because these organizations expand faster, there’s less time for administrative overhead. As a result, the percentage of billable time increases significantly. This leads to a much higher revenue yield per employee of over $25K annually. Higher per person revenue helps the organization expand and grow profitably. No one wants to work for an organization that faces financial challenges or loses market share.

The table also shows professional services organizations (PSOs) with high levels of visibility wasted less money on overhead because they stayed aligned and focused. Employee attrition went down significantly for these organizations. And we all know that knowledge workers are the true assets of a PSO. The net effect is a much more efficient organization, resulting in fewer cost overruns and 3 to 5 percent more in net earnings.

How to improve real-time information visibility

What is the potential for information visibility within professional services? Most departments have their own solutions which offer real-time visibility for particular tasks. For instance, sales and marketing personnel use client relationship management (CRM) solutions to manage the pipeline and better understand the services being sold and the price.

Likewise, those responsible for delivering services use professional services automation (PSA) solutions in order to better manage resources and service delivery. It ensures they meet timelines and project profit margins.

The problem is that PSOs only operate at maximum efficiency and effectiveness if the information available to one department — such as sales, marketing or services delivery — is also available to others. This helps departments work together to make sure the entire organization realizes more success.

No doubt, the department responsible for services delivery and human resources would prefer to see what deals are in the pipeline and what their potential bid price is. This information helps ensure they have trained resources available at the right cost to deliver the services. If this information isn’t available at a detailed level, the organization can’t efficiently build its bench in order to start work on time.

Likewise, the sales organization must have visibility into the resources available so it can focus sales efforts on selling projects that best match resource capabilities. Therefore, profits go up.

The impact of real-time information on goals

Having real-time information helps PSOs react faster and make the necessary changes to succeed. It also allows them to more accurately plan long-term initiatives based on the latest information. For example, executives typically look back a quarter or two to determine where they have or haven’t been successful and where they should invest.

Many organizations, however, struggle to look at the prior quarters because the information may not be available for several months. Thus, the lack of real-time information hampers the ability to accurately spot marketplace trends that might impact service strategy. Real-time information prevents surprises. Executives can compare information taken from this week, last week and several prior weeks to precisely determine where to focus future efforts.

Take advantage of the information infrastructure

We believe that using an integrated information infrastructure improves organizational visibility across the entire PSO. It becomes more relevant in light of all the new technologies, such as smart phones and tablets, which provide information access from almost anywhere and at any time. Now, executives, project managers and employees who deliver services have immediate access to any project-related data or changes in priority. They can immediately shift their focus to the most critical issues facing the organization.

No longer do employees have to make multiple phone calls to multiple people to get the message out. The results speak for themselves in Table 2. It reveals a few of the benefits of using integrated solutions.

Integration Drives PerformanceNotice that PSOs without a CRM solution have a deal pipeline of approximately 161 percent of the current quarter forecast. This means they have slightly more than 60 percent more work proposed than is expected to be completed in the quarter. Unfortunately, most of the work in the pipeline won’t be won or will have a start date much later than the current quarter. Therefore, PSOs should have a pipeline of at least 200 percent. This is double the amount of work that could be completed in the quarter.

Those organizations with CRM solutions have a pipeline of 216 percent. But if an organization integrates CRM with a core financial management solution such as enterprise resource planning (ERP), this jumps to 230 percent. It gives the organization a greater confidence margin, which allows the team to craft better proposals.

This analysis applies to PSA solutions in terms of how having integrated solutions further improves the benefits as opposed to having a non-integrated solution. Integrated human capital management (HCM) solutions also yield similar results. The outcome is that this increase in broad, real-time visibility across the PSO helps everyone work with the same information and, therefore, align resources to achieve optimal results.

The proof is in the real-time pudding

Few people doubt the importance of real-time visibility, but they want to see theory backed up by fact before pursuing it. We have monitored this key performance indicator for seven years. All the numbers prove real-time visibility improves performance.

PS executives who want to expand the organization rapidly and operate at high levels of both project margin and organizational profitability will want to do everything within their power and budget to provide the needed visibility to collaborate effectively.

To accomplish this feat, PSOs must use their information infrastructure to their fullest advantage. It’s a powerful tool that lets them adapt to current conditions as quickly as possible to reach and exceed their organizations’ goals.

Announcing the 2014 Best-of-the-Best Professional Service Organizations

What Does It Take for Professional Services to Excel in 2014?

By Jeanne Urich, Managing Director, Service Performance Insight

Learn from the Best-of-the-Best

For the past five years, Service Performance Insight has conducted in-depth analyses of the top 5 percent of PS Maturity™ benchmark participants to uncover the reasons for their superlative performance. After a careful audit of their survey responses and in-depth interviews with lead service executives, the top performing organizations have been named “Best-of-the-Best.” The top 5 percent of firms scored 20 or higher on a scale of 25 on the PS Maturity Model™.

BestoftheBest2014

According to “The 2014 Professional Services Maturity Benchmark,” out of 238 participating organizations, 13 firms significantly outperformed the benchmark average by excelling in all five service performance dimensions: leadership, client relationships, human capital alignment, service execution and finance and operations. With much higher profits and more satisfied clients, these firms outperformed their peers and the benchmark average.

Meet the 2014 top performers:

  1. Campus Management provides robust, elegant and cost-effective software solutions for higher education institutions. Campus Management is a four-time winner.
  2. TOP Step Consulting provides consulting, implementation and training for Professional Service operations and software. TOP Step Consulting is a five-time winner.
  3. Logical Design Solutions, Inc is a strategy and business solutions consulting firm that envisions and designs emerging business ecosystems. LDS is a five-time winner.
  4. TopDown Consulting is a leader in designing, implementing, and deploying EPM solutions.
  5. SmartERP provides innovative, cost-effective, and configurable solutions and services to common business problems on the Oracle PeopleSoft platform.  Two-time winner.
  6. e4 Services, LLC is a healthcare information technology consulting firm specializing in clinical, hospital information management and revenue cycle services.
  7. Agencyport Software builds software solutions that the world’s top insurance carriers use to engage with their product distribution channels and technology partners.
  8. Charles River provides an end-to-end solution to automate front- and middle-office investment management functions across asset classes on a single platform.
  9. EAC Product Development Solutions  provides tools and services to help companies get products to market faster.
  10. Varrow provides technology solutions for virtualization, storage, managed services and disaster recovery through advanced consulting and design services.
  11. The New Office is a leading NetSuite solution provider specializing in helping businesses improve processes and collaboration.
  12. Informatica Corporation is a leading independent provider of data integration, data quality, and big data software and solutions.  Two-time winner.
  13. Trimble creates unique products and solutions incorporating positioning technologies that help customers streamline workflows and analyze complex information.

2014BoBComp

The table compares the 13 Best-of-the-Best performing professional services organizations to the other 225 in this year’s survey. The size of the Best-of-the-Best organizations is much smaller than the average firm in the benchmark. Six are embedded PS organizations within software or software as a service companies, five are IT consultancies and two are management consultancies. Several of the IT consultancies derive a substantial portion of revenue from the resale of hardware and software products in addition to high value consulting.

Unlike previous years, only three of the top firms grew PS revenue more than 25 percent in 2013. One surprising finding is that three top performers grew annual revenue less than five percent and two actually experienced a decline in PS revenue. Yet all of the best delivered high levels of profit and client satisfaction. It is interesting to note that not a single winner this year came from an embedded SaaS PSO. Times sure have changed as in past years embedded SaaS PSOs tended to garner top honors. Not this year. This is because SaaS software firms have shifted the charter of their professional service organizations to focus on client adoption regardless of the impact on PS profit.

While the latest Best-of-the-Best were smaller in size, they grew their workforces at a much higher rate than the others. They also had a higher percentage of billable employees, and depended much less on third party resources. These companies prefer to recruit and deploy talented staff without relying on subcontractors. This translated to higher levels of employee and client satisfaction.

One of the more exciting discoveries is that female leaders are at the helm of four of the top performing companies. Female CEOs are disproportionately represented in the Best-of-the-Best compared to the PS industry. Although there are few female PS executives across the industry, they’ve proven they’re capable of turning their companies into high performers.

Summary of PS Maturity™ benchmark results

Unlike prior years, this year’s best had fewer employees than most firms. Despite their size, they’ve become leaders in specialized markets. Because of their market dominance, they spend less on sales and marketing, and invest more in employees and clients. Their reputations for delivering high quality results manifest in repeat business and referrals.

One-quarter of this year’s best have female executives, a trend that should continue with more women joining the professional services ranks. Their people-centered leadership styles work well in the PS sector.

As these organizations grow, it will become more difficult to maintain their collaborative and innovative cultures. Focused organizations with solid leadership, engaged employees and a strong information infrastructure can overcome stiffer market competition and most hurdles they face. Congratulations to the 2014 Best-of-the-Best on delivering outstanding performance in 2013!

How does your organization measure up? Get your copy of the 2014 Professional Services Maturity Benchmark now. Cover_2014PSMB_sm

Are your organization’s numbers moving in the right direction?

2014 Professional Services Maturity benchmark preview
by David Hofferberth, Service Performance Insight

Based on completed Professional Services Maturity benchmark surveys to date, we at SPI Research expect 2014 to be a strong year for professional services growth. So far, year-over-year revenue growth in the market is 12.6 percent, compared to 11.5 percent last year. If this rate holds, it will be the third consecutive year of annual growth in excess of 10 percent, showing the professional services market has fully recovered from the recession and is in the midst of a big growth surge!

The talent factor

profit 12 2013But we wouldn’t say everything is rosy in professional services, as PS executives continue to convey their difficulty in finding, hiring and retaining highly qualified professional services employees. Last year, we identified a talent cliff as a result of the market losing baby boomers and the struggle to replace them with a supply of qualified individuals with the appropriate science, technology, engineering and math (STEM) skills.

We expected this to be an issue for the next five to 10 years, and nothing has changed in last year’s assessment. For years to come, talent management will be the number one issue. In 2011, only 76,376 engineers and 43,072 computer and IT majors graduated from U.S. universities — not nearly enough to fill demand.

So far in this year’s benchmark, the average number of PS employees is 359. This figure is significantly higher than in the last three years, when organizations averaged approximately 220 employees. We haven’t had a higher average professional services size since 2009. All indicators show that PS firms are hiring and growing at an unprecedented rate.

Five Service Performance Pillars

Before digging into 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 that drive organizational performance.

The core tenet of the model is PSOs achieve success by optimizing five Service Performance Pillars:

  1. Leadership. This pillar represents the unique view of the future and the role the service 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. This pillar includes sales, marketing and partner relationships and effectiveness.
  3. Human capital alignment. This pillar focuses on recruiting, hiring, retaining and motivating a high-quality consulting staff.
  4. Service execution. 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. Level 5 optimizes and aligns all elements of the PSO for continuous improvement. On average, only 5 percent of PS organizations achieve Level 5 performance.

Each Service Performance Pillar has guidelines and key performance measurements that correspond to levels of maturity, which provide a roadmap to service performance excellence. The following sections highlight some of the latest survey findings.

Leadership

As expected, the latest scores reveal employees feel more confident about leadership and the PSO’s future. For the past three years, PSOs have shown solid growth, thus increasing confidence and optimism. It’s clear from the higher growth rates that employees feel positive about the direction the leadership has taken to get there.

On the flip side, the talent cliff has yielded two challenges: 1) increasing sales and marketing and 2) meeting financial objectives. PSOs are struggling with finding qualified employees, which could slow growth rates and profits. We expect resource management to play a larger role in 2014, as PS leaders must maximize their resources. Unfortunately, that won’t be enough. They must find, hire, train and retain a qualified workforce. Doing this could be difficult considering the low graduation rates for STEM majors.

Client relationships

For the third consecutive year, PSOs are growing in excess of 10 percent annually. Although we see their sales pipelines increasing to one of the highest levels ever, we also see that it takes almost 10 percent longer — about 105 days — to close deals compared to last year. The bid-to-win ratio, however, remains constant. It measures the number of bids accepted out of every 10 submitted. Currently, the bid-to-win ratio is at five, the same as last year’s.

One change that’s evolving is the movement toward fixed fee engagements as opposed to the more traditional time and materials engagements. The two types of engagement are close to even. Because PS executives demand more and receive greater control over their services spend, we expect fixed fee to be the dominant type soon. This evolution will force PSOs to concentrate on better service delivery and scoping projects properly.

Human capital alignment

Because of the talent cliff, we anticipate PSOs to look at their own employee base, investing in the needed skills for the organization to grow and prosper. Although specialization remains important, PSOs must have more agility and versatility in order to maintain high levels of billable utilization and keep employees motivated. Talent management will become an increasingly important aspect in the marketplace.

Since talent management will be the most important issue for the next decade, we asked questions related to the age and gender of the professional services workforce, as Table 1 shows. Currently, the average employee is 38 years old, and two-thirds of the employees are men, presenting several interesting trends.

First, most might think of someone in professional services as a grey-haired business guru, but the fact is the majority of the workforce is made up of young, energetic professionals, just a few years removed from college. With the average age in professional services approaching 40, it signifies an older employee base than our initial expectations.

Second, not too long ago, men dominated the professional services market. If someone said 90 percent of the workforce was comprised of men, most people would have believed it. Data says this market has changed, and the emergence of women in the consulting ranks has opened up greater opportunities and viewpoints. We doubt the ratio will be 50-50 in the next few years, but it could get there over the next decade as more opportunities evolve for women.

Table 1: Age of Professional Services Workforce

t1 01 2013

 

 

 

 

 

 

Heading into 2013, one area concerned us, and that was employee attrition. So far, the predictions remain accurate, as attrition lingers around 9 percent, when it was only 7.2 percent last year. We’ve seen this rise in the past five years and expect to see the trend continue as the economy improves.

Service execution

PSOs continue to keep average billable utilization at more than 70 percent. This translates to more than 1,400 billable hours per year per consultant. While 75 percent or higher would be better, the past two years have shown the strongest average utilization in the benchmark’s seven years.

On-time project completion may be a potential problem, as it went from nearly 79 percent down to this year’s 75 percent. Considering most of the other services execution metrics have improved, this key performance indicator most likely correlates with the talent cliff. The market cannot afford for on-time completion to go down for it will ultimately reduce growth rates, profitability and client satisfaction.

Finance and operations

We’ve been monitoring two other critical key performance indicators: 1) annual revenue per billable consultant that looks at the efficiency and effectiveness of the consultants delivering services and 2) annual revenue per employee, which highlights the effectiveness of managing the workforce.

To date, revenue per billable consultant sits at $190,000, down from $206,000 in 2012, a notable decrease that needs close monitoring. The good news is that the revenue per employee has risen from $168,000 in 2012 to $178,000 this year, an indicator that PS executives are moving to get their houses in order.

2014 crystal ball

We’re expecting 2014 to be another banner year in the professional services market. Yes, in spite of the talent cliff negatively impacting the future growth for many PSOs and increasing attrition. Count on seeing changes in the next year with the need for mergers and acquisitions to grow firms. Stay tuned.

What Are the Essential KPIs for Professional Services Organizations?

How to pick the right ones out of hundreds of possibilities
by Jeanne Urich, Service Performance Insight

With the growing contribution and significance of services to circlekpithe bottom line, effectively monitoring, measuring and managing the services business has become critical. But with more than 200 metrics to choose from, where does an executive start?

Running a professional services organization (PSO) is complex. It’s a game that must be won with singles and doubles, not home runs. Thus, it’s imperative to know which key performance indicators are essential, the ones PSOs must continually measure, and the ones that are nice to have but not essential. Figure 1 shows the essential key performance indicators and Table 1 defines each KPI.

Figure 1: Key Performance Indicators — the Essentials

Quads

The challenge for services executives is how to balance customers, employees, partners and operations. Excellent services leaders spend 50 percent of their time with customers, partners and the sales organization and 50 percent with employees and operations.

Table 1: Standard Key Performance Indicator Definitions

KPI Table

The challenge comes in continually capturing new business while ensuring revenues and costs remain aligned, all while providing consultants with the tools they need to deliver high-quality projects. Service is a balancing act requiring effective selling and quality project delivery at the same time.

These are definitions and descriptions for the most important levers that organizations can pull to improve professional service revenue, margin and customer satisfaction.

Revenue: Revenue starts with services sales or bookings, which convert to clean backlog once all required contracts, master service agreements and statements of work have been completed, signed and approved. Resources are then applied to work the services backlog. Billings occur based on contract terms: time and materials, fixed price, milestone, deliverables, etc.

The ability to recognize revenue will be determined by the firm’s accounting practices. The Sarbanes-Oxley anti-fraud law has imposed a complex set of accounting rules on organizations, requiring executives to understand contract obligations upfront to avoid revenue recognition problems later.

Gross margin: Margin must be measured at several levels. Most organizations use subcontractors and lower-cost offshore resources for services delivery. Subcontractors provide a lower-cost variable workforce and provide a rich source of margin. Systems integrators must closely monitor hardware and software pass-through revenue and margin. And finally, since PS is based on applying highly skilled professionals to deliver project revenue, the most important measure is direct labor margin.

Subcontractor margin, hardware and software pass-through margin, and direct labor margin all add up to produce gross margin. For even the best-run PSOs that command high bill rates and high billable utilization, it is difficult to consistently sustain a services gross margin greater than 50 percent.

Regional margin: Most services organizations measure regional and line-of-business profit and loss in addition to the global PS income statement. Depending on a company’s accounting practices, corporate overhead costs may be apportioned to the region or line of business or kept in a corporate overhead cost center.

For example, if a company requires a 20 percent PS net contribution margin and its corporate overhead is 20 percent, it will need regions to produce a 40 percent margin.

Services margins are typically lower in EMEA than in the U.S. due to the increased cost of the following:

  • Fringe benefits: Employee fringe benefit costs for health and benefits range from 22 to 25 percent in the U.S. but may be as high as 40 percent in EMEA, plus many countries include an expensive car allowance.
  • Vacations and company holidays: In EMEA, typically four weeks’ vacation and 12 or more holidays compared to two weeks’ vacation and 10 company holidays in the U.S. This extra non-billable time is somewhat offset by an expectation of higher billable utilization in EMEA.

Net contribution margin: The true differentiator for professional services profitability is how the practice manages below-the-line costs. Embedded PSOs within product companies typically produce a net services contribution margin between 10 and 40 percent. According to the Service Performance Insight 2013 PS Maturity benchmark, average reported net margin (EBITDA) for independent firms was 15.6 percent and for embedded PSOs, it was 23 percent.

Typical overhead expenses (as a percent of total PS revenue) include:

  • Direct labor expense (40 to 50 percent): Direct labor cost as a percent of total revenue.
  • Fringe benefit expense (6 to 10 percent): Fringe benefit expense as a percent of total revenue.
  • Subcontractor expense (7 to 15 percent): Subcontractor cost as a percent of total revenue.
  • Sales (2 to 20 percent): Includes all direct sales headcount and fringe benefits plus non-billable business development travel and expense, commissions, incentives, and sales training.
  • PS engineering and PMO (1 to 2 percent): This includes all PS engineering and PMO headcount; fringe benefits; and expenses such as labs, tools, delivery training and project reviews.
  • Marketing (1 to 2 percent): This encompasses all services marketing headcount and marketing expenses, such as Web, PR, advertising, trade shows, sales training, customer satisfaction survey, references and services packaging.
  • IT (1 to 2 percent): Comprises all IT capital expense, depreciation and headcount costs.
  • General and administrative (5 to 20 percent): This includes PS corporate management, facilities and non-billable travel.

Most PS organizations underinvest in PS engineering and services marketing and overinvest in non-billable management overhead and non-billable travel. Sales expenses may be hidden as non-billable time for key managers and solution architects. As a PS firm grows and matures, investments in dedicated services engineering, project management office, knowledge management, marketing and sales can pay huge dividends by making services delivery more repeatable and efficient and services sales more effective.

Customer satisfaction: For product companies, one of the primary raison d’etres for a professional services business is to produce reference customers. This is a crucial measurement area, yet it’s often overlooked. Unless the organization is very large, typical customer satisfaction loyalty surveys are not granular enough to showcase delivery problems.

No matter how small the organization, executives should create a global project dashboard to continually monitor project health. SPI Research recommends at least quarterly project reviews with defined criteria for red, amber and green, plus ongoing knowledge sharing to continue to improve intellectual property and standardize the project delivery life-cycle methodology.

Workforce plan: The lowest common denominator is the health of the services delivery organization. Billable headcount represents an organization’s brand and reputation and its services delivery capability and revenue potential. From inception, executives need to quote tiered bill rates by skill level and measure employee utilization — both billable and non-billable.

SPI Research recommends creating an organizational stack ranking showing profit and loss by person. Executives may find 80 percent of company revenue and profit is produced by 20 percent of the workforce, which means it is imperative to identify the top revenue producers and ensure they are recognized and rewarded!

Resource ownership: An interesting dilemma arises when regions or practices own the fully loaded cost of consultants. This produces a disincentive to resource sharing. Methods to overcome resource hoarding include central resource management and cost or revenue sharing for loaned consultants.

Utilization: Organizations calculate utilization in many different ways. In the U.S., the standard definition is based on 2,080 available work hours per year — this translates to 260 available workdays per year in EMEA. Most standard utilization measurements subtract company holidays (10 in the U.S. and 12 or more in EMEA). The standard available starting-hour calculation in the U.S. is 2,000 and the standard available days in EMEA is about 240.

Primary differences in utilization definitions emanate from the varying treatment of non-billable hours for internal projects, customer satisfaction issues or business development (in the numerator) and whether non-billable personal time off is excluded from the denominator. Some organizations measure billable utilization as the actual number of billed hours divided by the total available hours (including non-billable roles), while other organizations report billable utilization based only on their billable roles and exclude all of the hours of their non-billable staff.

Regardless of a specific utilization formula, it is important to develop a standard utilization definition and to publicize and consistently measure it throughout the organization.

Recommendations for improving financial performance

With increased global competition for business and resources, consulting organizations must continually improve. These improvements cut across every aspect of the organization, and all departments must work together to achieve services performance excellence. Executives need key performance measurements, integrated business applications and a plan for continual advancement.

In sum, there are many levers for improving financial performance. Thus, executives should pick three to five key metrics to improve each year and watch the money grow!

The 2014 Professional Services Maturity Benchmark

Review 2013 to prepare for 2014
by Dave Hofferberth, Service Performance Insight

We are preparing to begin our seventh annual Professional Services Maturity Benchmark survey. Much has changed in seven years, as the economy went from boom times to bust almost overnight. In the past two years, we have seen the professional services market regain momentum to traditional 10 percent-plus annual growth. While on the surface this growth gives many PS executives optimism about the economy’s future, it comes with a few caveats.

Dealing with lackluster results

2013Review.gifWhile the professional services market has grown more than 10 percent annually for the past two years, many professional services organizations still experience lackluster results. Professional services growth tends to be a leading indicator of the health of the overall economy because PS experts help organizations navigate change and growth while improving efficiency.

Although a long time coming, the North American market is finally stabilizing and recovering while the Europe, Middle East and Africa regions continue to traverse its sovereign debt crisis and China’s turbulent growth slows. Uneven market expansion combined with increased pricing and regulatory pressures have upped the ante regarding PSO efficiency and effectiveness.

Facing the talent cliff

Second, the professional services market is at an interesting juncture in terms of talent. The looming “talent cliff,” in particular. Research shows that professional services organizations are finding it increasingly difficult to find, hire and retain highly qualified staff with the skills necessary to succeed in a demanding market. In the U.S. and other developed countries, workers with requisite science, technology, engineering and math education and skills are becoming increasingly scarce. Furthermore, older workers with these skills are retiring at a never-seen-before pace.

With immigration being a sensitive topic for politicians and business leaders alike, many PSOs are going offshore to less developed regions to find personnel with adequate skills. Regardless, for the professional services market to grow, it will need to incorporate a more active role in the development and retention of its talent. In the upcoming survey, we will closely explore this topic, as it can affect the future of the overall economy.

The combination of a talent shortage and return to double-digit revenue growth have driven both billable utilization and the percentage of employees who are billable to higher levels than the past six years have seen. While these results show PS executives are more focused on eliminating overhead and non-billable staff time, there is a point at which voluntary employee attrition due to burnout and demand for higher compensation and benefits will begin to hurt these organizations.

Packaging services

Another perennial area of concern and attention are all of the activities associated with the marketing, packaging and selling of services. Independent and embedded PSOs constantly look for rainmakers who combine industry and domain knowledge with the ability to grow business relationships and a book of business. These rare individuals are not made overnight. Drive and innate business acumen must be cultivated over years, if not decades, to produce consulting leaders who can effectively develop new business.

While the ability to find and retain qualified consultants is still of primary concern, all PS executives must constantly keep their eye on sales. Their focus is to create services that clearly demonstrate value to their clients, and to do it repeatedly. This evolution has given rise to the demand for packaged services, which our research began to discuss a few years ago. The alignment between marketing, sales and services has never been more important.

Conducting business planning

Another area of concern is professional services business planning. Typically, at this time of year, PS executives begin their focus on next year’s goal setting. While the organizational charter might not change from year to year, each year brings new challenges and opportunities in the professional services industry. Clients combine our annual benchmark with their own assessments of strengths, weaknesses and opportunities. The net result is the creation of a strategic and tactical plan for growth and improvement.

A look at the Professional Services Maturity Model

The core tenet of the PS Maturity Model is that service- and project-oriented organizations achieve success through the optimization of five Service Performance Pillars:

  1. Leadership. Based on vision, strategy and culture, this looks at how executives create a vision and supporting strategy and lead the organization to achieve.
  2. Client relationships. This area is based on how the organization markets and sells services while focused on growth and client retention.
  3. Human capital alignment. This area looks at how the organization hires, develops, manages and retains its workforce.
  4. Services execution. This area considers how the organization delivers services efficiency and quality at the forefront.
  5. Finance and operations. This area is based on how the firm manages itself from a financial perspective, as well as on its reliance on information technology to support all operations.

Within each of the pillars are guidelines and key performance maturity measurements. These guidelines cut across the five service dimensions, or pillars, to illustrate the benefits of business process maturity. This study measures the correlation between process maturity, key performance measurements and service performance excellence.

The Professional Services Maturity Model is specifically targeted toward billable PSOs that either exclusively sell and execute professional services or complement the sale of products with services.

The difference between maturity levels

The model has five levels of maturity. It begins with level one, where the organization operates in a heroic manner. And it goes up to level five, where the organization operates in a structured and repeatable mode of continuous improvement, eliminating much of the uncertainty and waste that negatively impacts other firms. Level five performance is very difficult to attain, as it should be. However, it’s generally worth the effort as highlighted in organizational profitability.

Organizations that operate at levels one and two average approximately 6.7 percent net profit, whereas those operating at levels four and five average almost 30 percent. The difference is significant. Higher levels of profitability naturally allow the firm to hire and retain the highest-quality employees, command the highest billable rates, and have money left to invest in growth, which in professional services is critically important to long-term survival.

Maturity is determined through alignment and focus both within and across functions. For example, although financial measurements are of primary importance, they are equally weighted and correlated with leadership and sales and quality measurements to ensure organizations improve across all dimensions, not just in terms of financial performance. However, if the organization is profit-motivated, as most are, increasing maturity levels do show up in significant bottom-line profit.

The formula for sustainable success

Six years of results and insights gained have confirmed the original hypothesis that services organizations must develop a balanced and holistic approach to improving all aspects of their business as they mature. The emphasis on individual service pillar performance shifts as organizations mature. Excellence in only one particular service performance pillar does not create overall organizational success. Rather, it’s the appropriate balance and alignment within and across performance pillars that ultimately leads to sustainable success.

More than 1,500 firms have participated in the PS Maturity Model Benchmark since its first year. These organizations are global and come in all sizes and shapes. However, the consistency that exists among all of them is their focus on delivering project-based services, and generally all are for-profit or part of a profit-driven product organization.

Many of the firms, especially in the consulting sector, are heavily focused on growth and organizational profitability. But many of the embedded services organizations, such as those responsible for implementing hardware and software sold by the parent company, are more focused on areas such as sales, client retention and expansion. In other words, their mission is not necessarily to drive margin.

Pick up a copy of the survey

For many organizations, completing the annual benchmark is a rite of passage. These organizations’ executives understand the value they gain from its insight. It helps them better prepare their organizations for the challenges that lie ahead. Please take the time to download a copy of the benchmark survey so you can better understand the value this research could bring your organization.

How to Create a Billable Consulting Culture

What makes service transformations succeed?
by Jeanne Urich and Dave Hofferberth of Service Performance Insight

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One of the hardest, but most rewarding change efforts, is building a “billable consulting culture.” Sure, every professional service (PS) firm wants to increase the number of billable consultants, the number of billable hours and the consultant’s hourly rate. But how do PS firms build a culture so these behaviors are intrinsic?

According to a McKinsey 2010 survey of 2,512 executives, successful organizational transformations share the following characteristics:

  • Clear, measurable and aspirational targets to guide the transformation plan and initiatives.
  • A clear transformation structure or plan based on a thorough current-state assessment.
  • Employees engaged in the “need for change” and involved in identifying detrimental underlying mind-sets; employees empowered to develop and participate in the change effort.
  • Clear leadership focus on building capabilities while changing mind-sets and culture.
  • A sense of urgency maintained through clear, positive communication.

Why change?

Every PSO has a unique culture, typically reflecting executive leadership style and values. As the organization matures, people who stay take on aspects of the culture and accept it as the standard. If the current culture isn’t fostering company growth and encouraging employees to reach “billable” goals, the culture may need a renovation.

In our experience, there are three primary levels of service organization transformation or change, and each level represents significantly greater complexity and organizational culture change:

  1. Straightforward performance improvement. This typically involves maturing business processes and systems to improve repeatability and scalability while reducing costs. It does not require significant change in the business model or the way people work; instead, it focuses on streamlining and improving core business processes and systems.
  2. Significant new growth. At the next level of complexity, the organization seeks to expand into new service lines, geographies or capabilities, either organically or in combination with acquisitions. This transformation involves developing a growth strategy and adding new skills and capabilities along with new business processes and systems to accommodate and accelerate growth.The hardest part of this type of transformation is developing a clear and compelling strategy. If the strategy is sound, execution will be exhilarating and will continually build momentum.
  3. Organizational cultural change. Service organizations undertake a major transformation when the current business model no longer fits the required new business model or when dissatisfaction with current sub-par performance starts to reach crisis proportions. PS organizations undertake this type of transformation when they move from cost centers to profit centers or from on-premise to software as a service (SaaS) business models.

The company’s original staffing model may be changing to become a high-value consulting model. Or perhaps the embedded PS organization started as an adjunct to product development and is morphing into a true billable PS model. Or maybe the organization began as a sales enabler or customer support organization and is now becoming a profitable billable consulting organization.

Whatever the reason for the change, one of the most difficult and rewarding service transformation efforts is shifting the way people behave and work. To undertake a significant transformation effort, the amount of pain from continuing with the status quo must be substantial enough to warrant and drive a cultural change effort.

Creating a billable consulting culture

Leaders of most PS firms know that the most powerful predictors of overall PS success are not bill rates, discount levels or utilization. In fact, the SPI PS Maturity Benchmark results prove it is “confidence in leadership,” “strategic alignment of goals and measurements,” “ease of getting things done” and a culture that empowers creativity and collaboration that marks the difference in high-performing organizations.

Organizational culture is the unwritten customs, behaviors and beliefs that determine the “rules of the game” for decision-making, structure and power. Culture is based on the shared history and traditions of the organization combined with current leadership values. In effect, culture dictates “the way we do business here” and models the organizational survival tactics that facilitate assimilation and personal success.

When organizational culture is strong, employees do things because they believe it is the right thing to do and the company will reward them for their actions. However, if the current culture was developed to support an anachronistic business model, which must be changed, getting at and changing the underlying employee mind-set can be a daunting task.

Because service organizations are 100 percent people-based, creating a billable consulting culture in sync with the new mission and charter of the service organization is of paramount importance in any change effort. Successful service transformations engage the workforce in defining issues and creating and enacting improvement initiatives. “Top-down” improvement programs rarely work in PS organizations unless they engage leaders throughout the organization to define problems and participate in the solutions.

Defining the transformation vision

Humans don’t like change, and the older we get, the more stuck in our ways we become. PS employees are human beings first and billable consultants a distant second or third. They are only willing to alter their mind-sets if they see the point of the change and can envision why it might be good for them and how they might benefit from growing or adapting to take on the change.

Why change? Develop a sense of urgency by confronting reality and realizing the status quo is no longer an alternative. The “why now” must include the benefits of success as well as the penalty for failure.

Leadership must come clean with the sins of the past, which led to the current crisis. If the service organization was originally created to do something different — staffing, adjunct to engineering, sales or partner enablement — and is now aspiring to become a high-value consultancy, transformation leaders should acknowledge the past and explain why it no longer works for the future.

Frankly, too many successful, billable PS organizations delight clients and achieve respectable financial results to operate a money-losing, client-dissatisfying organization. If this is the status quo, the organization must face the very real possibility of going out of business or being replaced.

Where to? This involves painting a clear and compelling vision of the future. If employees cannot visualize the new “promised land,” they will not be willing to undergo the terrors of the journey.

Here, using industry examples and benchmarks help define the possibilities for the future. But, at the heart of every successful service transformation, the organization paints a new and unique future state business model.

Examples include unique partner enablement advisory consulting services to ensure vendor involvement and oversight for partner-led projects; first-mover migration strategies with unique “centers of excellence;” “two-in-a-box” onshore/offshore models to provide the best of on-site accountability and control with the cost advantages of near-shore or offshore resources or leading product sales with strategic business value analysis capabilities.

What’s in it for me? Leaders must translate the “need for change” and the “benefits of change” into a personal and compelling picture of the new work required. This is a typical failure point for many change efforts because employees are not engaged in defining the change or the role they will play in making it happen.

Often, consultants battle a losing product quality war. They face working obscene hours to overcome product defects or to hide missing product functionality. If a not-yet-ready-for-primetime product is the root cause of runaway projects, employee attrition and lackluster financial results, a key transformation initiative may involve creating interlock between services and engineering. In this scenario, senior solution architects may become the core change initiative owners to provide feedback to engineering. As a result, additional investments in pre-release quality assurance or train-the-trainer programs led by consulting experts may produce real change and improvement in both the product and consulting engagements.

Driving behavioral change

Once employees understand what’s in it for them, multiple interlocking elements and structures must all be in sync to drive and support the new behavior of creating a billable consulting culture. PS leaders must:

Empower action. Here is where the rubber hits the road. Employees must be enfranchised in both defining the reasons for change and the scope and impact of the change itself. For change to happen, employees must have the opportunity to practice the new work and see role models of the new behaviors. Employees need to experience and internalize the change personally.

A good example of moving toward a billable consulting culture is for senior project managers from around the world to be part of a service transformation focused on improving repeatability and scalability. This initiative team may be responsible for creating and rolling out a consistent, global methodology or defining how employees will store, share and use knowledge. If the transformation involves moving to a streamlined, centralized resource management model, core managers may own the selection and roll-out of the new resource management application including local training and consistent adoption.

Create pilot wins. Significant and lasting change will not happen overnight, nor do organizations have the luxury of abandoning their current business processes in favor of a new model. This is why successful transformations focus only on a few, critical initiatives.

If a catalyst for the transformation is poor client satisfaction and runaway projects, key solution architects and program managers can become the owners of creating a project management office (PMO) charged with improving quality initially on the largest, highest-risk projects. Once the pilot is successful, the core transformation initiative team can turn the PMO pilot into a new way of doing business to ensure quality and repeatability across all projects.

Communicate constantly. Significant change initiatives run the risk of starting strong, filled with passion but losing steam or dying completely over time. For a transformation to a billable consulting culture to succeed, the reasons for the transformation must be clear, and the PS firm must reward and celebrate consistent progress towards the new state and desired billable consulting behavior.

Quarterly global calls allow staff to review transformation initiative progress and reconfirm why the transformation is critical. Transformation plans and time for initiative teams to accomplish transformation tasks become part of the organization’s fabric. Field rotational assignments are the norm to ensure widespread leadership of key transformation initiatives and projects.

Implement broadly. Companies should only undertake transformations if senior leadership is committed to making significant and lasting change. Once the transformation occurs, engaging employees throughout the organization in understanding, defining and driving change is the only way for a service transformation to succeed. The focus must be on big issues:

  • Lackluster financial performance.
  • Dissatisfied clients.
  • Failure to achieve growth objectives.
  • Ineffective systems, tools and processes inhibiting growth and scalability.
  • Transitioning to a billable consulting culture.

Only a few (no more than three), broad, well-supported transformation initiatives should be part of the first year plan. After defining the key attributes of the new billable consulting culture, the company must support them with reward, recognition and compensation systems as well as recruiting and on-boarding practices.

For the new billable consulting culture to become “the way we do business here,” all of the human capital processes must support and reward the new desired behavior. Managers must give change-resistant employees an opportunity to understand the requirements of becoming billable consultants and enable skill training and mentoring. Celebration and reward for highly billable consultants must become the norm.

Fostering a billable consultant culture

Effective leaders model the values and behavior they expect from their employees. They work with their cross-functional counterparts to develop a shared vision of the future and the role the service organization will play in achieving that vision. They then create clear goals and measurements that drive alignment and empower employees to act and make decisions.

Management must provide clear and open communication to enfranchise employees to become part of the solution rather than the problem. Because employees emulate leaders, it is critical for them to demonstrate and reward a billable consultant culture. That way the culture will not be top-down, it will flourish organization-wide.

Stop the Bleeding!

Get back to profitability through focus, analysis and action
by Jeanne Urich and Dave Hofferberth, SPI Research

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The past few years have been tough on professional service (PS) providers. A changing economic climate, lost clients, project changes and cancellations have taken their toll on the professional service sector and its clients.

During these turbulent years, many PS firms have taken on greater proposal risk to keep the firms moving along and to generate cash flow. Now that there are signs the economy is moving out of its doldrums, it is time for many of these same firms to take a serious look at their project portfolio and determine where they stand.

The goal of this exercise is to evaluate both projects and clients to determine how to increase profitability by removing risk, eliminating underperforming work and ensuring any new work meets stringent guidelines for strategic organizational alignment, a preferred client base and greater profitability.

Evaluate your portfolio

It sounds easy, but sometime PS executives fail to evaluate their portfolio of ongoing and proposed work on a regular basis. Every current and potential project should be analyzed (using a portfolio management tools and project reviews) to see where potential issues might lie.

With the turbulence of the past few years, executives may be shocked to learn they have imbalance in their project portfolios. While even the best firms have a few dogs and legacy skeletons in the closet, losers might see more than expected — with serious negative consequences for margin and cash flow.

Every dollar lost on a runaway project actually represents at least 1.2 (assuming a 20 percent profit run-rate) times that in future opportunity costs.

The devil is in the details

A high-level evaluation of your portfolio might uncover which projects are out of sync, but it probably won’t provide the necessary (why) detail on how the work moved in a negative direction.

The next exercise should be evaluating the project to determine where it went wrong, and take corrective action if necessary. Sometimes work is proposed to meet longer-term strategic goals — new client acquisition, new market entry, expanded competency or client share of wallet and therefore, profitably might not have been the primary goal when work began.

In many cases, the work initially became unprofitable due to miss-set client expectations or poor estimates with too many hours spent in the early phases, or later on through scope changes, underlying product issues or taking on client tasks with little consideration as to their overall margin impact. In any event, PS executives should immediately embark on a process to “right-size” client expectations and deliverables, perhaps shedding some of the work, or subcontracting to another partner with a lower cost infrastructure.

In other cases, PS executives should conduct a series of meetings with the client to remediate the problems and get more money. Legal action may be the last resort, but legal advice is an important consideration if the project has fallen too far out of scope, time or cost. When projects run amuck, chances are slim client satisfaction will ever improve so it is often best to cut losses by terminating the contract.

Bring in a financial analyst

Many PS executives have turned to financial analysts as their firms have grown and become more complex. Financial analysts are responsible for developing and implementing policies and procedures to help PS organizations more efficiently and profitably operate business. Initially, just one competent financial analyst can bring structure to financial reports, and also bring in the tools to help PS managers at all levels better run their practices.

Once reporting is in place, PS management should continually monitor specific key process indicators (KPIs) for improvement, and take appropriate action when necessary. Obviously when projects go awry, or when the work proposed entails too much uncertainty and risk, management should pay immediate attention to fix the issue and to determine if a systemic issue caused the problem in the first place.

The PS organization should routinely (once a month) evaluate the overall portfolio and specifically focus on the 5 percent of projects that offer the most risk and complexity. Follow-up to these meetings is also critical to ensure corrective action has been taken and remind all management that every project must be profitable. With a serious monitoring, initiative chances are fewer projects will become problematic.

Getting back on track

Getting back to profitability is job number one! Even if your organization is marginally profitable, working to improve profits should be of continual concern to PS executives.

While most PS executives routinely meet with their management team to evaluate overall performance, few get down to the details often enough. These details can take a firm from slightly profitable to very profitable. The key is continual focus and dedicated resources to make it happen.