What You Need to Know About Professional Services Bill Rates
The art and science of services pricing
by Jeanne Urich, Managing Director, SPI Research
Services teams concentrate on utilization and less on rate realization. Focusing on pricing strategy is the key to doing more with less to achieve persistent profitability. The 2015 Global Professional Service Pricing research helps services organizations understand how they measure up, where they can improve to increase margins and how they can properly position their services in the market.
To participate in the 2015 PS Global Pricing survey, please visit http://www.spiresearch.com/spi-research/2015-ps-pricing-study/
Professional service organizations who complete the survey will receive a free copy of the benchmark.
The study will provide an analysis of list price and realized bill rates across a broad range of professional services verticals, geographies and job levels around the globe. It will analyze the growing trend toward more offsite consulting delivery and the prevalence of different pricing structures. The report will provide a view of professional services workforce distribution and composition by industry segment through an analysis of organization structures for various service segments including management consulting; IT consulting; software and SaaS; VARs and hardware and networking services.
What the 2011 pricing benchmark revealed
The major takeaway from Service Performance Insight’s 2011 Global Professional Services Pricing study is that success comes from the right combination of pricing policies along with outstanding services delivery quality and workforce efficiency. The two primary profit levers professional services organizations possess are bill rates and workforce productivity, often called billable utilization. PS organizations tend to concentrate more on productivity, often ignoring price improvements. Efforts to enhance price realization can produce both instantaneous and sustainable profit improvements.
The cause and effect of higher bill rates
Price realization based on realized bill rates in combination with billable utilization is a leading indicator of the overall quality and differentiation of the PS organization. Professional services organizations with the highest bill rates and best price realization tend to reinvest profit into their employees, which in turn, leads to a continuing improvement cycle.
Highly skilled, well-trained, motivated and loyal consultants undoubtedly produce the best client results. Satisfied clients provide referrals and buy additional services resulting in improved sales effectiveness.
Based on nine years of benchmark data, one of the consistent themes is the correlation between high bill rates and employee investment resulting in superior project delivery metrics and overall financial profitability. Bill rates, however, only tell a part of the story.
The market, the types of services provided and the reputation of the firm primarily govern rates. Management consulting senior partner daily rates are as high as $8,000 while Indian software development resources are priced as low as $25 per hour.
The top strategic management consultancies don‘t publish their rates, nor do they make them visible to their clients. These rates are justified based on the significant “bet your business” types of projects these firms deliver. High rates indicate the strategic business value top firms provide.
At the other end of the spectrum, the lowest bill rates are shown in commoditized hardware installation and repair, where providers mainly focus on implementation. Staff augmentation garners low rates because the client assumes almost all of the responsibility for successful business outcomes. Clients are buying a body with a specific skillset as opposed to a project based on a measurable business results.
Differentiation, specialization and market growth drive rates upward while commoditization and shrinking market demand drive rates down. The law of supply and demand is clearly evident in the pricing report because software as a service (cloud) services now command a 20 to 30 percent premium over traditional enterprise software bill rates.
Why is pricing important?
In a labor-based business like professional services, profit comes from the right balance of revenue and costs. PSOs have a very high fixed labor cost so the two primary profitability levers are either lowering cost (employee and subcontractor sourcing strategies, limiting benefits and overhead, using virtual business models and restricting discretionary spending on IT, travel, training and recruiting) or increasing revenue (higher bill rates, higher revenue per person, higher billable utilization and a higher proportion of billable headcount).
Throughout the recession, PSOs focused intently on the cost side of the equation. Now with economic improvement, they are concentrating on growing revenue through a combination of rate, market expansion and productivity enhancements.
Professional Service Pricing Strategies
Pricing strategies vary dramatically by market and geography. European PSOs prefer daily rates which may or may not include travel expenses. The percentage of time and materials priced contracts across all markets and geographies was reported to be almost 60 percent.
Every year a greater proportion of contracts across all verticals and geographies are fixed price reflecting client interest in shifting more risk and accountability to services providers. Table 1 shows a comparison of pricing strategies across PS vertical markets. It reveals IT consultancies and PSOs within software companies depend heavily on time and materials based pricing strategies.
Hardware and networking providers and SaaS PSOs have shifted the majority of their work to services packages and fixed price contracts while management consultancies favor time and materials based contracts, but may include performance guarantees.
Table 1. Pricing Structure by Organization Type
Future expectations for bill rates
All signs point to an unstable global economy for some time to come. Bill rates are not uniform around the world. Across the board, global consulting bill rates have been relatively stagnant while target utilization rates have continued to climb. The key question is how can the professional service industry sustain a business model where employees and subcontractors must be billable 75 percent or more of their time?
Will the pressure to work excruciating hours subside with the shift to a global and virtual economy? As the reality of increased consulting demand outstrips available supply, expect to see average billable hours to continue to increase, perhaps to a breaking point. Rates for the hardest to find resources are climbing.
Around the world, a significant price disparity exists for the same job skills within the same industry segments. If an organization can establish its brand and reputation as the highest-quality supplier in its market space, it can command the best rates.
Conversely, for services providers stuck in a commoditizing rut, the only viable strategy is to head for higher ground by expanding into a more lucrative market. For example, low-end enterprise resource planning providers will find new opportunities and premium rates if they add vertical expertise or take on new cloud technologies and services. Research indicates the unlimited possibilities for establishing new, exciting and profitable service lines will require significant leadership, vision and courage.
Bottom line, the consulting industry is thriving. Expect not only a heightened focus on bill rates, but also significant labor shortages ahead. Top performing firms will focus on both recruiting and retaining top talent while making sure they take advantage of premium pricing to fund these investments.