What Professional Services Must Do to Capitalize on Talent

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By Dave Hofferberth

How Professional Service organizations can staff projects with the right talent

Last month, SPI Research discussed the importance of talent in 2015. This issue will not go away. To improve their talent management strategies, professional services executives have increased the use of human capital management (HCM) solutions. Some of this change is due to the numbers of mergers and acquisitions in the industry — creating larger firms that must invest in HCM — along with the rapid growth of consulting firms in general.

talentThe other change is due to the advent of the cloud and how the new breed of HCM solutions enables PS executives to more efficiently track, monitor and control all aspects of talent management. As the cost of recruitment continues to rise, the ability to better search, find, hire and train the right resources becomes increasingly important.

The need for human capital management
Politicians continue to grapple with employment visas just as universities and K-12 educational organizations endeavor to increase students’ interest in the scientific fields. The lack of sufficient talent with strong analytic backgrounds in science, technology, engineering and math will be the professional service industry’s greatest challenge for the foreseeable future, and of course, it affects other areas of the economy as well. Professional services organizations have a natural advantage in the recruitment of highly skilled individuals, as most offer challenging work in exciting places at high levels of compensation and skill building.

Professional services executives must take advantage of every tool at their disposal in order to drive performance, productivity and satisfaction in the workforce. Many look to information-based tools such as HCM, along with professional services automation (PSA), as well as other social collaborative tools. These solutions offer PS executives greater structure and stability in terms of the quality and timeliness of the work offered, as well as better management of the workforce, which drive higher levels of both employee and client satisfaction.

Why HCM?
HCMPS begins with people, and therefore, on the technology front, we predict HCM systems will increase in importance and usage across the services industry. HCM solutions — 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 PSOs create a high-performance workforce. Key software modules include employee learning, skills tracking, compensation, performance management, policy compliance and succession planning. Each of these applications helps organizations manage personnel growth and development.

HCM benefits the PSO by maintaining a database of skills, benefits and pay rate information that is used for resource scheduling, recruiting and performance and career management. Effective HCM solutions provide rich applications that allow consultants to manage their own careers and skill development (training) and to bid on the projects of greatest interest to them.

HCM solutions provide greater visibility into employee skills, preferences, training and career advancement. They ensure equitable compensation and are an integral component of pay-for-performance and reward systems. Talent management is central to PS performance as the skills and attitudes of the consulting workforce provide tangible evidence of consulting value. And with better management of personnel, a PSO can ensure talent is on staff and available when needed, which helps the organization grow faster. HCM solutions, in conjunction with PSA, drive greater billable utilization, which ultimately results in higher revenue per employee and profitability.

Table 1 shows the results from the past three years of benchmarking professional services organizations. While HCM does not directly impact the sale and delivery of professional services, it does empower the organization to operate more efficiently with the right resources on board, enabling PS executives to focus on clients, service delivery quality, and profit.TAble2

What’s driving HCM’s leap?
Traditional HCM applications for recruiting, performance, learning and compensation are moving to the cloud with new social functionality, combined with employee access for self-managing careers, skills and preferences. The training industry has exploded with innovation, merging learning and skill-building with online video and gaming. In the people-based business of professional services, it is only a matter of time before talent management (HCM) and resource management (PSA) functionalities become intertwined.

Already exciting, new solutions have emerged to seamlessly post job requisitions and skill profiles based on resource demand. Soon vendors and consulting firms will make employees central to their value proposition by designing systems that mirror and automate all facets of the employee lifecycle from recruitment to retirement.

Supporting global workforce flexibility comes with a price and makes it impossible to run a PS organization by spreadsheet. Resource management and HCM applications are mandatory to accommodate global mobility, staffing and career management.

Going mobile
No longer do employers need offices and laptops to stay abreast of their employees. Now, a smartphone or another device is all they need. This tool permits them to be better connected with the recruiting processes and employees’ activities, training and compensation, especially in a dynamic environment such as professional services.

HCM use will increase significantly in the coming years with new cloud-based solutions coming to market that specifically target the management of human capital paired with the need to better manage resources from recruitment and hiring through training and retention. Of the solutions highlighted in the 2015 Professional Services Maturity Benchmark, ADP and Oracle’s Taleo are the two leaders. However, SAP Successfactors, Workday and Microsoft Dynamics are not far behind. These cloud-based solutions are beginning to gain acceptance as professional services organizations realize talent is their most valuable asset.

Recommendations for finding required talent
In order for the professional services market to grow and prosper, it needs more people. While machines may be scalable, people are not. Companies can add capacity by building or purchasing more machinery, but cloning personnel is just not possible — yet. There will be changes to the educational system to provide students with greater skills in the science, technology, engineering and mathematics disciplines, but it might not be enough people to replace the retiring baby boomers.

Human capital management solutions will become a vital part of professional services operations. They have been for some time in larger PSOs, but now have reached the midmarket and even smaller organizations as the needs of PS executives to manage talent increase.

The recruiting process is under the microscope, and PS executives must work more efficiently to improve it. It’s not just about finding the right people. It’s also about ensuring the organization is more targeted in its approach to human capital management. Enlightened firms are building their brands around the unique cultures, competencies and opportunities they provide.  Brand, culture and employee engagement are becoming intertwined and interdependent, mandating increased emphasis on deploying flexible, people-centric human capital management solutions.

The PS Maturity Scorecard – your prescription for success by Jeanne Urich

Keyboard with Improve Your Performance Button.For seven years, we at SPI Research have been benchmarking various levels of operational control and process maturity to determine the characteristics and appropriate behaviors for professional services organizations based on their organizational lifecycle stage. The primary questions we sought to answer when we first conceived the PS Maturity Benchmark in 2007 remain our primary focus today:

  • What are the most important focus areas for PSOs as their businesses mature?
  • What is the optimum level of maturity or control at each phase of an organization’s lifecycle?
  • Is it possible to build diagnostic tools for assessing and determining the health of key business processes?
  • Are there key business characteristics and behaviors that spell the difference between success and failure?

What it takes to become a high-performing Professional Service organization

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The original concept behind our PS Maturity Model was to investigate whether increasing levels of standardization in operating processes and management controls improves financial performance. The benchmark demonstrates that increasing levels of business process maturity do result in significant performance improvements as shown in Table 1.

In fact, we found that high levels of performance have more to do with leadership focus, organizational alignment, effective business processes and disciplined execution than “time in grade.” Relatively young and fast-growing organizations can and do demonstrate surprisingly high levels of maturity and performance excellence if their charters are clear. Further improvements accrue when an organization’s goals and measurements align with its mission, and investments are made in talent and systems to provide visibility and appropriate levels of business control. Of course, it helps if it’s well-positioned within a fast-growing market.

The core tenet of the PS Maturity Model is that services- and project-oriented organizations achieve success through the optimization of five pillars:

  1. Leadership: vision, strategy and culture.
  2. Client relationships.
  3. Human capital alignment.
  4. Service execution.
  5. Finance and operations.

The PS Maturity Model describes maturity guidelines and key performance measurements at each performance level. These guidelines illustrate examples of business process maturity while providing directional advice to move to the next level. This study measures the correlation between process maturity, key performance measurements and service performance excellence.

Taking the first step toward recovery

We’ve all heard about recovery programs. The funny thing is that they all start with you realizing you have a problem, and you’re sincerely interested in doing something to fix it. Recovery is a process that involves several steps. You can’t get to the next one without taking the first one.

The formula for improving professional services business performance has a lot in common with health improvement plans, weight loss plans and alcohol recovery programs — they all rely on an accurate diagnosis of the underlying issues that led to the problem in the first place. Lasting recovery depends on taking measurable steps toward an improvement goal, typically with the help of an expert coach.

One of my favorite expressions comes from Lewis Carroll’s “Alice in Wonderland.” “If you don’t know where you’re going, any road will take you there.” Here’s the conversation between Alice and the Cheshire Cat.

“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where —” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
“— so long as I get SOMEWHERE,” Alice added as an explanation.
“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”

Obviously businesses have more important things to do than wander aimlessly to prove they’re going somewhere. Having a destination and a route in mind is a much better recipe for success.

Building an improvement roadmap

To create lasting PS business performance improvement, here are five simple steps to follow:

1. Realize you have a problem.

Denial is one of the dominant attributes of lackluster business performance. Acknowledging there is a problem is the first step to recovery. The problem may lie in new, fierce competitors who have changed the playing field. It can be rooted in technology shifts which have commoditized cash cow services. The inability to see or seize new market opportunities may be another cause. Or the heart of performance issues may be due to dysfunctional executive relationships and lack of alignment.

You can create an improvement plan after you’ve first assessed the root causes of the problem. Benchmarks are a powerful tool for problem identification. A good benchmark provides an apples-to-apples comparison to other professional services organizations in the same business.

2. Learn about recovery.

Finding a solution is the next step toward solving a problem. In this case, the solution involves learning about possible ways to advance. Diagnostic tools like the PS Maturity Scorecard help firms understand where they are now and what it will take to move up to the next level of maturity as shown in Figure 1. Each firm’s improvement path will be unique, but visualizing the road peers have taken and the timeframes and investments they have made helps chart an improvement roadmap. Processes like the the PS Maturity Scorecard program help organizations avoid unnecessary potholes while focusing on the highest impact strategies.

Figure 1. PS Maturity Levels

Levels

Source:  Service Performance Insight, May 2014

3. Seek expert advice.

Enrolling in any improvement program involves discipline and determination. Expert coaching and advice reinforce positive steps while preventing back-sliding. Having an impartial yet knowledgeable business adviser can help reduce the emotional stress of change.

Organizations are best served by seeking expert advice to develop valuable new growth opportunities before competition or lack of alignment has cornered the firm into a death spiral. Here again, having an empirical benchmark standard provides a fact-based reality check and objective yardstick of the value of improvement. A scorecard like the one shown in Figure 2 is one way to do it.

Figure 2. Measure Service Performance Progress with a Scorecard

Measure-service-preformance

Source:  Service Performance Insight, May 2014

4. Prevent relapse.

As with all programs that require change, participants often don’t allocate the time, money or attention to fully develop and fund improvement priorities. Day-to-day business and tactical issues get in the way of long-term growth strategies.

Let’s face it. It’s hard to change old habits, so the temptation to resume business-as-usual behaviors is strong. This is a crucial stage for long-term, sustainable business enhancement because it defines the future path, whether change is possible and if the executive team is willing to see it through. Cement and reinforce improvement plans with quarterly check-ins and annual check-ups with the help of a coach and roadmap.

5. Maintain business improvement efforts.

Developing a lasting, sustainable growth strategy is hard especially when it involves change and building new management disciplines. The thirst for continuous improvement must become part of the organization’s DNA. Progressing through maturity levels depends on adopting repeatable and sustainable methods, tools and measurement systems.

Permanent business improvement does not happen overnight. The maturity model is not static as it reflects the dynamic and ever-changing PS industry and emerging best practices. Each year, the bar has been raised. Best-in-class performance five years ago may now be considered average. Maturity advancement requires continuous effort to take advantage of changing market dynamics. Preventing business setbacks requires maintaining healthy business measurements and controls.

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

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.

Sales and Services Alignment

How to eliminate gulfs and fix dysfunctions
by Carey Bettencourt, Jeanne Urich and Dave Hofferberth, Service Performance Insight

In a highly competitive environment, a company must successfully differentiate itself and effectively orchestrate the sales cycle. Unfortunately, many times schisms between the sales and services delivery organizations surface during the sales process. This results in deal closure delays or, worse yet, losing the deal.

qualityThe winning formula for sales and services delivery collaboration is based on a combination of aligned business processes and measurements reinforced by a supporting technology platform like customer relationship management and professional services automation. This article examines the root causes underlying dysfunctional sales and services delivery relationships and identifies common business process breakdowns, as well as the path to alignment.

Background

Most organizations struggle with a lack of cooperation between the sales and services delivery functions. Based on six years of professional services industry benchmarking with responses from more than 1,500 professional services organizations, we have discovered that few professional services organizations are satisfied with the relationship between sales and services delivery. According to the 2013 PS Maturity Model Benchmark report, sales effectiveness received a poor score of 6.4 out of 10; marketing effectiveness was worse at 5.2 out of 10.

A lack of alignment and trust between sales and services delivery leads to lost opportunities, miss-set client expectations, underscoped projects and poor resource utilization. Best-in-class organizations have found a way to bridge the sales and services divide to reap rewards in terms of larger pipelines, higher win-to-bid ratios, higher levels of consultant utilization and more satisfied clients.

The complexities of identifying professional services opportunities and developing them into successful client engagements demand a more structured approach to business development and a seamless information flow between sales and services delivery. This ensures opportunities are properly prioritized, scoped and staffed.

While the consulting market currently experiences healthy growth, both up and down markets accentuate breakdowns between sales and services. When fewer deals are available and sales cycles are longer, heightened pressure and a sense of urgency to close deals may exacerbate an already dysfunctional sales and services relationship. On the other hand, when opportunities are plentiful, resource imbalances and heightened risk aversion may also strain sales and services liaisons.

Sources of sales and services dysfunction

Gulfs between sales and services typically emerge in the choppy waters between functions where the overly optimistic sales tide meets the risk-averse services shore. Who, and which function is in charge of piloting client opportunities through these brackish seas?

Typical sales and services breakdowns occur in the following areas:

  • Proposals. PSOs often demonstrate a lack of clarity around which opportunities to pursue, how to create a winning proposal or who is ultimately in charge. Ambiguity can lead to procrastination; excessive bid costs; acceptance of egregious terms; and not enough time, tools or resources to bring all the pieces together into a compelling value-based proposal.
  • Pricing and scoping. In many cases, it’s unclear who has authority for discounting and contract terms. Poorly defined or unknown requirements, weak estimating tools, vague discounting limits, and inadequate or no pricing or contractual reviews contribute to mediocre financial results and unacceptable levels of risk.
  • Forecasting and staffing. Many PSOs are deficient in what it takes to move a suspect to a high-probability deal or how the sales forecast is translated into the resource plan. A lack of alignment and trust are exacerbated by noncongruent sales booking and services margin goals. Unreliable sales forecasts lead to disconnected sales and resource planning processes and insufficient functional interlock regarding opportunities and required staffing. The outcome is the absence of integration between sales, staffing and recruiting, resulting in not enough or too much services delivery capacity.
  • Services execution. Inconsistent communication between services delivery and sales regarding project status often occurs. No project dashboards, improper planning, and poor execution of scope changes and change orders lead to project overruns, nasty surprises and unhappy clients.

Business process requirements for sales and services alignment

A lack of agreement around key business processes that cross organizational or functional boundaries is at the core of dysfunctional sales and services delivery relationships. Issues are typically the result of differing views of the processes, unknown or misused levels of authority, and ambiguity around decision-making and measurements.

The foundation for all high-performing organizations comes from clear business process understanding and ownership tied to congruent goals and measurements. Table 1 illustrates how a simple method of assigning ownership and measurement of cross-functional business processes provides clarity and enhances performance.

t1

The impact of sales and services alignment

Effective sales and services delivery teamwork is at the heart of performance in the services industry. The integration of sales and services delivery business processes and systems is paramount to success.

In our 2013 PS Maturity Model Benchmark report, the “best of the best” embrace sales and services delivery alignment, and their results as shown in Table 2 speak for themselves.

t2

CRM and PSA integration drive performance

As Table 2 shows, integrated customer relationship management and professional services automation applications are key to breaking down the barriers between sales and services by providing accurate client and project information throughout the client life cycle. Running a knowledge and skill-intensive business like professional services with disconnected applications, spreadsheets and email is no longer a competitive option. Efficient execution across core business processes demands visibility, transparency and control.

Ideally, information flow mirrors and illuminates core business processes, beginning with prospecting and extending through the client life cycle. Time, cost, engagement progress and quality are critical elements that must be tracked throughout. Integrated applications provide visibility, alerts and work flow to ensure following of proper steps, securing of approvals and flagging of variances.

Executives and other involved personnel should be able to track information from the initial bid through project completion and invoicing. With this information, both management and consultants can monitor deals to ensure high levels of client satisfaction with acceptable revenue and profit margins.

The integration of PSA and CRM helps the sales organization to better understand the entire client relationship and discover opportunities to sell additional products and services. Sales and services cooperate to decide whether work should be bid, and at what price to win the opportunity and meet margin requirements. Both organizations can share information to be included in the proposal with the appropriate staffing plan and financial forecast as backup.

Accurate information enables the services delivery team to proactively plan and staff projects with the right resources while supporting the sales team in closing opportunities. The executive team is armed with real-time visibility into revenue and costs to support effective decision-making.

The 2013 PS Maturity Model Benchmark report demonstrates the power of CRM and PSA integration as an important foundation for improving sales and services delivery alignment. The benefits of sales and services delivery collaboration speak volumes.

SaaS Professional Services Come of Age

SaaS Professional Services finally finds its footing
by David Hofferberth and Jeanne Urich, SPI Research

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The year 2010 will go down in history as the one that Software-as-a-Service (SaaS) professional service organizations (PSOs) trumped enterprise software PSOs. One of the most significant changes in 2010 has been the dramatic shift of embedded SaaS PSOs from cost centers to profit centers.

Based on changes in accounting policies for multi-element contracts, SaaS software providers were forced to unbundle PS revenue from license subscription revenue. This significant change resulted in most SaaS PS organizations transitioning to become profit centers.

Remarkably, the 19 SaaS PS organizations that participated in SPI Research’s 2011 benchmark survey delivered the highest net profit of all PS sub-verticals 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) with an average net profit of a measly 6.4 percent.

According to Software Equity Group’s Q3 2010 Software Industry Equity Report, “By the close of the third quarter, the annual median trailing 12 month revenue growth rate of public SaaS companies had plummeted to 13 percent from 23 percent a year earlier and 46.5 percent two years earlier.”

Two of the fastest growing SaaS firms, Salesforce.com and Citrix, both grew past the billion-dollar mark. Based on their now considerable size, it is unlikely they will continue to post their early-stage meteoric growth rates. As the SaaS market matures, SaaS providers are making trade-offs between torrid revenue growth and profitability.

The significance of a maturing SaaS market means these firms are starting to focus on running PS more efficiently and profitably. As SPI Research 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.

Turnabout is fair play

In the 2010 benchmark, independent firms significantly outperformed captive (embedded) service organizations, but embedded service organizations came roaring back in the 2011 benchmark! A big change this year is that the best-performing embedded PSO is Workday, a fast-growing SaaS provider of human resource management solutions.

In the past, the best-performing embedded PSOs were always within enterprise software companies, not within SaaS companies that, up until now, had positioned PS as merely a channel to rapidly implement clients so they could secure lucrative multi-year subscription revenue.

The cloud flies high

One of the most interesting trends is the service sector movement towards deploying cloud-based solutions. Both large and small PSOs demonstrate a strong preference for SaaS-based solutions with 39 percent of the organizations expressing a preference for SaaS as compared to 29 percent preferring on-premise applications. The remaining 32 percent had no preference.

For firms planning to move their applications to the cloud, SPI Research found the average timeframe for the planned move was less than two years. This trend is gaining momentum, and SaaS will become the primary method of PS application consumption within five years.

SaaS PSOs take advantage of remote service delivery

One of the primary reasons for the surge in SaaS PS profitability is the fact that these organizations are able to deliver the majority of their projects remotely. This means they can take advantage of lower-cost home-based and offshore resources. Additionally, remote service delivery allows these organizations to achieve much higher billable utilization without the burden of non-billable travel. SaaS consultants and project managers alike are adept at multitasking which means they can handle multiple clients per day.

The trend towards more off-site work has been facilitated by cloud solutions, lower cost offshore and near-shore consultants, client and service provider desire to reduce travel and facility costs, and by the power and ease of use of remote service delivery tools.

SaaS PSOs have a unique advantage in delivering the majority of their services remotely:

  • SaaS PSOs billed the least hours on-site (23 percent) while hardware PSOs billed the most (56 percent).
  • SaaS PSOs reported the highest number of billable hours per consultant (1,399) while hardware PSOs reported the least (1,251).
  • Hardware PSOs spent the most hours per consultant in administration and non-billable project hours (616) while SaaS PSOs spent the least (458).
  • SaaS project managers were able to concurrently manage the most projects (6.8) while management consultancies managed the least (2.7).

Where’s Waldo?

A comparison of workforce location provides insight into the future world of work in the PS industry. SaaS PSOs are a harbinger of the new world of IT services. Although most have headquarters in North America, 30 percent of their PS workforce is located offshore. Most SaaS companies co-locate offshore PS and engineering staff to take advantage of lower cost and the availability of technical skills. The following chart shows hardware PS providers take the least advantage of home-based and offshore consultants (only 13.8 percent of their workforce) while SaaS PS providers take the best advantage of home-based and offshore consultants (45.3 percent).

For SaaS companies, the ability to co-locate PS, engineering and support groups provides unique advantages in assuring new client requirements and customizations are incorporated and supported within a single multi-tenant architecture.  For SaaS companies, co-location of PS, engineering and support improves collaboration and career advancement opportunities.

The dark side of SaaS PS

Unless Saas providers find a better way to capture client requirements and model business process change, the downside of SaaS PSO dependence on remote service delivery shows up in the lowest percentage of on-time project delivery, at 68.2 percent, along with the highest frequency of project overruns in our survey at 23.8 percent. This is significantly higher than the project overruns shown in management consultancies where only 7.3 percent of their projects experience overruns.

Despite the hype, SaaS projects take almost as long (4.6 months with three consultants), compared to enterprise software projects (five months with four consultants) and because SaaS providers generally charge higher bill rates, their projects cost more ($184K on average) compared to enterprise software projects ($154K). SPI Research also found PSOs within SaaS companies reported the highest percentage of billable work that had to be written off in the survey (5.4 percent), while those within hardware and networking companies reported the lowest (1.6 percent).

SaaS providers still have a way to go

Given the “youthfulness” of the SaaS market, as these organizations mature, particularly in estimating, project management, quality and on-boarding,  this improvement should positively impact revenue and profits in the near future. For instance, SPI Research found that because the market is still relatively new, the sales cycle for SaaS providers is significantly higher (110 days) than the survey average (98 days).

Fortunately, many SaaS providers have learned from years of experience in other software markets and have constructed their organizations to succeed in the long run. For instance, SaaS providers showed the highest percentage use of a standardized delivery methodology at 67.5 percent, when compared to the survey average of 57.7 percent. They also demand higher sales productivity, with service sales reps averaging slightly under $1.5 million per year in service quota.

And finally, because the market is relatively new, SaaS providers are expanding their new client base at a much higher rate (50 percent compared to the survey average of 37 percent) than their competition in other markets. This expansion will enable them to continue to grow faster than most of the firms in the survey, who primarily rely on add-on sales to existing clients.

Expect the young Saas to last

Software as a service is no longer a fad. As every industry has begun to rein in runaway technology deployment costs, SaaS appears to be the magic bullet. This movement does not assure all SaaS providers of long-term success because eventually their markets will become commoditized and growth will slow.  But in the near future, they represent one of the hottest sectors of the PS market and are proving SaaS clients are willing to pay high rates for rapid deployment.

SPI Research believes this market has just moved into the hyper-growth phase. If SaaS PS providers can efficiently deliver high-quality services, there is no reason this market will go anywhere but up.

Sales and Service: Separated by More than Just Culture

Boosting sales, profits and performance with automation
by Jeanne Urich and Dave Hofferberth, SPI Research

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In many professional services organizations (PSOs), the sales force appears to operate on an island, with a go-go-go attitude and minimal communication as to what each salesperson is selling, to whom and at what price.

During times of economic uncertainty, many professional services executives focus on two core areas of business:

  1. Increasing revenue generation by adding more sales personnel and bidding on more work.
  2. Reducing headcount in non-billable overhead to meet future margin requirements.

SPI Research’s 2102 Professional Services Maturity Model Benchmark shows that most executives spend more time on the former — working to increase sales.

Service tends to react to sales, but unfortunately cannot optimally staff and execute because it doesn’t fully understand the personnel requirements, time commitments and costs until sales officially sells the work.

While there tends to be executive-level communication between sales and service delivery, the sales force is just so busy, and with so much uncertainty, continual communication generally suffers.

To improve communication and sales visibility, many professional services (PS) executives invest in client relationship management (CRM) solutions to provide some level of visibility to executives. However, SPI Research found that very few of these organizations actually integrate the CRM solution with core financials, or the professional services automation (PSA) solution. This lack of integration creates inefficiency within the PSO, as resource managers and consultants alike do not have the visibility into future work in the skills required to assure they can deliver quality services on a timely basis.

For PSOs that do integrate both CRM and PSA with the core financial solution, the benefits are both quantifiable and lucrative. Taking an integrated strategic approach to core information systems within professional services organizations benefits both the PSOs and their clients.

Client generation takes center stage

During economic uncertainty, PS executives increase their emphasis on client retention and new client generation. They typically expand their services offerings to expand billing opportunities. Even when times are good, these executives spend a good deal of time wining and dining existing and potential clients.

New client generation — and its overall importance to organizational growth — is a main driver of client relationship management becoming widespread in the professional services sector. CRM is the second-most popular business application behind core financial accounting in PSOs.

Client generation is just the beginning of the professional services lifecycle. As a PSO finds new prospects and subsequently generates new bids for work, the PSO must plan for potential project execution if the client accepts the bid. Staff with the specific skill sets necessary to complete the work must be available and ready to go. If resource unavailability delays project initiation, the work might go to another firm, or go away.

A smooth transition between winning a bid and beginning the work is paramount in the development of long-term client relations. Ideally, the PS sales force works closely with the service organization. The communication between the two organizations must involve sharing client information that will help improve the odds of a successful engagement.

As the PSO initiates work and begins invoicing, the project scope must be well-defined and approved by both the client and the PSO. This communication increases the assurance that the client will pay invoices in a timely manner.

Lack of communication creates a cycle of inefficiency

Informal lines of communication have existed within the professional services market for decades. In smaller firms, this communication usually does not cause any major issues. However, as a firm grows, SPI Research sees “cracks in the armor” of communication as the PSO bids with greater numbers of people on more projects.

At a certain point in time, inevitably the PSO makes a mistake, and with too few or too many resources available, projects start off on the “wrong foot” and never seem to get on track. This scenario creates unnecessary tension between the PSO and clients. Unfortunately, having projects not run efficiently usually shows up in reduced future business opportunities with the client.

Ideally, both the sales organization and the service delivery organization see the same information and, therefore, understand the resource requirements and timelines for new service projects. If not, the potential for under-staffing, confusion and ultimately frustration tends to lead to employee attrition.

Apply a holistic approach to the information infrastructure

Professional services executives continue to look at their information infrastructure to determine if their application strategy meets the needs of the organization in terms of improving the core business processes, and offering greater visibility and transparency across the organization, along with information that will hold up under the scrutiny of regulatory audits.

Ideally, information flow mirrors that of the organization’s business processes, beginning with client prospecting and going through the subsequent business processes from bid through sale, resources, execution, invoicing and project close. It is critical during each of these project lifecycle phases that the PSO tracks information associated with costs, time and quality, and flags and moves any projects with issues to a higher level of visibility.

CRM and PSA integration drives performance

Over half the PSOs surveyed by SPI Research use both CRM and PSA solutions. However, fewer than 10 percent actually integrate both with their core financial solution. To better understand how the integration of CRM and PSA increases organizational performance, SPI Research analyzed 118 billable service organizations with between 30 and 700 employees. These PSOs are large enough to need CRM and PSA technology, but not so large as to deploy it selectively across different regions and practices.

When comparing those organizations that had both CRM and PSA but did not integrate them, versus those that did, SPI Research found significant improvements in overall performance, including:

  • Annual revenue from new clients: 49 percent with integrated CRM and PSA, 41 percent without integration — meaning the firm sells to a larger client base.
  • Bid-to-win ratio: 6.19 (integrated CRM and PSA) vs. 5.25 (no integration) — meaning a greater win ratio.
  • Billable utilization: 81.4 percent (integrated CRM and PSA) vs. 70.2 percent (no integration) — meaning more hours billed and subsequently greater revenue.
  • Earnings before income taxes, depreciation and amortization (EBITDA): 28.2 percent (integrated CRM and PSA) vs. 26.9 percent (no integration) — meaning increased profitability.

These results, and many others, show the integration of both CRM and PSA makes a dramatic impact to bottom-line operational and financial results.

Add CRM and PSA to your repertoire

Connecting sales and service makes sense, but unfortunately rarely happens due to cultural and incentive clashes. While direct communication is desirable, in many cases, PSOs have little time to provide sufficient information to accurately convey potential project needs and personnel.

At a high level, PS executives should answer important questions associated with sales and service, some of which include:

  • What is the expected of margin of the work?
  • How long will it take to complete the work, and at what points will the firm generate invoices?
  • Is the work on time, and is the client happy with its progress?

Executives and other relevant personnel should track the information from the initial bid through the project completion and invoicing. With this information, both management and consultants can monitor the projects to assure high levels of client satisfaction with acceptable profit margins.

The integration of CRM and PSA has created a channel of communication where both entities can stay informed and up-to-date on potential and current work. This direct communication not only yields higher productivity, but also shows up in higher profits, a more satisfied workforce and content clients

Leadership — the Best Economic Stimulus Package

Survey says leadership impacts the bottom line
by Jeanne Urich and Dave Hofferberth, SPI Research

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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.

Confident leadership

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.