Service Delivery Excellence

By Dave Hofferberth

5 KPIs that matter most

picture-1This is the second article in a two-part series on performance improvement in the delivery of services, based on measuring and monitoring five critical key performance indicators. Part one provided insight into why professional services organizations should specifically focus on five performance indicators in order to improve service delivery performance. This article digs more deeply into the KPIs and the value of improving each one.

KPI 1. Project duration
The average project duration in months depicts the effectiveness, or lack thereof, of selling longer-term projects. The average project duration is important in that it shows the average length and scale of today’s projects. Although easier to staff, longer projects are not necessarily more profitable because longer and larger projects may involve significantly more risk and complexity. However, extended projects with large project staffs can yield significant revenue and stability to the organization because there is less consultant churn from project to project.
Table 1 shows the majority of projects take between one and nine months. Clearly, revenue per project increases as project duration increases; billable utilization also rises as the duration increases. But what is perhaps most important about this table is that organizations with the largest projects tend to grow at a much higher rate than those organizations focused on very small projects.

KPI 2. Standardized delivery methodology
Consistency of service delivery is imperative in order to improve quality and instantiate best practices. While not all work can follow a standardized or structured service delivery methodology, the higher the percentage, the better the firm typically operates.
Mature firms invest significant time and attention to methodology development as a means of standardizing project processes, defining expectations and institutionalizing quality. Using a standardized delivery methodology is a critical component of a services productization strategy. It helps improve project forecasting and resource management by lowering costs while enhancing predictability. PSOs that can accurately plan and execute services in a structured way are more productive and more likely to deliver quality results.
There is significant effort involved in developing, implementing and adhering to standardized delivery methodologies, but the net impact for PSOs is beneficial.

table-2Table 2 compares the percentage of time standardized delivery methodologies are used to other key performance indicators. It shows that PSOs using a standardized delivery methodology have improved on-time project completion, higher revenue per employee and are more likely to achieve their annual revenue targets.

KPI 3. Billable utilization
Employee billable utilization is one of the most heavily tracked and scrutinized KPIs. While there are many definitions of billable utilization, the benchmark’s definition is based on a 2,000 hour per year basis. Employee utilization is calculated by dividing the total annual billable hours by 2,000. This key performance indicator is central to organizational profitability.

To be meaningful, utilization must be examined in conjunction with overall revenue and profit per person along with other leading indicators like backlog and size of the sales pipeline. It is a major indicator of opportunity and workload balance as well as a signal to expand or contract the workforce.

To improve margins, PS executives must continually focus on increasing employee billable utilization, as well as increasing the percentage of billable employees. The primary gain from increased utilization is a significant increase in revenue per employee. Interestingly, PSOs with higher employee utilization also reported more revenue growth, more revenue per consultant, more revenue per employee and larger projects. The dynamic combination of high utilization and a high percentage of billable employees leads to better financial performance.

table-3Table 3 shows the actual benefits this year’s firms experienced from increasing employee utilization. As you might expect, billable utilization is critical in terms of meeting deadlines and profit margin targets. High billable utilization is directly tied to the percentage of employees who are billable. This chart shows that firms with very high utilization are much more likely to meet their margin targets.

KPI 4. On-time delivery

table-4The percentage of projects delivered on time is a measurement determined by dividing the number of projects completed on time by the total number of projects. This KPI is critical for billable services organizations because when it decreases, both profitability and client satisfaction also decreased. The bad news is that the average on-time project delivery rate tends to be less than 80 percent for PSOs.

On-time delivery is an important key performance indicator as it affects client satisfaction and the ability to take on new projects. When projects are delivered late, client satisfaction suffers. It also causes new projects to be delayed. When planned resources are still working on the late project, they are unable to start another project. PS executives strive to keep employees utilized. However, when they cannot start work because prior projects are late, it affects everyone. The effectiveness of quality and knowledge management processes correlate highly with on-time delivery and, ultimately, help drive revenue per employee upward.

KPI 5. Project overruns
table-5Project overrun is the percentage that actual costs exceed budgeted costs or it is the percentage actual effort (time) exceeds the budgeted time. Project overruns may be expressed in actual time versus plan, actual cost versus plan or both. PSOs want to track this KPI because whenever a project goes over budget in either time or cost, it cuts directly into profitability.

Project overruns, like projects not delivered on time, limit future work and client satisfaction. In many instances, project overruns indicate a lack of project governance, which hurts project quality. Table 5 highlights how average project overruns influence on-time completion, annual revenue and margin target attainment. Obviously, project overruns are negatively correlated with on-time completion, as one increases while the other decreases.

What’s most important — as shown in the table — is that PSOs with high levels of project overruns yield poorer revenue and margin performance. Focusing on why projects run over is a critical step in performance and profitability improvement.

Using information wisely

These key performance indicators for services delivery, and many more like them, can be tracked through an organization’s Professional Services Automation (PSA). PSA is used specifically for improving services delivery and all five of these key performance indicators. PSA helps PS executives plan, sell, deliver and collect for work that meets targeted delivery dates and margins.

PSA solutions manage resources and projects, which helps improve billable utilization and bottom-line results. Twenty years of research have shown that those using PSA see a 5 to 7 percent improvement in billable utilization. That translates into an additional 100 to 140 hours billed annually per consultant. As you can imagine, the dollar value and profit associated with these hours are significant.

How these KPIs can help PS firms grow
To compete successfully today, professional services executives need to optimize every aspect of their organization – from the creation of a solid strategy and accompanying business plan to the sale of services that offer the greatest potential for growth and profit. It also requires a staff of high-quality talent.

Regardless of all of the other areas of the PSO, delivering services is where money is made in professional services. Achieving organizational growth and profit begins with project profit margin. Therefore, for PSOs to grow and prosper, they must be astute in terms of how they deliver services. The five key performance indicators discussed here are a good place to start.

Five KPIs for Service Delivery Excellence

By Dave Hofferberth

Valuable insights from the latest professional services benchmark

This is the first article in a two-part series on performance improvement in service delivery based on measuring and monitoring five critical key performance indicators. It provides background to this initiative, highlighting early results from the 2016 Professional Services Maturity™ Benchmark study. Part two will provide more details regarding why these five key performance indicators should be measured and monitored and the impact of poor performance.

What the latest benchmark reveals about professional services

With the economy still showing sluggish growth and competition growing, professional services executives must double-down their efforts to improve service delivery effectiveness. Otherwise, they won’t attain high quality, high levels of client satisfaction and high project profit margins. Service delivery excellence is imperative in order to achieve these goals.

Each year, market dynamics change, new technology is introduced, new regulations are enacted, and business priorities shift. As a result, professional services executives must continue to monitor the business environment to make the best investments possible to grow and prosper.

While the results of SPI Research’s 2016 Professional Services Maturity™ Benchmark have yet to be published, more than 550 professional services organizations have completed the survey, yielding tremendous insight into the market. For instance, professional services year-over-year revenue growth stands at 10.2 percent, up slightly from last year’s 10 percent. This indicates that the market continues to improve. Much of this growth has been fueled through new client acquisition, whether it is new logo clients or additional services offered to different departments within the existing client base.

However, the size of the sales pipeline in comparison to the quarterly forecast is down to 172 percent compared to 199 percent last year. This translates to fewer available deals, making it increasingly difficult to sell services. PSOs have had to increase discounts in order to win more work. Also, employee satisfaction is down, which is probably a result of higher levels of attrition due to pressure to work more hours than ever before.

Perhaps the most disturbing early result is that both project margin and organizational net profit are down from last year’s benchmark. SPI Research believes profit is the fuel for growth in professional services. And if there is so much pressure to discount services — especially at very low rates — the growth of the market could suffer.

Every professional services executive knows there are good times and bad. SPI Research expects a bright future in the professional services market. To achieve their desired financial goals, PS executives must continually evaluate all aspects of their organization, from their personnel to the services developed and to target markets and clients. SPI’s Professional Services Maturity Model™ is designed to help PSOs improve organizational performance, beginning with those areas with substandard performance.

To help organizations focus on service delivery excellence, the following highlights some of the key performance indicators that should be continually monitored and measured.

Why focus on KPIs?

Understanding when and how to start a performance improvement initiative can be difficult in any organization. Some key questions include:
• Are we achieving high levels of client satisfaction?
• Is our work delivered on time and on budget?
• Does each project meet its desired margin and completion goals?
• Based on the current project, will the client continue to buy and refer our solution?

Most executives have a solid understanding of their areas of weakness but too many and conflicting priorities get in the way. A good place to start is by focusing on key performance indicators, how they are trending, how they compare to peers and the steps required to improve them.

SPI Research tracks over 200 KPIs across professional services organizations. Each KPI is important by itself. However, tracking too many can be a burden. Many PS executives have neither the time nor the resources to track them all. Yet department heads might be required to focus on 10 to 20 key measurements. The point is to track those relevant to your organization and understand how they impact overall growth, client satisfaction and profit.

Five KPIs to measure and improve service delivery

Service delivery is where PSOs plan, estimate, propose, staff, execute and invoice for work. Service delivery is where money is made in professional services as people and projects are the revenue-generating and profit machines of the organization.

Professional services executives, project managers and engagement managers have more than 30 service delivery metrics they use to measure service execution. These five above are among the most important when considering organizational improvements:

1. Project duration in months. The length of time it takes to deliver projects.
2. Methodology use. The use of standardized or structured delivery methodologies.
3. Employee billable utilization. The percentage of available employee work hours that are billable.
4. On-time, on-budget project delivery. The percentage of projects delivered on time and within budget.
5. Project overrun. Overruns in terms of costs or hours compared to the estimate and budget.

Why these five? Stay tuned for part two to see an analysis of these five KPIs and how to quantify their value for your organization. Over the past nine years of benchmarking nearly 2,500 professional services organizations, SPI Research has found these metrics are critical for performance and profit improvement.

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™.


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.


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

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

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

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

Summary of PS Maturity™ benchmark results

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

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

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

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

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

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

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

The talent factor

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

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

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

Five Service Performance Pillars

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

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

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

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

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


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

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

Client relationships

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

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

Human capital alignment

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

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

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

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

Table 1: Age of Professional Services Workforce

t1 01 2013







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

Service execution

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

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

Finance and operations

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

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

2014 crystal ball

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

The 2014 Professional Services Maturity Benchmark

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

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

Dealing with lackluster results

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

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

Facing the talent cliff

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

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

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

Packaging services

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

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

Conducting business planning

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

A look at the Professional Services Maturity Model

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

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

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

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

The difference between maturity levels

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

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

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

The formula for sustainable success

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

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

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

Pick up a copy of the survey

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

How to Create a Billable Consulting Culture

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

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

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

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

Why change?

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

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

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

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

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

Creating a billable consulting culture

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

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

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

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

Defining the transformation vision

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

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

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

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

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

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

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

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

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

Driving behavioral change

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

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

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

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

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

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

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

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

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

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

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

Fostering a billable consultant culture

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

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

Stop the Bleeding!

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

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

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

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

Evaluate your portfolio

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

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

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

The devil is in the details

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

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

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

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

Bring in a financial analyst

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

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

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

Getting back on track

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

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

Backlog: The Fuel for Growth

Taking the PSO’s pulse
by Jeanne Urich and Dave Hofferberth, SPI Research

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Sell, bid, win, deliver and collect. It sounds easy, doesn’t it? Unfortunately, things can go awry quickly with professional service sales, execution and delivery. Before work can begin, there must be a sale. While no one takes this for granted, professional services organizations (PSOs) must optimize sales processes and pipelines so they can sell profitable work that leads to successful projects and happy, referenceable, bill-paying clients.

Many PS executives look at the win-to-bid ratio and use it as a barometer of sales success. Indeed, this figure is important, but it only tells part of the story. PSOs can have high win-to-bid ratios that do little good when inflated at the expense of margins.

One area executives must concentrate on is beginning of the quarter backlog. This project backlog is an excellent predictor of future success, as it enables the PSO to put a strategy in place to optimize both delivery and future sales.

How backlog affects billing and margins

SPI Research defines project backlog as the total value of unexecuted contracted orders or projects. Quarterly project backlog includes executed or closed contracts that have not yet been billed. Quarter beginning backlog comprises clean sales orders that the PSO has booked (closed) and can deliver and bill within the current quarter.

Sales planning 101: The number of bids with an estimated price, close date, delivery date and billing date provides the underpinning of revenue and margin forecasts. If everything goes according to plan, the PSO meets its revenue and margin targets. Unfortunately, especially in today’s economy, not everything goes according to plan.

An excellent way to meet both revenue and margin targets is to have a well-constructed backlog of work in the queue. Thus, if actual delivered revenue and margin are in poor health, adding more staff, working additional billable hours and delivering work early may be the cure.

SPI Research realizes every PS executive knows building up service backlog improves their potential of delivering higher profit. However, many PS executives might not realize how inter-related backlog is to other key performance indicators (KPIs).

Backlog research results

SPI Research has examined the 26 largest PSOs with over 300 employees in the most recent benchmark survey and verified the importance of increasing project backlog. The table below highlights the direct correlation between backlog and the following areas:

  1. Revenue per billable employee.
  2. Margin target achievement.
  3. Billable utilization.

Table 1: The Impact of Project Backlog

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This table shows that as backlog increases so do these three critical KPIs. Higher backlog allows employees to complete more work, as more work is available to them. This increase in work shows up in higher utilization levels, which means that employees bill more hours. It also generally leads to higher bill rates, given the PSO has the luxury of only bidding on desirable, lucrative engagements. And more hours at a higher bill rate yields both higher revenue and profit.

SPI Research has tracked backlog in billable PSOs for the past three years. In 2009, the average quarterly revenue backlog reported was 42.8 percent (49.1 percent in 2007 and 42.7 percent in 2008). Although average backlog remained the same in 2008 and 2009, many firms reported suspended or cancelled projects and longer sales cycles and deferred purchase decisions. This translates into less billable work.

Backlog is one of the most powerful predictors of future performance. In better times, best-in-class backlog ranged from 70 to 100 percent of the current quarter revenue forecast. Backlog is the fuel for growth. An anemic backlog forces firms to close and try to convert bookings to revenue all within the same quarter.

Fuel in the tank

A larger backlog represents “fuel in the tank” and improves an organization’s ability to grow while increasing the accuracy of financial forecasts. Firms with light backlogs rely heavily on discounting and scramble to “make” their quarterly revenue commitments. SPI Research believes this causes a firm to spiral into a compromised economic position.

PSOs that report less than 40 percent of their quarterly revenue target in backlog showed lower revenue per person, lower project margins and poorer attainment of financial targets. Unpredictable revenue and “feast or famine” work cycles combined with unnatural “Hail Mary” sales deals are symptoms of a light backlog.

Build up your pipeline

For smaller firms, keeping a balance between marketing, sales and delivery is problematic. Smaller firms also contend with more hybrid roles that drive down billable utilization and cause sub-optimization of both selling and delivery roles.

As early as possible, small firms benefit from investments in dedicated sales and marketing. This allows sales to sell, marketing to market and delivery personnel to focus on delivering excellent work. The most effective way to grow backlog is to improve sales and marketing effectiveness. If this fails, it forces the PSO to cut staff or accept lower profit based on lower revenue projections.

Watch out!

Managing your backlog is like managing your pulse. It typically doesn’t receive enough attention until things deteriorate. If backlog gets too low (similar to a low pulse), PSOs begin to discount heavily. This may improve the backlog, but it reduces long-term growth and profitability. If backlog is too high, PSOs face the problem of insufficient or overworked staff, which can quickly deteriorate client and employee satisfaction rates, and again, long-term growth and profitability.

Your organization can use many key performance indicators to track overall performance. Quarterly backlog is one of the more important ones, and sales and PS executives should regularly analyze and discuss it. Slight fluctuations in backlog are no cause for concern. Yet keeping an eye on backlog can prevent significant fluctuations from becoming the norm, leading to a reactive organization with frequent “boom and bust” cycles. Looking ahead can help ensure long-term health and predictable growth for your PS organization.

The Importance of Service Execution

Consistency and control drive performance and profits
by Jeanne Urich and Dave Hofferberth, SPI Research

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From the beginning of the economic downturn, much has been made of the need to improve client relationships and better manage cash flow. But what about improving service execution? This question is on the minds of many professional services (PS) executives as the economy improves, albeit erratically, and many organizations must focus on service performance enhancements.

To better understand how to improve service execution, PS executives must first analyze the relationship between on-time project completion, billable utilization, client satisfaction and employee satisfaction. Intuitively, one would expect on-time project completion to drive up client satisfaction. But are high billable utilization and high employee satisfaction the chicken or the egg?

Also, if engaged, happy employees are the real catalyst for superior project and client outcomes. Then what are the key factors that drive employee satisfaction? Regardless of whether PS executives truly understand all of these relationships, now is the time to evaluate your workforce strategy to assure you have the people to meet the changing needs of your clients, both current and new.

What levers do PS executives pull to improve performance?

Increasing utilization is the first place everyone looks. But this most popular key performance indicator is primarily driven by workforce planning and capacity, and eventually execution. It is easy to temporarily improve billable utilization by cutting the workforce size, but how do you continue to maintain high utilization?

The SPI Research benchmark shows organizations with average billable utilization of 75 percent or higher also produce better client results. However, this situation occurs more from a result of planning, staffing and selling, rather than just “right-sizing.”

Establish best practices

To increase organizational performance, PS executives should implement many improvements that will lead to a more efficient and effective workforce and higher-quality services. SPI Research has found professional service organizations (PSOs) have been able to increase capacity and service quality in many areas through these best practices:

  • Establish a project management office (PMO): Creating the PMO allows your organization to improve both the efficiency and quality of the work through standards, methodologies and tools.
  • Do performance reviews: Conduct periodic performance reviews at least once a year. Spend time with employees on areas where they can expand their skills to remain valued employees. This process provides them with greater long-term job stability, and leads to greater company loyalty.
  • Use professional services automation (PSA): Most firms surveyed by SPI Research use PSA solutions. To improve the benefits of PSA, these organizations integrate it with the core financial solution as well as client relationship management to better plan and execute services.
  • Manage resources: A critical component to any PSA solution is resource management. Given the wide distribution of the workforce and a movement toward increased remote service delivery, resource management will become increasingly important to ensure adequate staffing levels and better cost management related to people.
  • Look forward: Expand the horizon to look out further than you already do. This forward-looking view will improve staffing levels and highlight areas of greatest need. It also helps your organization improve its workforce strategy with a goal of optimizing the balance of internal and external resources.
  • Use external resources where appropriate: Third-party resources are an excellent way to avoid the volatility involved in the hiring and firing of staff. They provide a valuable service because of their rapid deployment when necessary without the long-term costs associated with internal employees.
  • Develop skills internally: While using third-party resources is an effective way to manage the fluctuation in service demand, using too many external resources leads to lower morale and greater turnover. Implementing training programs to improve both the depth and breadth of skills creates a more flexible and adaptable workforce.

Benchmarking many of these initiatives can show you the change in your organization’s performance. With this knowledge, you can further improve or reevaluate your execution strategy to accomplish more.

Watch out for landmines

Inevitably, as the demand for services improves, PSOs relax with a false sense of security. This situation can have negative long-term effects that can lower profitability and create an environment where employees lose confidence in management. This leads to higher turnover, unhappy clients and lower profits.

Issues to consider: Don’t over-staff just because the workload appears to be improving. Revisit your subcontractor strategy as you grow. Eventually, you can reduce it. While every PSO has a different strategy for its external workforce, keep it consistent and communicate well internally. As a result, the workforce gets on board, which improves their morale.

Just because you might see increased profitability and margins, don’t take your “foot off the pedal.” Stability in your financial performance is very important to your growth strategy. It allows you to more accurately plan and implement policies to improve overall organizational financial performance by carefully evaluating everything from pricing and project management to invoicing and collections.

Continually benchmark your organization to find both the hidden gems and under-performing assets. Work to better understand why some of the practices in your organization perform well, and implement policies and procedures that other organizations can use. Also, look at your practices that have not fared so well, and consider implementing changes to bolster performance, or eliminate the practices altogether.

Stay on track

Slowly, but surely, the economy is picking up steam. After all of the downsizing or right-sizing, your employees will appreciate growth. But even with the pickup in demand, growth will remain unsteady for the foreseeable future. And the services in demand just a few years ago might not seem as important as they used to be. Your organization must be prepared for both new clients and the new types of work.

Focus on improving both the quantity and quality of the services you deliver. What changes in your clients’ needs have you seen, and how will you address them? There is little doubt that the past few years have left scars on many, if not most, of your clients. How can you both change and help them going forward?

Set targets for performance improvement and benchmark your organization to assure staff is on the right track. It is also essential that you report these improvements so that the workforce understands your commitment to improve the overall performance of your organization. When the next downturn occurs, this should lead to greater job stability.

Strategic Resource Management for PSOs

Five approaches to drive up billings and revenue
by Jeanne Urich and Dave Hofferberth, SPI Research

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As global economic conditions have deteriorated over the past two years, our research shows downward pressure on the billable professional services (PS) market. Annual revenues are still growing slightly, but they are not increasing at the double-digit rates of 2007.

Based on survey responses from 211 professional service organizations (PSOs)in October and November of 2009, 95 independent PSOs averaged meager year-over-year revenue growth of 1.5 percent. Their 116 embedded counterparts (PS organizations within product companies) fared a bit better with year-over-year revenue growth of 6.4 percent.

When the market tightens, professional service executives have two basic choices to increase profitability:

  1. Focus externally to improve sales and marketing effectiveness. Over the past two years, almost every PS firm we interviewed concentrated the majority of their efforts in this area. We expect this to continue for the foreseeable future. In most cases, working to improve sales is not enough.
  2. Turn inward and look for ways to reduce costs and increase profitability. Some have reduced discretionary spending and cut back on benefits, IT and facilities. Others have been forced to reduce staff, particularly in non-billable roles.

Cost cutting is an important short-term survival tactic, but a more effective long-term strategy is to focus on driving up billable utilization and revenue.

Improving billable utilization

To improve margins, PS executives must continually focus on increasing employee billable utilization, as well as increase the percentage of billable employees. This table shows the actual (not theoretical) benefits 211 firms have experienced from increasing employee utilization. The primary gain from increased utilization (in the second column) is a significant increase in revenue per employee.

0210 2Source: Service Performance Insight, December, 2009

Interestingly, companies with higher employee utilization also reported a larger percentage of billable employees. This dynamic combination (high utilization and a high percentage of billable employees) leads to incredible financial performance and expanded overall revenue, as shown in the last column.

Billable utilization challenges

In professional services, a dedicated focus on increasing billable utilization is paramount to success. There are four primary strategic and operational challenges to improving employee utilization:

  1. Employee attrition.
  2. Changing workforce dynamics.
  3. Greater distribution of the workforce.
  4. Changing client demands.

Employee attrition (yes, attrition hurts!)

Yearly attrition in the professional services sector has declined to the lowest level we have ever seen — currently at 6.2 percent. This reduction in attrition is primarily the result of the poor economy and lack of new job opportunities causing employees to “hang-on” to their current position, whether they are happy or not. As the economy starts to pick up, and new jobs open, we expect attrition to climb back to historic levels of 10 percent or higher.

Layoffs and general cost-cutting have reduced bench strength. It now takes management longer to approve positions, and to hire, train and deploy new employees. The current average length of time to hire is 59 days, and it takes an additional 67 days for a new hire to become productive — making it hard to increase revenue and margins when firms must backfill leaving employees.

The following chart shows the correlation between happy employees and satisfied clients.

0210 3Source: SPI Research December, 2009

This table shows the negative consequences of high attrition rates. As attrition rises, the probability of on-time project delivery decreases while average project overruns increase significantly. Remaining employees have to pick up the pieces from exiting workers and must quickly come up to speed and reestablish client relationships. Clients must back-track to reestablish previous decisions and vendor commitments.

Organizations with high levels of attrition often turn to third-party contractors to supplement lacking skills. While subcontractors can help keep costs down, too heavy a reliance on subcontractors has the potential negative consequence of reducing morale, overall productivity and quality — as contract workers have less loyalty to their temporary employers — and communication and collaboration can suffer.

Changing workforce dynamics

The second area of concern for high billable utilization is the changing workforce. Not only is the workforce becoming more global, but Generation X, Y and Z workers are less inclined to make the lifestyle compromises of past generations and are more attracted by “cool” new technology than remuneration and security. Although more technology-savvy, the new workforce is less specialized than in the past and may lack client and business acumen.

Twenty and thirty-year careers with the same firm are a relic of the past so young consultants must quickly learn new technologies and business processes on the fly without the benefit of classic on-the-job training. Increasingly, professional service consultants must work independently and be effective at communicating and collaborating remotely.

Consultants work best when they focus on the type of work they enjoy and have the right skills and personality to deliver quality services. Most consultants are continual learners who thrive on new challenges, so any effective resourcing strategy must support training, mentoring and access to experts and tools.

Workforce distribution

The third strategic and operational challenge impacting employee utilization is workforce distribution. Our research shows the new world of work is increasingly global, making remote service delivery, collaboration and communication tools critical for success. While over 80 percent of our most recent survey participants are North American-based PSOs, over 44 percent of the workforce is located overseas, and only 20 percent is based within the confines of corporate headquarters. Having workers in many locations worldwide can create serious issues in employee productivity and efficiency.

Over the past several years, the amount of work PS consultants deliver on the client’s site has reduced significantly. Based on client and service-provider desire to reduce the cost of travel and the availability of powerful remote service delivery tools, consultants are performing more and more PS work remotely. These changes have caused PS executives to reevaluate their hiring practices, globally sourcing employees with solid core skills and with the ability and attitude to work independently while rapidly “self-learning” new skills. Except for the most difficult technical problems, a “can do attitude” combined with a strong work ethic and great communication skills are the most-prized virtues of today’s consultants.

Changing client demand

The final area impacting utilization is client demand. There is no doubt PSOs are being asked to demonstrate the value they deliver in greater depth than in the past. Each year, clients are less willing to accept time and materials contracts and are shifting more risk and greater accountability for success to their suppliers through fixed-price and shared-risk contracts. This demand increases administrative effort and reduces billable hours, as consultants must spend more time in pre-sales, “proof of concepts” and documentation to prove the worthiness of their services.

To ensure projects meet their value and budget requirements, clients are starting to divide projects into sub-projects, which they can monitor more closely, using tools such as earned value analysis.  Clients also demand the ability to cancel at a moment’s notice if the project fails to fulfill requirements.

Clients and professional service providers have moved to virtual project teams. The benefits of “virtual” projects are reduced travel costs and the ability to use the best available resources, regardless of location. The negative aspect of global project delivery is more hours spent on administration and communication. Often global projects require both an onshore and an offshore project manager. The onshore manager is responsible for client relationships, requirements, budget and timeline, while the offshore project manager keeps the offshore team on schedule and ensures the client requirements are translated into a detailed work plan.

More project overhead and management duality is a necessary component of ensuring offshore teams meet schedules, and client requirements are reflected in the work product. This area cannot be underestimated, as project management and administrative time account for a greater percentage of work-hours than ever before. Over the past year, we have seen the percentage of work monitored by a project management office (PMO) go from 37 percent to 42 percent.

What resource management strategy is best?

To improve utilization, executives must improve resource management effectiveness. As the following chart shows, there are pluses and minuses to all flavors of resource management strategies.  Green shading indicates “Best in Class” and red shading indicates “Worst in class” based on responses from 195 firms.

0210 4Source: SPI Research December, 2009

Our recent research shows there may not be “one magic bullet” resourcing strategy that is clearly superior to all others. The five strategies that follow enable PSOs to manage talent and fulfill client demands.  Although centralized resource management is the most prevalent strategy, each organization must create a resourcing strategy that works best for their business, with the ultimate goal of increasing utilization and client and employee satisfaction.

  1. Centrally-managedMost resource management pundits favor “centralized” resource management. It appears to provide superior management visibility into the entire project backlog and level of skills required both today and in the future. Central control may be best for fast-growing organizations with large projects but may not produce the highest levels of billable utilization because a certain amount of churn and resource and client unhappiness can result from impersonal centralized staffing policies.
  1. Local resource managementLocal resource management is the preferred form of resourcing for young organizations where the workforce is small enough to foster real esprit de corps, and employees wear many hats. Smaller organizations can’t afford the overhead of a dedicated resource management function, and relationships and roles are fluid, requiring more local control and finesse.
  1. By horizontal skill setsManaging resources by horizontal skill sets is useful for developing best practices, repeatable processes and shared knowledge. For example, many firms have project and program managers report directly or indirectly to the PMO. By building affinity around “birds of a feather,” project managers or specialized consultants can more easily share best practices and standardize methodologies, templates, etc. As organizations grow, a horizontal or competency-based overlay reporting structure can help firms develop repeatable best practices and deep, shared expertise.
  1. Account-basedResource management by account may be a good strategy for very large accounts where there is a strong backlog of projects, but account-based resourcing can cause big issues if account revenue dries up. A recent example was Electronic Data Systems’ (EDS) reliance on revenue from General Motors. As the relationship with General Motors soured, and its fortunes began to wane, Electronic Data Systems was left holding the bag.
  1. Centers of excellenceThe current trend towards vertical Centers of Excellence (COE) was pioneered by Accenture over the last decade. The advantage of industry-specific “Centers of Excellence” is the development of deep business-domain knowledge. In theory, each Center of Excellence acts as a clearinghouse for specialized knowledge, expertise and solutions. Clients and prospects delight in seeing a “Vision of the Future” for their “oh, so special” unique industry. The downside of COE can be excessive overhead, the creation of an ivory tower mentality and the inability to learn from emerging new horizontal and vertical trends. Further, use of horizontal skills sets and technologies outside the COE can become cumbersome and inefficient.

And let’s not forget that professional service organizations are based on the unique knowledge, skills and personalities of a highly motivated and compensated workforce. So, erring too far in making resource management more science than art may not take best advantage of hard-to-find experts. Leading firms understand the skills required and available, and work toward providing additional training to improve employee performance.

Investment in people, process and systems allows these organizations to minimize employee attrition and drive utilization to extremely high levels. Our research shows PSOs that create standard job positions clarify the skills their workers must have. And providing additional training helps increase both productivity and morale, both of which improve organizational performance.

Looking inward

Given the economic downturn, and its negative impact on pricing and overall profitability, many PS executives have begun to look at areas to improve revenue and margins. While they have focused plenty of effort on improving sales, executives know they must also look inward at their workforce, and streamline operations wherever possible.

Reducing both billable and non-billable headcount has somewhat improved billable utilization, but going forward, professional service executives must take a proactive approach to their workforce strategy. Perhaps, this is why resource management has become a top priority for PSOs with widespread resources and a reduced bench.

The economy will pick up; the PSOs that have developed a comprehensive workforce strategy supported by a strong resource management infrastructure will be in a much better position to drive revenue and profits upward going forward.