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The proof is in the numbers
by David Hofferberth, Service Performance Insight
It’s nearly impossible to read any article on leadership and come to the conclusion that leadership does not matter. Therefore, most of us already acknowledge leadership’s importance, but few of us have been able to truly quantify its benefit.
For the past seven years, Service Performance Insight has analyzed leadership metrics in our annual Professional Services Maturity Benchmark. We ask eight core questions, which are subjective in nature yet provide significant insight into the importance of something as nebulous as leadership.
We asked professional services executives to rate the following aspects of their organization in terms of how well they operate on a 1 to 5 scale (1: not well to 5: very well). The questions include:
- The vision, mission and strategy of the professional services organization is well understood and clearly communicated.
- Employees have confidence in PS leadership.
- It is easy to get things done with the PSO.
- Goals and measurements are in alignment for the PSO.
- Employees have confidence in the future of the PSO.
- Leadership effectively communicates with employees.
- Leadership embraces change; we are nimble and flexible.
- Leadership focuses on innovation and is able to rapidly take advantage of changing market conditions.
The net result of these questions is a score ranging between eight and 40. We analyzed the results of the 2014 survey thus far with more than 100 responses and segmented the responses into those organizations that averaged at least four out of five on all questions against those averaging less than four. In other words, we put the organizations into two groups: those with strong leadership characteristics and those lacking them. Table 1 compares some of the most important key performance indicators between the two groups and how much it changed from the previous year.
Table 1: Key Performance Indicator Comparison
The table highlights some distinct advantages of strong leadership. PSOs with leaders who truly lead the organization — with high levels of communication and collaboration — grow their organizations at a much higher rate than those lacking these qualities.
With strong leadership, employees understand what’s required of them, and can go about conducting their daily business with the confidence their work meets corporate objectives. Strong leadership helps employees get on the same page working toward a common goal. With this knowledge, employees are more productive, ultimately delivering higher levels of client satisfaction and profitability to the organization.
Communication is key
While all KPIs are important, some tend to be more so than others. Table 2 shows how organizations where leadership does a good job of communicating with the workforce outperform the others. These organizations excel in the area of communicating the PSO’s vision, mission and strategy.
Table 2: KPI Comparison Between Effective Communicators and All Others
Also notable in this table is that those organizations with the strongest leadership achieve leadership KPIs better than all the others by more than 16 percent.
One area not covered is that as organizations grow in size, the effects of leadership become less statistically significant. Obviously, large organizations need strong leadership. However, communication suffers when large organizations are dispersed globally and employees have minimal exposure to the core leadership team. To compensate, leaders in large organizations must ensure their regional executives have the skills necessary to translate corporate goals and strategies to their workers, and have strong listening skills to give remote employees the feeling they’re an important part of something special.
Seven years of research has shown that executives must offer a clear and consistent strategy, backed by explicit expectations and goals that every employee can aspire to meet. The greater the clarity, the easier it is for employees to interpret the underlying meaning and then work to meet them.
Professional services remain employee-centric
The survey process results indicate the importance of continuing to strive for new and innovative solutions to problems. Innovative organizations provide employees with the confidence to know the organization will be around for many years to come, and they will be continually challenged and personally grow as the organization expands.
The broader economy, such as manufacturing and retail, may be just beginning to improve, but the professional services market has now had three consecutive years of more than 10 percent growth. This growth, while good for the bottom line of PSOs, will ultimately come at the price of higher attrition levels, as employees — with skills in demand — see a vibrant economy for themselves. Therefore, they will look to make more money and for greater challenges. This aspect of the work is another reason why leadership is vital.
Happy employees, who might otherwise believe there are other options available to them, will more than likely stay at their current organization if they are confident in its future, and see a path for them to personally develop and grow. Leaders must continue to offer that vision of the future, which excites and motivates the workforce to continue with the organization.
The importance of leadership
Leadership styles continue to be debated and analyzed for their effectiveness. Research thus far shows that leadership does matter, and it can be quantified. PS has many other attributes that allow some firms to perform better than others. This annual benchmark attempts to provide PS leaders with the insight to improve all aspects of the organization. However, there’s no doubt that success begins with leadership, and leaders must perform at high levels for the organization to succeed and move ahead.
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
But 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:
- 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.
- Client relationships. This pillar includes sales, marketing and partner relationships and effectiveness.
- Human capital alignment. This pillar focuses on recruiting, hiring, retaining and motivating a high-quality consulting staff.
- Service execution. Execution represents all aspects of project execution: resource management, project management, knowledge management and delivery methods and tools.
- 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.
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.
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
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.
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.
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
While 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.
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:
- Leadership. Based on vision, strategy and culture, this looks at how executives create a vision and supporting strategy and lead the organization to achieve.
- Client relationships. This area is based on how the organization markets and sells services while focused on growth and client retention.
- Human capital alignment. This area looks at how the organization hires, develops, manages and retains its workforce.
- Services execution. This area considers how the organization delivers services efficiency and quality at the forefront.
- 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.
Leadership types and roles must match the organization
by David Hofferberth and Jeanne Urich, SPI Research
Great service leaders must wear five hats simultaneously. They manage and inspire the human side of the business — developing a vision, walking the talk and building a great team. They’re constantly on the lookout to find ways to improve execution by streamlining the business while searching for new avenues for growth. They have an innate sense of what tomorrow’s business should be, and steer their organization into a position to prosper even more in the future.
Being a leader in any industry is both exciting and challenging, but in professional services (PS), walking the line between leading and doing is especially difficult. PS leaders must play a number of roles, which include:
- Strategist: Defining the vision, mission and associated strategies to reach the firm’s objectives.
- Salesperson extraordinaire: Meeting and developing close relationships with the most critical clients and prospects.
- Industrial engineer: Understanding and codifying business processes to streamline and improve service execution.
- Cheerleader: Motivating the workforce to improve quality, cost and client satisfaction in both good and bad times.
- Financial guru: Managing the organization’s profit and loss and cash flow to reach desired financial objectives.
The bottom line is that it’s not easy being chief cook and bottle washer. In professional services, executives must contend with an entirely people-based business, and therefore, client concerns associated with quality do not come down to a poor manufacturing process or defective materials. Instead, they fall on inadequate skills and processes associated with client development and project delivery or both. PS leadership is a constant balancing act between marketing and selling new business while striving to deliver quality engagements.
Overall leadership objectives
Regardless of which hat the PS leader wears, he or she must meet several overarching objectives to drive the organization forward. The leader must:
- Set the vision and strategy and develop the service organization’s mission and charter by effectively teaming with the cross-functional leadership team.
- Develop a service strategy to capitalize on chosen markets and customer segments.
- Ensure goals and measurements align with and support the strategy.
- Foster new ideas and methods in response to changing requirements.
- Ensure effective bi-directional communication to maximize collaboration.
- Improve visibility and overall efficiency and effectiveness on a frequent basis.
In the dynamic PS market, standing still means falling behind. There’s never time to rest because PS organizations must account for every hour, and non-billable hours are forever lost unless they were invested in building future capabilities. PS organizations are constantly in motion, delighting clients while simultaneously looking for new ones. Change is constant as new technologies, client business problems and execution challenges never take a holiday.
Based on SPI’s in-depth research of over 600 billable professional service organizations, fostering a consulting culture built on both the desire to solve client problems and establish business value for doing so requires a unique leadership skill set. Tipping the balance too far in the direction toward aggressive business development at the expense of clients and staff or too far in the direction of delivery excellence without a profit motive are extremes to avoid.
What type of leader are you?
Based on our research and experience, we believe PS leadership competencies must change and advance as the organization grows and matures. We have identified four major leadership profile categories based on the size of the organization and its focus. These profiles concentrate on the content of the job (competency required) as opposed to the leader’s personality style. As organizations grow, the complexity of the leadership position increases. Furthermore, the role shifts from doing to managing to leading and ultimately to inspiring.
To be effective, a leader’s competencies must match the organization’s requirements and maturity level. For example, entrepreneurs successfully juggle many different problems but may be averse to consistency, operational controls and measurements. They enjoy the chaos, flexibility and heroic nature of startup environments. They’re not afraid to roll up their sleeves and jump into the fire, but their aversion to authority and standards isn’t a good match for larger, more-established organizations.
As with personality profiles, leadership competency profiles are not right or wrong. They accentuate characteristics that must be present to be successful in the current role while envisioning and growing both personal and organizational skills for the firm of the future.
Generally, PS leaders fit in one of four main types of leadership profiles:
The Entrepreneur. This type of leader generally does well in start-up environments. Entrepreneurs are doers, meaning they have their hands in all parts of the organization, from the development of tools, technologies and business processes to the management of clients and finances.
They tend to have stronger technical skills than business or leadership skills. Because they must convince potential employees and clients to join in, recruitment and ramping up are important to them. Growth and early client references are top priorities.
The General Manager. This leadership profile best suits larger organizations where they replace chaos and “anything goes” with planning and building efficient operating processes and guidelines. Because a growing organization requires a general management skill set, leaders need to develop strong financial and operational skills. At this stage, the organization may potentially expand both globally and by line of business. Thus, the PS leader must understand and institute new organizational models and global structures to ensure consistency, quality and efficiency.
The general manager must be able to delegate plus recruit and develop strong geographic and functional leaders. At this phase, it’s critical for leaders to invest in business and strategic planning to help the organization focus on the most promising markets for growth. Large organizations require this leader to be an effective communicator and planner as well as take an active role with premier clients.
The Specialist. Specialists focus on a market niche or specialize by technology or vertical market. Vertical-market or business-process experts typically lead highly specialized boutique firms. The specialists at these firms possess unique knowledge and skills, and differentiate themselves by hiring elite subject matter experts.
Often, many consider the firm’s leader an industry guru who can attract like-minded specialists to concentrate exclusively on the uncommon problems the firm specializes in. These firms and their leaders often excel in domain knowledge and market thought leadership along with the development of exceptional intellectual property.
The downside of specialists is that they may have poor business and operations skills. They may not be able to scale the organization or diversify into new markets. When the visionary leader leaves, the firm may be in trouble because it has not developed broader horizontal skills and competencies.
The Strategist. As the organization grows to a point where it’s big, global and has established a strong brand, it needs a strategic leadership style to continue to build the brand and assure clients and prospects that they have made the right decision in selecting the firm to help them make “bet your business” decisions.
Even though at every stage of growth, the leader should lead, inspire and communicate, as the organization grows both in strategic and geographic impact, effective internal and external communication becomes mandatory. Strategic leaders create effective leadership teams, prioritize and sequence improvement initiatives carefully, redesign organizational structures to make good execution easier and most importantly, integrate all these tactics into one coherent strategy.
Leaders are multi-dimensional
Great leaders have distinctive qualities regardless of the type, size and maturity of the organization they run. Intelligence and the ability to create and communicate a vision, mission and strategy make up an incredibly important part of the job. Leaders must have a unique blend of capabilities, seemingly divergent, that on the whole inspire confidence. For instance, they must have strong people skills to listen to and empathize with employees and clients, yet they must be decisive and hard-nosed when they need to take action.
Successful PS leaders don’t need to have superior skills in every dimension, but must be clear, deliberate, fair and consistent. They must ensure the organization aligns with the overall strategy and direction of the company. Then, they develop goals and measurements to support that vision and constantly monitor, measure and improve every facet of the operation.
Great services leaders must be multi-dimensional. They drive strategy and execution at the same time, but they can’t do it alone. Leaders are only as good as their teams, so their focus is always on team improvement and enrichment. They convey their message to their top performers and hold those persons accountable. They rely on good practices and measurements to improve and document their performance, and to allow them to concentrate on the problems and issues only they can solve.
Leadership affects organizational performance
by Jeanne Urich and Dave Hofferberth of Service Performance Insight
According to our 2011 Professional Services Maturity Model Benchmark report, out of 214 participating organizations, 12 firms (5 percent) significantly outperformed the benchmark average by excelling in all five service performance dimensions of leadership, finance and operations, human capital alignment, service execution and client relationships.
The top 12 firms significantly outperformed their peers and the benchmark average with almost double the revenue growth and 258 percent higher net profit.
Best-of-the-best PSO comparison
The chart below provides a comparison of professional services organizations (PSOs), based on the data we received.
SPI Research interviewed the top firms to discover their best practices and reasons for their superlative performance. Although each firm has a different business model and operates in different industries, we discovered fascinating similarities in several key areas.
Professional services maturity excellence starts with leadership
The leaders of the top 12 firms had significant prior experience creating and running PSOs. Many of them started as consultants with the Big 5 or in professional services (PS) for large technology companies. Based on years of experience, they bring deep vertical industry business process and consulting domain knowledge to their current leadership role.
Almost all the leaders of the top organizations have been in their current role for many years. They were either responsible for creating the organization or turning it around. Every leader relentlessly focuses on client and employee satisfaction. They “lead from the front” by setting an example of the types of relationships they value with ingrained respect and support for their clients and employees. In smaller organizations, the leader is the chief rainmaker and may bill a considerable number of hours at the firm’s highest rate.
A clear differentiator between the “best” and the “rest” is that PS has a seat at the executive table. PS is an integral part of the company’s strategy, regardless whether the PS organization is embedded within a product company or run as an independent service business. In all cases, PS leaders operate at a peer level, not a subordinate level, with their sales counterparts. Furthermore, in every single situation, the primary product sales organization is compensated for selling PS.
SaaS PS organizations lead the way
In the 2010 benchmark report, independent firms significantly outperformed captive service organizations. However, embedded service organizations have come roaring back in the 2011 benchmark report!
A big change this year is that the best-performing embedded PSO is Workday, a fast-growing software as a service (SaaS) provider of human resource management solutions. Dave Duffield co-founded Workday. He’s also the legendary founder of PeopleSoft and widely known for his attention to the people-side of both his business and the industry.
But the bigger news is that the 19 embedded SaaS PS organizations in the benchmark produced the best overall earnings before income tax at 23.1 percent, compared to eight other industry segments (software, hardware and networking, IT consulting, management consulting, accounting, marketing and advertising, architects and engineers, and other PS) that have an average net profit of 6.4 percent. As we predicted, the shift to running PS as a profit center within SaaS organizations is well under way. It is only a matter of time before all SaaS PS organizations shift to a profit focus.
Leaders are very specialized
One of the most noticeable differences in the top 12 PS organizations is their deep vertical or business-process focus. The top performers focus on narrow and highly specialized vertical industries or business processes. Examples include research and publishing for architects and engineers, merger and acquisition analysis, enterprise portals and intranets, retail price optimization, supply chain asset management, professional service automation, higher education learning systems and financial service investment management solutions.
We believe this intense focus around specific vertical business processes and deep business domain knowledge is the wave of the future for PS organizations. Geographically-focused, horizontal solution providers will find their markets increasingly commoditized and will be forced to compete on price and staffing. Firms of all sizes should start thinking about vertical and business process specialization. Specialized firms offer highly differentiated services, which give them a market advantage. Specialization allows them to command the best rates.
Leaders take advantage of subcontractors and partners
Leaders use subcontractors to a slightly greater extent than the benchmark average (14.5 percent of total revenue versus 11.3 percent), but the big advantage is that they earn 42 percent compared to the average of 29 percent margin on their subs. These leaders have developed tight, mutually beneficial relationships with their subcontractors and partners by treating partner employees the same as their own and insisting on the same level of training and certification.
Leaders provide their methodologies and tools to partners to ensure they deliver every engagement with high quality. This symbiotic relationship results in delighted customers, loyal partners and the ability to quickly and profitably scale as demand increases. Leaders who use offshore resources insist on significant onshore customer-facing time to ensure their offshore resources are knowledgeable of and sensitive to client requirements.
IT investments pay big dividends
A clear differentiator for the top 12 organizations is their investment in IT applications to run their business. Every leading organization has invested in a PSA solution, and they are twice as likely to have integrated their PSA application with their core financial application. This level of integration between their PSA and core financial applications provides excellent visibility to resource scheduling and project profitability so they can quickly respond to changing requirements while delivering best-in-class margins.
In next month’s edition, we’ll discuss the four other performance pillars: finance and operations, human capital alignment, service execution and client relationships.
Lessons from the top 12 professional service organizations
by Jeanne Urich and Dave Hofferberth, SPI Research
The 2010 Professional Services Maturity Model Benchmark reports that out of 225 participating organizations, 12 firms (5 percent) significantly outperformed the benchmark average by excelling in all five Service Performance Pillars:
- Finance and operations
- Human capital alignment
- Service execution
- Client relationships
The top 12 firms outperformed their peers and the benchmark average with almost double the revenue growth and 30 percent higher net profit.
Best-of-the-best PSO comparison
The top 2010 performers
The following professional services (PS) firms have superior PS Maturity benchmark scores:
- The Parker Avery Group is an advisor to retail and consumer packaged goods companies.
- OMNI Consulting Group LLP provides an economist strategy focus for global companies facing technology decisions, from acquisitions to valuation models.
- Accruent provides a comprehensive suite of enterprise location management solutions that help organizations operate their real estate and facilities portfolios as a competitive advantage.
- Verint® Systems is a provider of Actionable Intelligence® solutions and services for enterprise workforce optimization and security intelligence.
- Siemens PLM Software is a global provider of product lifecycle management (PLM) software.
- TOP Step Consulting improves business efficiency and productivity for professional service operations.
- Campus Management provides software solutions for higher-education institutions.
- RightNow® delivers cloud-based software solutions that create superior experiences for customers across the Web, social media and contact center.
- Blackbaud is a global provider of technology and services designed specifically for nonprofit organizations, to improve operational efficiency, build strong relationships and raise more money to support their missions.
- Stellar Solutions is an engineering services company providing end-to-end technical expertise and problem-solving skills to national and international aerospace programs.
- Thot Wave Technologies provides consulting services to help organizations get more value out of information by turning information into thinking data®.
- Maconomy is a global provider of enterprise resource planning business solutions for project-based and knowledge-intensive organizations.
According to Marc Chardon, Blackbaud’s CEO, “Blackbaud partners with nonprofits to accomplish their mission, and our professional services team is a critical part of delivering our complete solution. The 2010 PS Maturity Model Benchmark is an extremely comprehensive study, and we are proud to be named among the best-of-the-best.”
SPI Research interviewed the top firms to discover their best practices and reasons for their superlative performance. Although each firm has a different business model and operates in different industries, we discovered fascinating similarities in several key areas.
PS Maturity excellence starts with leadership
The leaders of the top 12 firms had significant prior experience creating and running PS organizations. Many of them started as consultants with the Big 5 or in PS for large technology companies. Based on years of experience, they bring deep vertical industry business process and consulting domain knowledge to their current leadership role.
Almost all the leaders of the top organizations have been in their current role for many years; they were either responsible for creating the organization or turning it around. Every leader relentlessly focuses on client and employee satisfaction. They “lead from the front” by setting an example of the types of relationships they value with ingrained respect and support for their clients and employees.
Top firms focus on specific vertical business processes
One of the most noticeable differences in the top 12 PS organizations is their vertical business-process focus. In almost all cases, the top performers focus on narrow and highly specialized vertical industries or business processes. Examples: Commercial real-estate management, retail price optimization, professional service automation and call center optimization.
Other top-performing firms focus on recession-resilient industries: not-for-profit fundraising, education learning systems, and aerospace and defense. Only one firm in this year’s best-of-the best is a broadly focused large system integrator. We believe this intense focus on specific vertical business processes and deep business domain knowledge is the future for PS organizations. Geographically-focused horizontal solution providers will find their markets increasingly commoditized and will be forced to compete on price and staffing. We believe firms of all sizes should think about vertical specialization. Specialized firms create market advantage and command the best rates.
PS Leaders have a seat at the executive table
A clear differentiator between the “best” and the “rest” is that PS has a seat at the executive table. PS is an integral part of the company’s strategy, regardless whether the firm embeds the PS organization within a product company or runs it as an independent service business. For the embedded PS organizations, several PS executives have moved into a quasi-COO role and have taken on additional responsibilities for support, engineering or alliances. In all cases, the PS leader operates at a peer level, not a subordinate level, with the sales counterpart. And in all cases, the primary product sales organization is compensated on selling PS.
No partner channel conflict
Another striking characteristic of the “best” firms is that they are often the sole supplier of PS for their company’s products. In other words, they don’t have to deal with partner channel conflict. For the embedded PS organizations within product companies, the percentage of PS revenue as a percent of total company revenue is well over 20 percent and in some cases, as high as 75 percent of total company revenue. These product companies rely on rich PS revenue and margin to fund research and development and/or sales.
Leading from the front is critical
by Jeanne Urich and Dave Hofferberth, SPI Research
What are the five dimensions of professional services leadership? How can you apply them to create and lead a great services organization? How does the importance of each dimension change based on organization size and company lifecycle stage?
The role of Professional services (PS) is changing, and consequently, the talents PS leaders need to be successful are changing. As PS has become a more significant differentiator and revenue source, the role of PS leaders is becoming more strategic. The software as a service (SaaS) model places the company’s entire revenue stream on the shoulders of PS executives since leaders and their team must convert bookings to revenue by successfully deploying new users.
Today’s PS executives have to have superior leadership, sales and operations skills. Technical competency and domain knowledge are important, especially in smaller companies, but the ability to “lead from the front” — to identify, recruit and motivate top performers is crucial.
Professional service leaders must excel in five critical dimensions:
- Strategy, vision and creativity: The ability to forge partnerships, to motivate and inspire peers, employees, partners and customers. The ability to create new ideas and methods in response to changing requirements.
- Finance and operations: The ability to manage profit and loss. The ability to generate revenue and profit while developing repeatable processes.
- Human resources: The ability to attract, retain and motivate employees.
- Technical and domain knowledge: The ability to provide product and domain knowledge and feedback to clients and the company. The ability to develop a “trusted advisor” relationship with clients and develop this capability within the consulting organization.
- Sales, marketing and communications: The ability to effectively communicate with peers, employees, partners and customers to generate and close business and win deals.
PS leaders develop a playbook, a set of orchestrated moves guaranteed to put points on the scoreboard. Here are two “sure-fire” moves for your playbook.
1. Strategy, vision, and creativity — Ensure alignment between corporate and services strategy.
PS leaders must have a thorough knowledge and understanding of how to play the game, and the ability to envision how to play the game in the future to win. They must also have a vision of building the program to meet the demands of stakeholders. That vision must be in sync with their goals and realistic achievements in the short and long-term.
So where do you start? Start at the beginning! The most important and probably the hardest professional service leadership challenge is developing a compelling vision and strategy and then ensuring the executive team aligns with it. An annual strategy “tune-up” and business plan is a critical first step along the road to performance excellence.
Answer the following key questions.
- Who are our target customers?
- What is the business problem they want to solve?
- How does our solution solve their business problem?
- Why do they buy our products and services?
- Why do they buy from us instead of our competition?
- How are we different (and better)?
Now rank the importance of the following service roles.
- Building referenceable clients.
- Assisting the sales organization in new client acquisition.
- Providing service revenue and margin.
- Supporting and training partners.
- Providing product feedback.
- Selling additional products and services to the installed base.
If disconnects exist, now is the time to facilitate a dialogue and come to closure on the service charter and strategy. The strategy may change over time as products and markets mature, so an annual “strategy alignment check-up” is essential to keep the organization focused on the “right” priorities.
2. Sales, marketing and communication — Communicate clearly corporate and services strategy.
Successful leaders must communicate effectively with their team and clients to persuade them that their approach will be successful and beneficial to all. The team has to win as often as possible, minimize losses and learn from mistakes. Successful leaders know their competition and develop winning strategies to defeat them.
Effective sales, marketing and communication never go out of style. Effective sales skills can overcome a host of weaker dimensions. The most important sales and marketing skills required at all lifecycle stages are the ability to effectively articulate the service value proposition, to showcase marquee accounts through customer testimonials and to demonstrate thought leadership through presentations and white papers.
Creating loyal, referenceable customers is one of the most important elements for any company’s future success. Making every client “wildly satisfied” should be a top priority. Client satisfaction is based on setting proper expectations during the sales, proposal and contract process and delivering high-quality solutions that meet or exceed those expectations. Do what you say you will do and always let your client know what to expect — how you will conduct the project, the roles of the project team, timelines, deliverables and the escalation path. Clear and open communication — for good and bad news — is essential.
Another key ingredient is the proper handoff from all customer-facing personnel. Finally, customer satisfaction that results in clients you can reference must be a primary goal for all employees. It is important to consistently and effectively measure customer satisfaction and make it an essential part of client engagements and employee measurements.
Do you know who your best clients are and why they buy? Do you know what it takes to ensure they will continue to buy from your company? Do you make client meetings a priority? Do you solicit feedback and proactively respond?
Create a “top client” program to gain their feedback and commitment. Top client executive advisory boards are a great way to provide connection with your best clients. Each cross-functional executive team member should become an executive sponsor for up to five key accounts and plan to meet with his or her client counterparts at least twice a year. Annual or semi-annual top client executive advisory board meetings provide invaluable feedback. Create a “premier” account program with special benefits — access to engineering, beta programs and premium account management to build client loyalty.
Required leadership traits
There are many other ways for PS leaders to excel. They don’t need to have superior skills in every dimension, but they must be clear, deliberate, fair and consistent. Their most important job is to ensure PS professionals align with the overall strategy, direction and goals, and performance measurements support that vision. Services is a game of nickels and dimes so the effective leader must constantly monitor and improve every facet of the operation.
Great service leaders must be multi-dimensional — able to drive strategy and execution at the same time — but they cannot do it alone. Leaders are only as good as their teams. Their singular focus is always on the improvement and enrichment of their team. They must convey their message to their top performers and hold those persons accountable to deliver. They must rely on sound practices and measurements to improve and document their performance, and to allow them to focus on the problems and issues only they can solve.
Survey says leadership impacts the bottom line
by Jeanne Urich and Dave Hofferberth, SPI Research
Are you sick of hearing about economic gloom and doom? Are you looking for some good news that won’t cost billions of dollars? Good news is right in front us. Even better, it’s something we can put into action immediately, and it won’t mortgage our children’s future. For a project and people-oriented business like professional services (PS), effective leadership is the best and most affordable economic stimulus package available.
Intuitively, we know that best-in-class professional service organizations (PSOs) are based on exceptional consultants. We also know that it takes strong leadership to inspire organizations to achieve greatness. But what we haven’t known until now is the direct impact of PS leadership on the bottom line. We think you will be as astounded as we were to discover that great or poor leadership permeates every facet of PSO performance.
In the 2008 PS Maturity Survey, we asked a series of questions regarding various aspects of professional services vision, strategy and leadership including confidence, clarity and alignment. Strategic decisions set the direction and tone for the PSO and affect all functions because strategy dictates the goals and objectives for the organization, the types of clients to pursue, the types of services to offer and the interrelationship between functions.
In 4th quarter 2008, 170 survey respondents, representing small to large, embedded and independent PS providers were asked how well various aspects of their organization operated (using a 1 to 10 scale: 1, “not very well” to 10, “very well”). Survey results show how various aspects of leadership impact key performance throughout the organization.
Confidence in leadership
Respondents answered whether they had confidence in PS leadership. Two-thirds of the 170 respondents said they had confidence in PS leadership (rated 8 or higher), whereas only 5 percent stated that they didn’t have confidence (rated 4 or less). As confidence in leadership improves, so do most key performance measurements:
- Year over year, revenue growth was 16 percent when confidence in leadership is high, as opposed to only 11 percent when it is low.
- The contribution margin was over twice as high (23 percent vs. 10 percent), when comparing high versus low confidence.
- Annualized employee attrition was almost four times lower (5.5 percent vs. 20 percent) when confidence is high.
- Project on-time delivery was nearly twice as high (76 percent vs. 44 percent) when confidence is high.
We discovered every critical key performance measurement worsens as confidence in leadership diminishes. According to survey results, no other factor has the same profound impact on the overall health and well-being of the service organization. Poor leadership creates a negative spiral effect — poor human capital results (high attrition, low morale, poor employee satisfaction) — which in turn leads to poorer financial performance and low levels of client satisfaction.
Because PSOs rely on the quality and commitment of the consulting staff, poor leadership produces an immediate and long-lasting negative effect. Fortunately, positive changes in leadership can also produce immediate improvements because PSOs exhibit resiliency and are able to heal and regenerate themselves rapidly. Unlike product-based organizations, extremely rapid turnarounds are possible in people-based PS organizations.
Organizational vision, mission and strategy clarity
The survey asked, “Is the vision, mission and strategy of the PS organization well-understood and clearly communicated?” Alignment and clarity are critical success factors in terms of how the organization maximizes its people, processes and capital.
The results were similar to those of “confidence in leadership,” in that PSOs that provided high levels (rated 7 or more) of clarity around their organizational vision, mission and strategy performed at much higher levels than those that did not (rated 4 or less). For instance, when comparing high levels of clarity to low levels, we found that revenue growth (17 percent vs. 11 percent), contribution margin (24 percent vs. 14 percent), and attrition (7 percent vs. 9 percent), were superior when the vision and strategy of the organization were clear.
Clear leadership direction and effective bi-directional communication are critical success factors. Employees who lack an understanding of the service mission, vision and strategy have no ability to work toward achieving it. For embedded service organizations within product companies, the service mission is often schizophrenic. Embedded service organizations must continually walk a mission tight rope, trying to balance product revenue, customer requirements, partner demands and service profit. In worst case scenarios, the service organization is set up to fail because these objectives become mutually exclusive.
Goal and measurement alignment
Another survey question asked, “Are goals and measurements in alignment for the service organization?” Alignment speaks to focusing the organization around core values, reinforcing its purpose and stimulating action to achieve its goals.
Alignment or lack of alignment also has a significant impact on bottom-line performance. Lack of alignment comes from conflicting or too many priorities and is characterized by low levels of empowerment and functional silos or factions. The highest performing service organizations exhibit clarity of purpose and alignment around a succinct set of core values. Effective measurements and compensation reinforce those values.
While the results were not as statistically significant compared to confidence in leadership or clarity of organizational vision, mission and strategy, they were still impressive. We found improvements in terms of revenue growth (17 percent vs. 13 percent), contribution margin (23 percent vs. 19 percent), and employee attrition (6 percent vs. 9 percent), as the organization aligned its goals and measurement systems.
Alignment highlights the importance for PS executives to get a seat at the cross-functional leadership table to ensure the entire corporation understands and supports the role of the service organization. A clear strategy and charter provides a compass for performance and provides the foundation for employee achievement.
Superior PS leaders operate as valued cross-functional team members. They transcend the role of delivering tactical projects and quarterly financial results to become the voice of the customer for the executive team. In turn, the executive team recognizes and acknowledges the true value of exceptional customer service and does not tolerate closing deals that throw the service organization under the bus due to impossible timelines, functionality or cost.
Leadership failure is at the core of the current economic crisis. Early signs of economic recovery, like spring daffodils, are starting to emerge. Renewed confidence in leadership and policy alignment will fuel the turnaround.
The tools for effective leadership, clarity of purpose and alignment exist within all service organizations. By investing in these critical aspects, service organizations can create their own economic stimulus plan.