Professional Services Maturity™ Benchmark Reveals Stormy Seas Ahead

Find out the latest trends in the professional services industry

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2015 Professional Service Maturity Benchmark Preview

By Dave Hofferberth, Managing Director, Service Performance Insight
Get a Peek into How the Professional Services Market Is Performing

We’re currently collecting surveys for the 2015 Professional Services Maturity Benchmark. The early results are in, and professional services growth is slightly above 10 percent year-over-year. This preview is based on almost 40 completed surveys, a nice chunk of the 250 surveys expected by December.Look into the future

While the results are not final, they shed some light into the overall health of the professional services market and what we might expect in 2015. Read on to get a glimpse into the future.

Five performance drivers
Before highlighting the latest findings, let’s review the key functional areas that we call pillars. Our hypothesis is that professional services organizations consist of five pillars or business functions, which drive organizational performance.

The core tenet of the model is professional services organizations achieve success by optimizing the following five Service Performance Pillars:

1. Leadership. Represents a unique view of the future and the role the services organization will play in shaping it. Leaders develop a clear and compelling strategy, providing a focus for the organization to spur action. They also set the tone and direction for the organization.
2. Client relationships. Includes sales, marketing and partner relationships and sales effectiveness.
3. Human capital alignment. Focuses on recruiting, hiring, retaining and motivating a high-quality consulting staff.
4. Service execution. Represents all aspects of project execution: resource management, project management, knowledge management and delivery methods and tools.
5. Finance and operations. The financial backbone of a services firm that addresses planning, revenue, margin, billing, collections and IT infrastructure.

Five levels of maturity are defined to show progression for each pillar. It starts with Level 1, where processes are immature and employee roles are broad, and progresses up to Level 5 where the organization, methodologies, tools and governance are synchronized and structured. Organizations at Level 5 optimize and align all elements of the PSO for continuous improvement. On average, only 5 percent of PS organizations achieve Level 5 performance.

Each Service Performance Pillar has guidelines and key performance measurements that correspond to levels of maturity, which provide a roadmap to services performance excellence.2015Quest

Client relationships: New clients still drive the market forward
For the past five years, professional services organizations have averaged between 30 to 40 percent of total revenue from new clients. Unfortunately, that number currently hovers around 30 percent, well down from its high of almost 40 percent just a few years ago.

New client revenue as a percent of total revenue, is an excellent barometer of year-over-year growth, and is highlighted by the roughly 10 percent annual growth the market is currently experiencing. Although 10 percent growth is positive, we would prefer to see it average around 15 percent signifying significant market growth.

Human capital alignment: Billable utilization drops
Professional services organizations that have completed the survey average 67 percent billable utilization, which translates to 1,340 billable hours out of a 2,000-hour year. Ideally, they should average 75 percent (1,500 billable hours per year).

This difference of 160 annual billable hours reflects an approximate $32,000 loss in billings per consultant. Much of this comes from the low billable utilization of the embedded services organizations — primarily software and hardware providers — who average roughly 60 percent billable utilization.

Service execution: Larger projects, better on-time delivery
In terms of man-months, the organizations that have completed this year’s survey show longer project durations, with 24 man-months in 2014, up from 19 in 2013. The number of staff on a project has increased significantly, while the length of the projects is slightly down.

Also, 80 percent of the projects have been completed on time, the highest level we have seen in the past five years. This KPI bodes well for quality project delivery and ultimately project margins going forward.

Finance and operations: Financial success yet to be determined
With the exception of revenue per employee, which highlights the effectiveness of the overall organization, most of the financial key performance indicators are down from last year. However, there is one notable exception: organizational profitability. That’s gone up.

Our analysis of this area shows that organizations have reduced non-administrative costs and, thus, improved overall profitability. The surveys to date indicate a concern that margins are slightly lower, and therefore despite all the success in delivering projects, there’s room for improvement.

Finalize plans for 2015
As professional services organizations enter the final quarter of the calendar year, it is imperative they start the annual planning process to create an effective and executable business plan. It should highlight strengths and weakness, and enable everyone to focus on service areas where they can deliver the highest growth and profitability.

Many executives will use their services portfolio management — such as professional services automation or project portfolio management — solution to understand their most strategic services, along with their best strategies for growth and profit. Armed with this information, they can determine adequate staffing and support levels in order to meet their projections.

They should also create a budget highlighting the costs and revenues associated with the services they forecast to deliver. Obviously, change is continual, and this budget should be reevaluated on a quarterly basis, at a minimum. Leading firms use their IT infrastructure to continually monitor performance and make adjustments as necessary in real time, rather than waiting an additional month or quarter which may be too late.

Professional services performance to be continued …
The net result of the surveying so far has shown professional services organizations have weathered the uncertainty of the economy over the past year, but are still not out of the woods completely. It will take significant effort to improve operational efficiency and organizational productivity. Thus far, an emphasis should be placed on sales and new client penetration.

These organizations must also continue to deliver projects more efficiently and effectively, focused on on-time delivery and overall project margin. The year is not up yet, and we have surveys coming in every day. So far, the glimpse shows some promise for the following year.

We expect 2015 to be another solid year in the professional services market despite global uncertainty and the talent cliff negatively impacting the future growth for many PSOs with increasing attrition. Count on seeing changes in the next year with the need for mergers and acquisitions to grow firms. Stay tuned.

Cover_2014PSMB_smTo receive a free copy of the detailed benchmark report when it’s completed, please take the PS benchmark survey now. (Valued at $995.) For seven years, PS executives have gained insight and comparative statistics into how PSOs operate. They use the groundbreaking research to chart their course to service excellence. Don’t let your organization fall behind. Complete the survey by December 1 to get a free copy of the results that will help you grow your business.

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

Iss1205SPIimage

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

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

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

By Jeanne Urich, Managing Director, Service Performance Insight

Learn from the Best-of-the-Best

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

BestoftheBest2014

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

Meet the 2014 top performers:

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

2014BoBComp

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

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

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

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

Summary of PS Maturity™ benchmark results

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

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

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

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

What’s Changing the Professional Services Industry in 2014?

You need to know about a new acronym that’s smack dab in the middle of it all
by Jeanne Urich, Service Performance Insight

Get ready for some SMAC! No, it’s not some new designer drug. It’s a new acronym for the technology trends dominating the services landscape in 2014:

  • S: Social media
  • M: Mobility
  • A: Analytics and big data
  • C: Cloud

Mar PSJSMAC and its underlying technologies have caused a seismic shift in technology buying. It moves power and control to consumers and business executives and away from the IT domination of the past. New buying centers mean big business for nimble service providers.

It also means traditional IT product and feature selling has been eclipsed by social media-fueled buying behaviors and perceptions. These new technologies usher in a wave of consumer and line of business buying power, making both the sale and delivery of consulting services more complex.

How SMAC is changing professional services

End users and line of business buyers lack the sophistication of IT buyers, as they tend to be highly influenced by market perception, referrals and references. They want straight talk around business benefits as opposed to technical mumbo jumbo. They need demonstrable proof that the solution will actually be used and provide an immediate, positive business impact.

No more multi-year projects, no more extensive customization. These new buyers want proven out-of-the-box functionality, effortless integration with legacy applications and an easy-to-use, intuitive user interface with robust, graphical reporting. Applications must — with minimal modification — work on any device with a focus on mobility.

Social media’s impact

The focus on social has a much greater impact than massive IPOs and market caps for Google, Facebook and Twitter. Buyers expect applications to be socially aware, with Facebook-like functionality for crowdsourcing, instant messaging and telling a friend. Built-in connection and integration with the major social channels is mandatory. This means service providers must expand the social media knowledge and skills of their consulting workforce to ensure new applications provide social connections.

User adoption is of paramount importance. What user group wants a new application if no one else uses it or contributes to it? This means service providers can no longer sell, install and run. They need to provide training and incentives for users to quickly adopt and embrace new applications. Projects must now include early adopters in pilots with a greater emphasis on effective rollout campaigns designed to secure the hearts, minds and loyalty of new user groups. Another trend is gamification, which compels applications to create scores and offer prizes to get and keep users engaged.

Social has made a major impact on buyer behavior and knowledge. Buyers have a wealth of information available at their fingertips, empowering them to research and select services providers based on clarity of messaging and proven reputation. Referrals remain important, but prospective buyers can easily circumvent the vendor’s sales and marketing teams to find out whether past clients are satisfied.

Clear, compelling services provider websites must provide all the needed information for prospective buyers to research and compare capabilities and competencies. The days of in-person, local or regional selling and service aren’t dead. Rather, they’re under increasing siege from global competitors that offer a greater breadth of capabilities at competitive rates based on lower labor costs.

The move away from legacy apps to mobile

Because mobile technologies have eclipsed the use of applications, providing access to apps from a variety of mobile devices is no longer a “nice to have,” but a “gotta have.” This means consultants need knowledge and experience with all major iOS and Android devices while keeping up with emerging standards.

It also means the amount of real estate for user apps and the number of clicks must be minimal. This trend is a major force in streamlining overweight legacy applications with a premium on ease of use and compelling graphics. Mobile skills are in short supply. To recruit and retain mobile experts, services providers must invest in training and knowledge transfer.

Making sense of analytics and big data

Much has been said and written about big data, especially as a means for legacy enterprise application providers to remain relevant. The answer lies not only in access to massive, virtual storage, but also in developing a workforce that can understand and use statistics to power business decisions. Analytic engines and technology often surpass the analytic skills and competencies of business users who have to make sense of it all.

Nonetheless, whenever there’s smoke, there’s fire. The critical shortage of analytic skills represents a significant opportunity for service providers, whose consultants combine technical knowledge with vertical industry acumen, to create the reports and data access corporations need. Stay tuned for an ongoing database and analytics war as SAP uses Hana to wean its users from Oracle.

The cloud overtakes legacy applications

Last, but not least. The cloud has created a whole new oligarchy of monster application providers such as Salesforce, NetSuite and Workday. It seems like these companies have grown overnight in producing multibillion dollar revenue streams by stealing enterprise clients from IBM, SAP and Oracle. Continued advances in software-as-a-service (SaaS), business-process-as-a-service (BPaaS) and infrastructure-as-a-service (IaaS) have created a shift towards configurable, cloud-based delivery models where services are enacted directly within technology platforms.

These standardized platform-based services will gradually replace traditional labor-intensive transactional models and expensive, waterfall projects. Legacy application service providers have been slow to react and jump on the cloud bandwagon. However, cloud applications will increasingly dominate and overtake enterprise legacy applications because they offer accelerated time-to-value and superior return on investment.

The transformation of businesses

Next-generation service providers will focus on transforming businesses and business processes through technologies like cloud, social media and mobility, and applying analytics across the end-to-end services platform to deliver insights and create new value. Power has shifted away from IT to consumers and business executives, allowing operating executives to reach their clients and employees in new and exciting ways.

Social media has created a new services vision — in which buyers and service providers seamlessly interact by building shared learning communities centered on business process improvement and streamlined business interactions. This empowers end users to select, buy and implement self-service applications, thus transforming their interactions with their clients. Increasingly, organizations are demanding access to management and reporting capabilities for their outsourced business processes through mobile devices — anytime, anywhere. Because of this, smartphones and tablets make up the new primary mode of application access.

Never has the promise of technology as a powerful force for business transformation been so close to reality. But the real power lies within service providers that can apply this tsunami of technology to solve real-world business problems. Expect the services industry to grow in 2014, exceeding overall IT spending growth as it has for the past 10 years. However, look for winning services organizations to be those that focus on specific vertical industry business problems yet are savvy enough to build horizontal skills in social, mobile, analytics and cloud. They’ll apply technology and industry knowledge to streamline and transform the way the world does business.

An opportunity for independent services providers

The good news for independent services providers is that the venture capital community and Wall Street are forcing technology companies to outsource professional services to independent service providers. As a result, multibillion dollar service provider channels have been created overnight. Witness more than 1,400 Salesforce.com service providers and a vibrant developer community based on the Force.com platform.

All the major enterprise cloud software companies, such as Workday, SuccessFactors (SAP), NetSuite and Oracle, lead with partner-centric service strategies. During a recent earnings call, Workday co-CEO Aneel Bhusri said, “I do think that what we need is to find local service partners, much like we have — we’ve got the big companies like Accenture and Deloitte and IBM working with us on a global basis. So we also have companies like a DayNine, Collaborative and OmniPoint that are more, I would guess, home boutiques. We need to find those same boutiques in Europe and in Asia. And that’s pretty much what we are doing.”

2014 is the year of SMAC, powered by independent service providers that harness social, mobile, analytics and the cloud to deliver real-world business value.

Just How Important Is Leadership in Professional Services’ Success?

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.

SPI Research leadership indexLeadership 02 2014

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:

  1. The vision, mission and strategy of the professional services organization is well understood and clearly communicated.
  2. Employees have confidence in PS leadership.
  3. It is easy to get things done with the PSO.
  4. Goals and measurements are in alignment for the PSO.
  5. Employees have confidence in the future of the PSO.
  6. Leadership effectively communicates with employees.
  7. Leadership embraces change; we are nimble and flexible.
  8. 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

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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

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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.

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

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

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

The talent factor

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

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

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

Five Service Performance Pillars

Before digging into the latest findings, let’s review the key functional areas that we call pillars. Our hypothesis is that professional services organizations consist of five pillars that drive organizational performance.

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

  1. Leadership. This pillar represents the unique view of the future and the role the service organization will play in shaping it. Leaders develop a clear and compelling strategy, providing a focus for the organization to spur action. They also set the tone and direction for the organization.
  2. Client relationships. This pillar includes sales, marketing and partner relationships and effectiveness.
  3. Human capital alignment. This pillar focuses on recruiting, hiring, retaining and motivating a high-quality consulting staff.
  4. Service execution. Execution represents all aspects of project execution: resource management, project management, knowledge management and delivery methods and tools.
  5. Finance and operations. The financial backbone of a services firm that addresses planning, revenue, margin, billing, collections and IT infrastructure.

Five levels of maturity are defined to show progression for each pillar. It starts with Level 1, where processes are immature and employee roles are broad, and progresses up to Level 5 where the organization, methodologies, tools and governance are synchronized and structured. Level 5 optimizes and aligns all elements of the PSO for continuous improvement. On average, only 5 percent of PS organizations achieve Level 5 performance.

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

Leadership

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

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

Client relationships

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

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

Human capital alignment

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

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

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

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

Table 1: Age of Professional Services Workforce

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

Service execution

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

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

Finance and operations

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

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

2014 crystal ball

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

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.

Warning: Talent Cliff Ahead – Part 2

The looming technology workforce shortage
by Carey Bettencourt, Jeanne Urich and Dave Hofferberth, Service Performance Insight

talent hookIn the first of a two-part article on the talent cliff, we presented some of the major talent management issues that professional services executives face. Here, we share insights and preventive actions to consider in avoiding the talent cliff.

As most professional services executives already know, they cannot depend on the U.S. federal government or the education system to bail them out. Washington tends to be short on ideas but long on programs. Generally, the solutions come from businesses working together to increase the pool of talented workers. Therefore, it is imperative that PS executives, and especially their younger workers, stay well connected to the university system in order to recruit talented people.

The new world of work depends on a multilingual, global, technically skilled, project-based workforce. Today’s professional services leaders must squarely confront the realities of attracting and retaining a new generation of consultants against the backdrop of technical labor shortages as skilled baby boomers retire. Globalization has significantly impacted workforce strategies, with many services providers providing hybrid on- and off-site resources through regional and global competency centers.

Engage the changing workforce

Changing workforce dynamics drive PS executives to create a different type of workforce that requires technical and client management competencies with equal parts of flexibility, autonomy and accountability. This change means that one of the most important challenges for leaders is competing for top talent in a level, global, Web-enabled playing field of “digital natives” who value collaboration and cool, new technologies more than security and remuneration.

Today’s human capital alignment challenges include:

  • Attracting, retaining and motivating top talent.
  • Managing through a technical labor shortage.

According to a Towers Watson Global Workforce Study, the top drivers of employee attraction, retention and engagement are competitive base pay, an organization’s reputation as a great place to work and a senior management team that is sincerely interested in employee well-being. Surveys continually show that creating a high-performance employee culture involves leadership, effective teamwork, access to high-quality training and career development plans rather than compensation alone. Table 1 shows the most effective retention strategies by generation.

One of the more interesting aspects of our research is the importance of an integrated human capital strategy. Finding, hiring, motivating and retaining key employees are just the beginning. We found that human capital alignment metrics contain the highest number of performance indicators with extremely strong correlation to success — meaning how employees perform once onboard dictates ultimate success or failure.

Our research shows major growth in the use of flexible scheduling options — 40 percent more organizations now have telecommuting programs than a year ago. And more than half of all companies now offer flex time so that employees can adjust work hours to minimize commutes and accommodate required travel and child care. Remote services delivery has rapidly become standard for professional services organizations, with 40 percent or more of all PS work now delivered virtually from an off-site location.

Table 1 April 2013

Implement innovative talent strategies

To fill the workforce void, more and more PS organizations are developing innovative new talent strategies: close partnerships with local universities; new hire internships; job-sharing programs; flexible work, study and child care options; onboarding programs; and on-the-job training and mentoring combined with extensive onshore assignments for offshore employees.

Increasingly the reputation of the firm as a great place to work is just as important as client referrals. What this all boils down to is that talent is fast becoming the No. 1 make-it-or-break-it element in professional services growth … or even survival.

To meet these demands, top PS organizations are:

  • Focusing on programs to hire and train entry-level talent with skills in science, technology, engineering and math.
  • Investing in internships and college hiring to groom the next generation of consultants.
  • Cross-training current employees who have strong analytic abilities.
  • Sponsoring training and work visas for international workers with strong backgrounds and skills in science, technology, engineering and math.
  • Offering flexible work arrangements: work from home, job sharing, remote services delivery and child care options.
  • Building a culture of excellence. Leading-edge technologies, clients and projects plus a culture that supports collaboration and innovation attract the best and brightest.
  • Paying for performance that links compensation to knowledge and skills growth along with contributions to the practice — not just revenue generation alone.
  • Investing in employee engagement because communication, training and recognition are essential to keep a talented workforce engaged.

Mitigate employee attrition

Table 2 April 2013PS leaders should also closely monitor voluntary attrition. In an industry as highly
specialized as professional services, workers who leave take a great deal of expertise, experience and enthusiasm with them. Our six years of benchmarking have shown that as the attrition rate rises, so do a number of issues negatively impacting organizational performance and profitability.

Table 2 highlights some of these issues. PS organizations with higher levels of attrition tend to be less successful at growing their client bases and struggle to deliver projects on time and within budget. All this translates into slower growth and profitability for the PS organization. At a time when global growth is important, and larger organizations are acquiring smaller ones, it is imperative that PS organizations grow and remain profitable. Without profitable growth their long-term prospects are severely reduced.

STEM-ing the talent cliff

The talent cliff is looming. For professional services organizations, the talent management strategies implemented will be the most critical factor in determining long-term success. Organizations that effectively manage the talent cliff will be positioned for growth and prosperity. But those organizations that fail to understand and manage this burgeoning issue will face increasing business risk and diminishing success.

And one final note for those of you who are parents with children in high school — encourage them to major in science, math, engineering or technology!

 

 

2013 Professional Services Maturity Benchmark

What will it take to grow and succeed in the year ahead?
by Carey Bettencourt, Jeanne Urich and Dave Hofferberth, Service Performance Insight

Ruler SuccessIn February, we introduced our sixth annual Professional Services Maturity benchmark with cumulative results from 1,059 PS organizations. The results show the professional service market is experiencing high levels of growth across most market segments, including IT consulting, management consulting and managed services. The benchmark has yielded a few trends you should know about.

Growth is strong, but not as strong as in 2011

Accustomed to high levels of growth, the professional services market saw annual revenue growth rates of 15 to 20 percent in the early 2000s. As the global economy dipped into an extended recession, the PS market retrenched but not to the point of flat or negative growth.

In our six years of benchmarking, the average annual growth rate has never been negative. 2009 had the lowest point of year-over-year revenue growth, while 2007 was the most recent high point. Refer to Table 1 for a year-to-year comparison of key performance measurements.

201302 KPI TableThe 2012 survey showed an average growth rate that was almost 20 percent lower than 2011 growth, as shown in Figure 1. This decline from 2011 could be a reaction to the European sovereign debt crisis and worry over the implementation of increased U.S. regulatory costs in 2013. Regardless, double-digit growth rates signify the strength of the global professional services market, making it a dependable source of revenue and profit, particularly in technology and management consulting services.

YOY 5 yr PS RevStaff augmentation, at the bottom end of the market, is experiencing contraction and significant rate pressure. As for the upper end of the market, the demand for unique and specialized expertise is growing along with higher bill rates. Growth rates over 10 percent generally lead to hiring, while growth below that can be managed through efficiency gains, increased utilization and use of third-party contractors.

It’s no surprise that the greatest reported challenge for PS organizations is talent management, as skilled talent shortages have forced firms to revitalize college recruiting and invest significantly in employee development. With economic improvement, we have seen a steady increase in attrition, bringing it on par with pre-recession levels as the war for skilled talent intensifies.

Declining overhead personnel

One key performance indicator that has improved every year is the percentage of employees who are billable as compared to non-billable management, sales and administrative personnel. This metric was less than 70 percent in 2009, but it has risen every year since.

The percentage of billable staff is now more than 75 percent of total staff. While this might not sound significant, it bodes well for profitability because there are now three billable consultants to every non-billable employee. This ratio reduces the pressure for excessive billable utilization because the chargeable workforce has to carry fewer non-billable staff.

Increased reliance on powerful integrated accounting, sales and professional services automation solutions has resulted in significant productivity improvements and fewer administrative roles. However, as the percentage of senior management personnel continues to decline, it could cause operational and sales concerns for PS organizations.

With fewer sales and administrative personnel, sales and marketing efforts could suffer. Reductions in other supporting organizations such as human resources, finance, accounting, and service quality or engineering may compromise recruiting, employee development, financial management and quality. Monitoring this key performance indicator will help PS executives ensure that short-term profitability improvements don’t inhibit long-term growth and quality.

Profits continue to rise

The average organizational profitability in this year’s survey is impressive, as it nearly tripled that of just two years ago. The 2012 benchmark revealed average EBITDA to be 18 percent. Considering the 2011 benchmark showed average profit at 13.5 percent, this year’s survey shows the market is growing and profits are there for the taking.

Many PS organizations are taking the necessary steps to improve profitability. For instance, quarterly non-billable expense went from $1,600 per employee to less than $1,300. Annual non-billable administrative time per employee declined from 232 to 150 hours, giving each employee more than two weeks of additional time. Unfortunately, PS organizations squandered most of this improvement on non-billable project hours, which went up from 196 to 225 hours.

Bill rates also continued to rise, resulting in a higher revenue yield per consultant. Average revenue per consultant soared to $206,000, up from $197,000 in 2011.

Although client delight is always the number one PS priority, high profitability provides an excellent indicator of firm health. Many profitability levers, such as cutting administrative, facility and discretionary travel expenses, are sound business practices for the long-term. However, other profit levers such as staff, salary, bonus and training cuts may improve short-term profitability yet damage morale and growth over the long-term.

Sound management practices favoring long-term growth investments over short-term tactics will yield sustainable profits. For example, providing employee incentives helps drive performance improvements, revenue growth and profitability. Employee, quality and infrastructure investments will lead to greater financial performance over the long haul.

Metrics matter

Every year, we recognize the top 5 percent of benchmark participants with the annual “Best of the Best” award based on superlative overall maturity scores. Perennial winners share many common characteristics, with the main ones being constant management operational vigilance and respect for metrics.

The leaders of the best-of-the-best firms have real-time visibility into and control over all aspects of the business. They understand the impact of key metrics such as attrition, project overruns and excess overhead on bottom-line profitability.

The most mature organizations are more likely to have implemented integrated accounting, CRM and PSA backbones to give them the real-time visibility they need to catch problems and spot negative trends before they spiral out of control. Their key focus and investment are in finding, hiring and retaining top-quality staff, yet they’re frugal in other areas such as expensive facilities and perks that don’t affect client and employee satisfaction.

Looking ahead

A focus on greater efficiency and productivity were major reasons for growth and success in 2012. 2013 will require greater creativity as increased burdens such as health care costs and taxes could limit profitability and inhibit growth as PS organizations’ clients face similar challenges.

The growth and success of the professional services marketplace comes from the organizations offering innovative services to help clients manage change and improve performance. As market dynamics change, leading PS organizations have adapted to take advantage of new technologies to create innovative solutions to help their clients.

2013 will be no different in terms of the need for continuous improvement. But the headwinds will be slightly stronger, and the need for repeatable service offers and organizational efficiency and effectiveness is critical if professional organizations want to remain competitive and profitable.