Revenue and Jobs Soar for 2017 Best-of-the-Best Professional Services Organizations

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SPI Research, the leading independent technology services research firm, today named the 2017 Best-of-the-Best professional services organizations (PSO). SPI’s extensive annual survey, the PS Maturity™ Benchmark, revealed top performers grew both revenues and new jobs at more than twice the rate of average firms.  The Best-of-the-Best augmented their consulting workforces by 16.9% compared to 5.9% headcount growth for average firms.

This past year, the top 21 firms out of 416 organizations who participated in the survey, outperformed their peers and the benchmark average with not only significantly higher profits, but also larger projects and more satisfied clients.

The Best-of-the-Best excel across five critical service performance dimensions: leadership, client relationships, human capital alignment, service execution, and finance and operations. The Best-of-the-Best recognition is significant because it measures PSOs not only on bottom line financial results such as profit margins but also on a breadth of leadership metrics to reveal exceptional, holistic performance.

For the past eight years, SPI Research has conducted in-depth analyses of the top five percent of PS Maturity™ benchmark participants to uncover the reasons for their superlative performance. Top performers tend to be more specialized than average firms. They concentrate on high-growth segments (Cloud, Security, Talent and IT) or vertical industries like healthcare where they are often the market leader. Because of their sterling reputations, a significant portion of their business comes through referrals.

Best-of-the Best Comparison to Average Consulting firms:BoB2017TableThe top performers revealed in SPI’s 2017 benchmark study are:  

Fruition Partners, a CSC company, is a global technology-enabled services firm focused on elevating service management to the cloud.

Neueda is a global IT consultancy, training and software development company with specific industry focus on Public Sector, Utilities and Capital Markets.

SaaSfocus Inc. is a customer-centric, high-tech, cloud services consulting company focused on aiding and consulting businesses in their pursuit of cloud and other emerging technology solutions.

CirrusOne specializes in the delivery of complex CPQ, CLM, billing and customer success solutions.

Mason Advisory is a UK-based IT consulting firm that works with clients to solve complex business challenges through the intelligent use of IT.

Centrify secures identities across hybrid, cloud, mobile and on-premises IT environments.

Stoneridge Software draws on years of experience in the Microsoft Dynamics space to provide complex ERP implementation and support.

e4 Services, LLC is a healthcare information technology consulting firm specializing in clinical, hospital information management and revenue cycle services.

Superior Controls, Inc. reliably delivers automation and control systems integration services.

LDS  is a consulting firm that envisions and designs digital solutions for global organizations.

Advoco is a leading Enterprise Asset Management (EAM) consulting services company, focused on Infor EAM solutions.

Collaborative Solutions is a leading global Finance and HR transformation consultancy that leverages world-class cloud solutions.

Pariveda Solutions, Inc. is a leading management consulting firm specializing in performance improvement.

Aspect’s contact center, self-service and workforce solutions work together to deliver better outcomes for those on either side of the conversation.

Jacobus Consulting is a leading healthcare consulting firm focused on improving patient care and quality, system and workflow operations, and financial performance.

Integrated Project Management Company, Inc. (IPM) is a leading project management consulting firm, planning and implementing strategic and critical projects.

AHEAD is a consulting company that helps enterprises transform how and where they run applications and infrastructure.

Box is transforming the way people and organizations work so they can achieve their greatest ambitions.

The annual benchmark from SPI Research draws on a database of over 2,482 PS organizations to provide in-depth analysis of PS metrics and performance. For the 2017 report, 416 companies representing more than 200,000 consultants provided input. The complete 2017 PS Maturity™ Benchmark report is now available for purchase.

Service Performance Insight (SPI) is a global research, consulting and training organization dedicated to helping professional service organizations (PSOs) make quantum improvements in productivity and profit. In 2007, SPI developed the PS Maturity Model™ as a strategic planning and management framework. It is now the industry-leading performance improvement tool used by over 15,000 service and project-oriented organizations to chart their course to service excellence.

Contacts

SPI Research
Jeanne Urich, 650-342-4690
jeanne.urich@spiresearch.com
www.spiresearch.com

Defining the Professional Services Market

By Jeanne Urich

Insights into the Professional Services Market

2016psmb_coverBased on 10 years of benchmarking the professional services industry, one of the top questions we are asked is how we define the professional services market and the demographics of the thousands of PS organizations that have participated in our research. Although the only company names we reveal each year are the best-of-the-best PS organizations, we want to share some interesting demographic information to show the impressive growth of the professional services market.

Professional Services Highlights in 2016

Based on input from 549 PS firms from around the world, year over year, PS revenue growth has exceeded 10 percent for the fifth year in a row. Strong job growth, with year-over-year headcount expanding by 7.8 percent, proves the vitality of the PS segment. The PS organizations in the 2016 PS Maturity™ benchmark employ more than 350,000 consultants who each produce an average of $198k in annual revenue. Collectively, these firms generated more than $69 billion in PS revenue. What’s more, these firms reported strong earnings growth, with average net profit moving up from 13.2 percent in 2014 to 15.5 percent in 2015.

On the horizon, PS headwinds appear to be picking up momentum. Major leading indicators such as the size of the sales pipeline, bid-to-win ratios and backlog all fell sharply in 2015. At the same time, voluntary and involuntary attrition has risen to the highest level since the recession. And as we have seen for the past nine years, the gap between the best-performing and worst-performing PSOs continues to widen. This year, the 300 (55 percent) lowest-performing firms generated merely 2.1 percent in net profit while the top 100 (20 percent) generated 23.5 percent in net profit.

Professional services industry by the numbers

We use the North American Industry Classification System (NAICS) to analyze the services market as Table 1 shows. The primary professional services designation is NAICS 54xx which defines PS sub-verticals as “Those in this subsector engage in business processes where human capital is the major input. These establishments provide the knowledge and skills of their employees, often on an assignment basis, where an individual or team is responsible for the delivery of high-value services to the client. The individual industries of this subsector are defined on the basis of the particular expertise, training and credentials of the services provider.”

Table 1: Vertical PS Markets — the North American Industry Classification System
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Source: U.S. Census and Service Performance Insight, May 2016

Additional industry segments that generate substantial professional services revenue include software (NAICS 5112), data services (NAICS 5182) and employment services (NAICS 5613). Including these segments, the U.S. professional services industry generated approximately $2 trillion in revenue and employed 12.5 million U.S.-based workers. The U.S. market represents roughly 60 percent of global professional services revenue, which leads to a global revenue estimate of $3.4 trillion and provides employment for 20.8 million professional service workers. These figures exclude revenues and PS employees in telecommunications, financial services and healthcare services.

According to the 2015 U.S. Census, professional, scientific and technical services (NAICS 54xx) revenue was $1.56 trillion, up 4.7 percent from 2014. Across the services industries, the fastest-growing segments in 2015 were employment services (recruiting and staffing), management consulting and accounting. Two segments experienced market contraction from 2014 to 2015. These were specialized design services and architectural, engineering and related services.

Within professional services, the fastest-growing and most-vibrant segment is software and IT services. There are more than 100k software and IT services companies in the U.S., and more than 99 percent are small and medium-sized firms with fewer than 500 employees. This total includes software publishers, suppliers of custom computer programming services, computer systems design firms and facilities management companies. This segment of the PS industry draws on a highly educated and skilled U.S.-based workforce of nearly 2 million people.

Many of the concepts and uses of professional services described in this report also exist within product-driven organizations. As a result, we use the term “services-driven organization” or embedded service organization (ESO) to describe the rapidly expanding market for service organizations within product companies.

PS maturity benchmark vertical market demographics

The 2016 PS Maturity™ Benchmark is a comprehensive global study of the professional services industry based on 549 participating organizations representing more than 350k consultants.

Figure 1: Professional Service Vertical Market Distribution of the 2016 PS Maturity™ Benchmark Participants
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Source: Service Performance Insight, May 2016

Tables 2 and 3 further analyze the survey demographics by vertical market, highlighting the surveyed markets. According to this year’s survey, VARs experienced the greatest year-over-year PS revenue growth, closely followed by software as a service, or SaaS, PS organizations and IT consultancies. Overall, PS revenue grew 10.2 percent, slightly higher than last year’s 10 percent.

Based on completed surveys from 2,066 PS organizations over the past nine years, PS revenue growth for the past five years has averaged 10.9 percent. Over the same five-year period, these firms have increased PS headcount by 8.3 percent. Across the PS industry, annual revenue growth is always higher than PS headcount growth. This means firms become more productive as they scale up while the overall PS industry continues to ratchet up productivity.

Table 2: 2016 PS Maturity™ Benchmark Demographics by Vertical Market
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Source: Service Performance Insight, May 2016

Hardware and networking represented the largest organizations, with a PS headcount of 1,469. Accounting firms reported the smallest average PS headcount at 152 accountants, with PS revenues averaging $24 million. Architectural and engineering firms reported the highest percentage of total revenue from PS at 90.8 percent. For other PS firms and VARs, professional services are a small component of their business. They reported the lowest percentage of total revenue.

SaaS organizations experienced the most mergers and acquisitions while staffing firms experienced the least. According to Equiteq, the consulting market experienced a strong uptick in merger and acquisition activity, with overall deal volume increasing by 13 percent from 2013 to 2014. Thirty-five percent of the more than 2,000 consulting acquisitions reported were under $5 million, and 70 percent were under $40 million. The vast majority of consulting firms are small, with revenues below $100 million.

Table 2: 2016 PS Maturity Benchmark Demographics by Vertical Market Continued
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Source: Service Performance Insight, May 2016

What it takes to be a top PS firm

Going forward, leading-edge firms must continually reinvent themselves. They must always on the prowl for the next big thing while delivering exceptional projects to ensure a rich stream of repeat and referral business. Firms cannot stand still. They must continually stay ahead of the markets they serve while intentionally harvesting and repurposing current consulting assets to be able to deliver future projects better, faster — and, if need be, cheaper.

Get more information about the 2016 PS Maturity Benchmark and purchase it.

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.
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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.

A Smarter Way to Create the Annual PS Business Plan and Budget

A proven way to effectively build your business plan

Planning Pyramid
As 2016 approaches, it is time for professional services executives to begin the planning process. This process typically takes one to two months and sets the tone for the year to come. It’s a great time to assess overall corporate strategy in order to determine whether the organization should continue on its current course or make changes to grow faster and more profitably.

Certain components of a strategy generally do not change from year to year, such as the organizational vision, mission, values and culture. Still, professional services organizations should review their charter and associated business model each year to determine whether they align with changing market conditions, competition and employee capabilities. The best PSOs take both a top-down and a bottom-up approach to business planning, and to developing the budget.

Plan by department, build up to organization

Departmental planning allows each group to set its strategy to ensure it meets overall strategic priorities and goals. Here is a list of questions each group needs to address:

Executive (Leadership)
Leaders in successful PSOs first develop and then communicate the charter and vision throughout the organization. Target markets and go-to market strategies help define a portfolio of services that align to achieve financial objectives. And then — by aligning the workforce around its strategy — PS executives can ensure everyone on board is focused to deliver solid financial results.
Questions for executive leadership:
• Do we have the right strategy, and if not, how should we change it to capitalize on our markets?
• How is our strategy going to change over the next year?
• What types of services, geographies and clients should we concentrate on?

Marketing and sales (Client relationships)
Embedded in the business plan will be a strategy that differentiates the services sold from those of the competition. The less they are differentiated, the more susceptible they are to pricing pressure. To be effective, people responsible for selling services need to be able to communicate the value the organization provides to potential clients. Proper expectation setting through requirements and contracts ensures prospects become satisfied clients.
Questions for sales and marketing:
• What services should we sell that generate the highest growth and profit potential?
• Do we have the right marketing and sales personnel to achieve our corporate goals?
• What other services do we see being offered in the field that we could also begin to sell, and how should we price them?
• Will we focus more on new client acquisition or selling services within our current client base?

Human resources (Human capital alignment)
Employee cost is typically the single largest line item in a professional services budget. Research has shown that it is increasingly difficult for PSOs to find, hire and retain talent. If the PSO is well-aligned, it will know what skills are required to meet growth and profit objectives. The organization will also be in a better position to compensate employees for the value they deliver.
And don’t forget training! It makes the workforce more valuable, and employees appreciate the investment in them. As a result, it leads to lower voluntary attrition rates.
Questions for HR:
• What skill sets will be important in the upcoming year, and do we have the necessary personnel in house?
• How much and what types of investments will we make in recruiting?
• What type of training should we offer in order to prepare our employees for the work ahead as well as ensure they stay with our firm?
• How has compensation changed over the past year, and what should we do to motivate and retain a highly qualified workforce?
• Do we need to consider third-party resources, and how much do they cost?
• How do we measure and improve employee engagement?

Service delivery (Service execution)
When it comes time to service delivery, PSOs need to pay attention to service delivery costs. Furthermore, they need to check for quality and ability to deliver the value clients expect.
Since service delivery is where money is made in professional services, the ability to balance project margin with client satisfaction will go a long way to helping the PSO grow and prosper.
Questions for service delivery:
• How can we improve our estimates and on-time, on-budget delivery?
• Do we have the right resources available to meet the plan?
• What tools and investments do we need to meet our plan?
• How can we deliver with higher levels of quality and at higher margins?

Finance and operations
Professional services organizations pay close attention to the margins of the services they deliver. Executives are responsible for figuring out how to deliver higher-quality services at higher margins. They also need to continually analyze the entire organization to find ways to improve operational capabilities that will result in higher levels of profit.
Questions for finance and operations:
• What are our revenue objectives, and how do they tie in with the sales plan?
• What profit do we want to achieve by geography, by line of business, by consultant?
• How will we manage cash flow?

Uncertainty exists
The fact is, there are many things occurring in the marketplace that are beyond a PSO’s control. Issues such as global growth, competition, new technologies, government intervention and even mergers and acquisitions among the competition or internally can alter the strategy going forward.

And as it happens every year, PS executives should consider new service offerings to take advantage of changing industry dynamics. A host of internal and external factors impact the business plan and the budget.

Your five-step process to build a budgetbudget
SPI Research has created the following five-step process for PSOs to follow in building a budget:
1. Review last year’s successes and failures to figure out where to start.
2. Analyze where revenue and profits came from last year and get into specific details. Are these growth areas for the following year?
3. Identify the key assets and look to see what is needed to round out the organization.
4. Define the service portfolio, which helps determine what areas to invest in that will generate both the best short- and long-term growth and profitability.
5. Determine the key performance indicators that show how the organization is performing.
Review past successes and failures

The first step is to review last year’s budget and analyze the successes and failures of the organization. Of course, no one wants to repeat last year’s mistakes. A frank assessment helps refocus on strengths while shoring up weaknesses. What type of expansion is planned? Services, regions, clients?

Analyze last year’s revenues and profits
Look at the organization and dig deep into the details to identify organizational costs. This requires analyzing the cost structure in four different areas:
1. Core costs focus more on service delivery, what it takes to deliver services, what tools are required, what the service portfolio looks like and what it might cost to add more services.
2. What types of skills are required, and where are they located? How much do they cost? Based on our current rate and cost structure, can we operate at acceptable margins? This area in conjunction with core costs represent all of the field costs necessary to efficiently and effectively deliver services.
3. Here, analyze supporting costs. Everything associated with marketing and sales, facilities, IT, overhead and all other costs necessary to make sufficient profit.
4. Analyze capital costs, the costs necessary to build and grow the organization.
Identify assets

Once the four areas of cost have been identified, take stock of your assets. What are the key assets of your organization?
1. First and foremost, it’s people. While manufacturing organizations have all types of equipment and materials, the success of PSOs ultimately depends on the caliber of people they hire. Executives should identify people who generate the most revenue and profit and also have the highest billable utilization levels. This will help executives clone them by hiring or training similar superior talent.
2. Second is the service portfolio. What services are offered and where? Are they strategic to growth or tactical? How do we harvest the maximum profit from our cash cows to invest in new growth areas?
3. Third is clients. Who are they, and where are they? Are they happy with the services offered and delivered? Do they want more types of services? And if so, will these services be profitable? What are their payment policies?
4. Finally, finances. What capital is required to expand? What is the projected cash flow and profit? These must be compared to the budget. At the end of the day, the PSO is probably in business to make money, so it is critical finances are managed closely.
The secret is to capitalize on information within the core business solutions to better understand the true value of each of your assets.

Define the service portfolio
The next step is to look at the service portfolio. This exercise enables PS executives to look at the long-term future of the organization. There may be very profitable services, but they may have a limited time horizon. For instance, at the end of the last century, Y2K initiatives were all the rage. But they were not going to last past the year 2000.

Therefore, analyze the service offerings to determine which ones are more strategic and provide long-term benefit to the organization as opposed to short-term tactical solutions. Both are important, but the long-term strategic initiatives will help the PSO build its brand.

Determine the key performance indicators
Finally, which key performance indicators should the PSO monitor? Every department should have three to five major KPIs to monitor in real time and watch for positive and negative trends. Real-time monitoring allows them to make modifications to help maintain positive growth and profitability.

Common causes of a failed business plan
These are the most common reasons business plans fail:
• Leadership team’s inability to effectively confront the reality of the current business environment with a realistic fact base and competitive benchmarks.
• Focused on too many — sometimes competing and overlapping — priorities.
• Lack of alignment across all parts of the organization around a core set of measurable improvement initiatives.
• Inability to rapidly engage the entire organization in translating improvement plans into operational tactics and job-level objectives.
• No follow-through to accelerate the learning and performing cycle while creating committed leaders at all levels of the organization.

Bringing it all together
Most executives probably have their vision, mission and values in place, and have had them for several years now. Before a PSO can prepare a budget, it needs a business plan to provide organizational direction. The business plan will guide the budget.

Most organizations conduct planning and budgeting on an annual basis. While modifying the strategic vision might be a yearly process, organizational planning and budgeting are living documents, which should be evaluated quarterly, at the very least. Economic conditions change as do competition, technologies and regulations.
The plan and budget put together a few months ago may not be relevant today. Therefore, PS executives need to stay current with economic changes as new developments could change the organization’s focus.
Lastly, and most importantly, focus on growth!

There is still time to complete the PS Maturity benchmark survey! Participants will receive a FREE copy of the 2016 PS Maturity Benchmark when it is published in February, 2016. Cover2015PSMB

What the Leaders Do

By Dave Hofferberth and Jeanne Urich, Managing Directors, Service Performance Insight, LLC

This is the third article in a three-part series examining the metrics that matter for running a professional services organization and the elements of the professional services income statement. Part one looks at key metrics, typical targets and the incremental impact of small improvements. Part two provides descriptions and industry averages for the critical components of the professional services income statement — both revenue and expense. In this article, we focus on the top 20 percent of professional services organizations to reveal the best practices that set them apart.

LeadersBased on eight years of benchmarking more than 2,000 professional services organizations, by far, the most important questions and variances come from our income statement analysis. Both revenue and costs show enormous variability — not just by type of organization as in embedded versus independent — but also by PS vertical such as IT consulting, management consulting and embedded software versus hardware as well as by organization size.

There are no definitive right or wrong answers as services-based businesses are comprised of many different business models. The secret success formula is based on maximizing the productivity and profit of each business line while limiting unwarranted overhead. Our research shows that the most successful services businesses also tend to be the fastest growing. Growth comes from being well-positioned in expanding markets. The best firms understand where the market is going and create unique services to provide an early-mover advantage for their clients and themselves.

Flat or negative growth in a services business is deadly because of the high cost of finding and retaining talented consultants. Without enough new and interesting work and clients, high-priced consultants will start looking for new opportunities where they will be able to grow their skills and income.

What the leaders do
Each year, we conduct an in-depth analysis of the top 20 percent of PS Maturity benchmark participants to uncover the reasons for their superlative performance. Table 1 compares the top 20 percent consisting of 44 organizations to the other 80 percent comprised of 176 organizations to highlight how leaders generate revenue and where they curtail costs.
Table 1: PS Income Statement Comparisons Between the Top 20 Percent and Average Organizations (in percentages)

Table 1

The leading organizations produced almost twice the net profit of average firms! They derived more revenue from their own direct labor and relied less on revenue from subcontractors and pass-through revenue from reselling software, hardware and other materials. Time and again, our analysis finds the leading firms are extremely well-positioned in fast-growing market segments. They tend to be the premium supplier in their space — able to command the highest rates and garner the best clients and projects.

While the leaders perform well in a number of areas, several are worth noting:

  1. Direct labor: Leading organizations generate higher direct labor margins compared to average firms. They tend to have the best people and clients and, therefore, can charge the highest rates.
  2. Subcontractors: While having an external pool of resources is generally a good idea, the best firms primarily sell and deliver with their own internal resources, reducing or eliminating the inefficiencies and potential quality issues of a third-party resource pool. Leading organizations place a premium on exceptional project delivery, so they use their own employees and arm them with unique tools, templates and methods, using subcontractors sparingly. This strategy helps the leaders maintain the highest levels of delivery quality while continually enhancing their brand and competencies.
  3. Sales and marketing: Leaders tend to spend less than average firms on sales and marketing. Interviews reveal that they are well-positioned in growing markets, with the majority of new clients and opportunities coming from referrals. Leaders also tend to be more specialized than average firms, which means their services are more unique. As such, they’re less likely to encounter stiff competition. Target buyers come to them, reducing their cost of sales and marketing. Leaders are more efficient at sales and marketing because their target clients are better defined, and they are able to reuse knowledge and know-how gained from previous engagements.
  4. The one thing that makes the difference
    As your organization grows in numbers of people, practices, geographies, etc., it becomes increasingly difficult to manage finances. The fastest-growing and most profitable professional services organizations integrate their core business solutions with their accounting system (enterprise resource planning). These organizations simply operate better, in large part due to enhanced visibility to all aspects of the business.

    Our research shows the highest-performing organizations have invested in integrated information systems in which all aspects of the business — marketing, sales, service delivery, HR and finance — work together with one source of the truth for clients, projects and employees. Integrated business applications reduce manual data reentry and reduce errors from information duplication for clients, deals, projects and contracts.

    Employees are not forced to input the same information multiple times into the customer relationship management, professional services automation and HR systems as an integrated information system captures key information once and then reuses this information to provide insight to different aspects of the business.

    Most of the firms surveyed in our benchmark utilize a best-of-breed CRM from a vendor that is different from their ERP supplier. And most do not connect the CRM to ERP, thus missing out on attaining the full benefits of CRM. A CRM solution connected to ERP provides PSOs with greater clarity in terms of the services marketed and sold as well as their potential profits and cash flow. They are able to quickly assess and capitalize on their best markets, their best clients and their best service lines.

    Why integration matters
    Integration between CRM and PSA ensures service delivery has visibility to the deals and opportunities in the pipeline, and sales can see the status of projects and change orders. Finance can review contract terms and conditions to ensure bills are generated and payments are collected that conform to finalized contracts. All of this information drives timely, fact-based decisions while empowering employees at all levels to swiftly react to changes and issues.

    As PSOs move from disconnected CRM to its integration with the core ERP solution, they achieve better performance metrics in terms of bid-to-win ratio and deal pipeline, to name a few. These benefits provide greater stability and more success in the marketing and sale of services. As the competitive environment intensifies, expanding sales to new clients, winning bids more frequently and increasing the deal pipeline lead to faster growth and greater profitability.

    Most professional services organizations utilize PSA solutions. The benefits are clear in terms of increased billable utilization and overall project management success. However, not all of the firms integrate PSA with the core financial management solution; without this integration the potential benefits of PSA are reduced. Connecting the ERP and PSA solutions allows collection of project-related information such as time and expense as well as billing milestones while enhancing the view of budget to actual revenues and costs.

    PSA is both a strategic and tactical solution for professional services. The information contained within PSA not only helps PSOs grow more efficiently and effectively, it also provides visibility into the types of clients and projects that are a best fit. PSA integration with ERP is critical. We have found many of the most critical financial metrics such as revenue per consultant, employee and PS profit increase substantially when these best-of-breed solutions are connected.

    Follow the money
    There are obviously many ways PSOs use cash. Their largest expenditures are for people as the business is labor intensive and labor driven. These firms use cash to recruit, hire, train and compensate their employees, and each of these costs is variable.
    As work is delivered, there are costs associated with travel and materials along with employee costs. Marketing, selling and general and administrative costs account for a large portion of a PSO’s expenditures.

    What is important here is that the only way to make money is through invoicing and bill collection. Even though the mandate is to deliver high-quality projects on time to your clients, the billing process and your success or failure with collections ultimately drive revenue and profit.

    Tips to make more money from professional services
    Here are a few tips to maximize profit:

    1. In today’s competitive environment, establishing a high-quality brand and reputation is imperative.
    2. Go deep. Starting out, it is better to be highly specialized in a high-growth area. Premium firms start as domain experts. With success, the firm can expand both geographically and horizontally.
    3. Leaders must focus “on” the business … not “in” the business. In other words, they need to pay attention to the strategy, direction and operations of the firm, not day-to-day firefighting.
    4. Drive year-over-year top-line revenue growth of more than 10 percent. The PS sector consistently grows at greater than 10 percent. If your organization is not beating the benchmark, you are falling behind.
    5. Make more margin on all aspects of the business: Measure margin by service line, by geography, by client, by team and by consultant. Analyze winning strategies and replicate them.
    6. Don’t put all your eggs in one basket. Make sure no one client or a handful of clients make up more than 15 percent of your business. Client and portfolio diversity limit risk.
    7. Drive EBITDA to at least 15 percent, the PS industry benchmark. This requires gross margins of greater than 45 percent and keeping costs to less than 30 percent of total revenue.

    To get a FREE copy of the 2016 PS Maturity Benchmark – please complete the benchmark survey before December 1st, 2015http://spiresearch.com/psmaturitymodel/2016psmm/

    Cover2015PSMB

     

Professional Services Benchmark Reveals Goldilocks Year

By Jeanne Urich, Managing Director Service Performance Insight

How does your firm measure up?

According to Service Performance Insight, 2014 was a Goldilocks year for professional services organizations because incremental growth, productivity and profit enhancements combined to deliver results that were not too hot, not too cold, but just right. The 2015 Professional Services Maturity Benchmark reveals industry growth of more than 10 percent for the third consecutive year.
Porridge

Highlights from this year’s benchmark
• Steady growth: Annual revenue growth (10 percent), headcount increases (8 percent) and larger project backlogs delivered steady, consistent and manageable growth.
• Productivity improvements: Nearly all professional services organizations experienced significant improvement in revenue per consultant ($197K versus $193K) and revenue per employee ($167K versus $155K) due to moderate increases in billable utilization (71 percent versus 70 percent) and the percentage of the workforce that was billable (75 percent versus 71 percent).
• Talent management remains the top challenge: Firms struggled to find and develop the talent they needed to sustain their growth. Attrition rose for the fifth year in a row to 8.9 percent versus last year’s 8.3 percent and will likely continue to rise as consulting demand outstrips supply.
• Sales effectiveness still difficult but improving: Although consistently a top challenge, sales metrics improved with larger sales pipelines and shorter sales cycles, adding up to more firms reaching their revenue targets.
• Profits up: Embedded service organizations — software, SaaS and hardware — delivered exceptionally strong performance with net contribution margin increasing to 19 percent from 15 percent in 2013. Profits grew in all vertical markets and all geographies. Europe, the Middle East and Africa (EMEA) posted the best geographic profit progression from 13 percent in 2013 to 16 percent in 2014.
2015 Benchmark Trends
In the professional services sector, 2014 marks the year that the great recession finally ended and business returned to normal. But the new normal in technology services is very different than the normal that led up to 2008. The cloud gold rush continues unabated and has spread to the enterprise — ushering in a new wave of well-capitalized global competitors that are squarely focused on solving big business problems in sales, marketing, talent management and finance. Cloud computing will grow from a $41 billion business in 2011 to a $241 billion business in 2020, forever disrupting the status quo.

Talent is the Top Challenge
In 2015, the sobering new reality of a global skilled talent shortage is taking center stage. The global workforce is simultaneously getting younger and older as millennials begin to make up a higher and higher percentage of workers while baby boomers refuse to retire, due in equal parts to economic and job satisfaction reasons.

The knowledge workers of today, who comprise the professional services sector, are more multigenerational, more multicultural, more global and more technology savvy than ever before. Leading and inspiring this workforce means top-performing PS organizations must focus as intently on developing unique cultures as they do on cultivating exceptional domain knowledge and competencies. Continuous learning is no longer a nice to have, it has become a survival prerequisite.

Developing business
Almost on par with the challenge of finding, hiring and engaging top talent is the challenge of business development. Today’s business development success relies on senior relationships and consulting acumen. Billable experts who provide valuable insights are the most effective solution sellers, but finding them and keeping them engaged is a daunting task. Winning firms are those that find creative ways to generate and qualify new opportunities, ensuring time-constrained knowledge experts can focus on the best clients and opportunities without wasting time on poorly qualified deals.

The PS success formula going forward means leading-edge firms must continually reinvent themselves, always on the prowl for the next big thing, all while delivering exceptional projects today to maintain a rich stream of repeat and referral business. Firms cannot stand still or rest on their laurels — they must continually stay ahead of the markets they serve while intentionally harvesting and repurposing current consulting assets to be able to deliver future core projects better, faster and, if need be, cheaper.
2015 promises to be an exciting and challenging time for professional service providers.

About the benchmark
Using information that’s typically confidential such as detailed bill rates and compensation, the 190-page report analyzes 200 key performance metrics and includes 235 supporting charts and graphs. It includes income statements and expense ratios for eight professional service vertical markets.

The annual benchmark from Service Performance Insight draws on a database of 1,517 PS organizations to provide an in-depth analysis of PS metrics and performance.Cover2015PSMB
Purchase report here.

Talent Management is the Top Challenge Facing Services Organizations

by Jeanne Urich, Managing Director, Service Performance Insight, LLC

Picture1
In 2015, talent takes center stage as both the top challenge and the top improvement priority in the world of technology professional services. Global economic recovery, changing workforce dynamics and the pervasive use of technology in our professional and private lives have transformed the world of work.

For example, today’s consulting workforce is increasingly virtual with almost as many consulting hours delivered off-site as on the client’s site. According to the 2015 PS Maturity benchmark, based on input from 220 professional services organizations representing more than 63,000 consultants, 25 percent of consultants primarily work from home with another 15 percent described as contingent workers either onshore or off.

The new world of work depends on a multilingual, global, technically-skilled, project-based workforce. Professional services leaders must squarely confront the realities of attracting and retaining a younger workforce against the backdrop of a technical labor shortage.
Globalization has significantly affected workforce strategies with many service providers providing hybrid on- and offsite resources via regional and global competency centers. Based on technology advances, consulting emphasis is shifting toward business process and vertical expertise. However, demand for horizontal application and technical skills remains high.

Human Capital Alignment
Service Performance Insight’s “Human Capital Alignment” pillar encompasses all elements of the professional services workforce strategy. Human Capital Alignment focuses on the people processes and systems required to recruit, attract, retain and motivate a high quality consulting workforce.

The bottom line in the Human Capital Alignment pillar is that known best practices of providing clear roles and job descriptions, timely performance reviews, fair compensation, career planning and skill building pay huge dividends in employee satisfaction, billable utilization and on-time project completion. Executing an effective Human Capital Alignment strategy produces a long-lasting payback and should make the short list for any maturity improvement plans.

Table 1 shows how PSOs mature across the Human Capital Alignment pillar.

Table 1
One of the most important challenges for today’s B2B professional services leaders is competing for top talent in a level, global, web-enabled playing field of digital natives who value collaboration and cool new technologies more than security and remuneration.

Today’s Human Capital Alignment challenges include:
• Attracting, retaining and motivating top talent.
• Managing through a technical labor shortage.
• Managing a global, multilingual, multicultural, multigenerational workforce.
• Managing a variable, contingent workforce or both.

By definition, professional services organizations are judged by the quality of the people within the firm. The essential elements of the PS workforce plan are shown in Figure 1.
Figure 1
Interesting trends have emerged from SPI Research’s eight years of benchmarking more than 2,000 professional services organizations, which are outlined in the following sections.

Big changes
• According to the 2015 PS Maturity benchmark, PS attrition is rising at an alarming rate. In 2015, worldwide PS attrition rose to 9.3 percent from 8.1 percent in 2014. On a global basis, attrition is highest in Asia Pacific at 10 percent, closely followed by North America at 9.4 percent with EMEA lowest at 6.7 percent.

• A key finding in TriNet’s 2014 employment report states: “Technology and professional services were the hottest growing sectors for the year, with annual net job growth of 49 percent and 26 percent, respectively. For the technology sector, this is nearly twice the growth rate when compared to 25 percent in 2013. Professional services witnessed the greatest year-over-year increase as 2013’s annual growth rate was only 8 percent.”

• Fewer and fewer consultants work from a central headquarters location mandating the use of technology to support communication, collaboration and knowledge sharing.

• Every year a higher percentage of PS employees are billable (75 percent), which means leaner management and lower administrative overhead.

• Ratings for confidence in leadership, ease of getting things done and innovation have declined each year indicating PS employee engagement and trust are waning.

• Average time to recruit and ramp a new consultant has increased to 126 business days, indicating the war for top talent has accelerated.

• Bill rates for the top PS organizations average 25 percent higher than average rates indicating clients are willing to pay a premium for superior skills and knowledge.

Unchanged
• Year-over-year headcount growth is consistently lower than year-over-year revenue growth which means the PS industry is constantly ratcheting up productivity.

• Project staff size and duration continue to decline, mandating effective resource management strategies to rapidly reassign and redeploy consultants.

• The percentage of work provided by subcontractors and offshore resources has remained constant at 12 percent, which provides insight to the best mix of full-time to contingent labor.

Happy employees and delighted clients equal higher profit
Effective recruiting and ramping make a big difference. Location is no longer as important as finding self-starting employees with good communication and organizational skills. The best firms are developing core service offerings with defined roles, skills and project templates.

This effort helps shorten recruiting and ramping time and provides a sound framework for new hires to rapidly become productive. The best firms offer their employees more than a week of job-related training including soft skills focus on consulting, communication and negotiating skills.

One of the most interesting aspects of Service Performance Insight’s research is the importance of an integrated human capital strategy. Finding, hiring, motivating and retaining key employees is just the beginning.

SPI Research found Human Capital Alignment metrics contain the highest number of performance indicators with extremely strong correlation to success — meaning, employees, and how they perform once onboard dictate ultimate success or failure.
Table 2 shows the correlation between attrition and revenue growth and profit. This table demonstrates the negative consequences of high attrition rates. As attrition rises, all other aspects of performance suffer. The probability of on-time project delivery decreases while average project overruns increase.

Remaining employees have to pick up the pieces from exiting workers and must quickly get up to speed and reestablish client relationships. Clients are forced to back-track to reaffirm previous decisions and vendor commitments.
Table 2
The costs of attrition permeate all aspects of the firm. Lower employee engagement influences the firm’s ability to recruit top talent based on employee referrals. The very real cost to replace exiting employees shows up in 125 work days on average to find, recruit, hire and ramp new consultants.

This lost time is just the tip of the iceberg as it does not measure lost productivity time for recruiters and managers nor the impact on the remaining workforce to take over work after a valuable employee has left. SPI Research believes the real cost to replace a valuable consultant is in excess of $150k making a big negative impact on bottom-line profit.

Talent priorities for 2015
Based on SPI’s research and discussions with top-performing PS organizations, four areas must be addressed to develop best consulting talent practices.

1. Confidence in leadership. Like everything else, it starts with effective leadership. These leaders are clear about the future direction of the firm, understand and take advantage of changing market dynamics and communicate the direction of the company and the role employees play in shaping it.

PS is a logical, knowledge-driven business, so leaders must focus on clarity and a few but impactful improvement priorities. All of the best firms provide open, honest and transparent communication based on a foundation of open books and systems.

2. Great place to work. Top performing firms find innovative ways to help overworked consultants maintain life-work balance. From a facility point of view, firms focus on two priorities: creating open, team-centric workspaces where project teams can meet and collaborate as well as virtual work-from-anywhere environments with state-of-the-art collaboration and remote access tools.

Despite the fact that most work is delivered virtually or at the client’s site, top firms ensure there are opportunities throughout the year for consultants to meet in person to enhance their knowledge and skills while celebrating achievements. An ethical, open and recognition rich environment provides the cornerstone of great work places.
Table 3

3. Culture. In today’s fast-paced consulting environment, the concept of culture is more important than ever. Meet with any top performing firm and you will instantly recognize what sets it apart. It may be a focus on only hiring the best and brightest from certain universities, building a collegial, knowledge-intense environment. It may be building a community-based culture with a premium placed on local hiring, community relationships and driving business on a local level.

Or it may be a culture based on pushing the technology envelope — always seeking the next big thing and willing to invest in innovation. Firms must deliberately focus on what sets them apart to be able to build a brand that models the behaviors and type of employees who will best fit.

4. Growth opportunities. The best firms provide rich environments for continuous learning. They offer opportunities for formal and informal growth: mentoring, coaching, lunch and learns, best practices sharing, knowledge repositories, collaboration environments and centers of excellence. In the current turbulent talent market offering career, skill and knowledge growth are an imperative.

Regardless of an organization’s size and maturity level, the firm’s people comprise the essence of the organization. They determine financial viability, brand quality and customer satisfaction. They define the effectiveness of service delivery, sales and marketing. From inception, all PSOs must place a premium on attracting, retaining and motivating high quality consultants.

Defining the Services Charter

By Jeanne Urich, Managing Director, Service Performance Insight, LLC
How to optimize today’s PSO to drive revenues

2014 appears to be the latest high point in the consistent recovery of the services sector. Both technology spending and the technology professional services industry have led economic resurgence with strong improvements in the demand for services. This has resulted in significant year-over-year revenue and margin growth. Professional service executives are cautiously optimistic as they start focusing on long-term growth strategies.

The Current State of Professional Services

According to early results from the SPI Research 2015 PS Maturity™ Benchmark survey, discretionary spending for information technology and training has gone up. Now that business is improving, services executives have refocused their attention on profitably, growing revenue through geographic, vertical industry and portfolio expansion. The survival tactics of the recession have given way to exploring new growth strategies within the context of global customers, a war for talent and intensified competition.

Changes in the economy and the competitive market are dictating new approaches to the creation of a services portfolio. As traditional products are replaced by more attractive cloud-based solutions, profit margins have been squeezed out of low-level installation, configuration and integration services.

Clients are no longer content with simple product implementations. They now demand greater service provider accountability for results. This change has precipitated new strategies, business processes, change management, managed services and training offerings aimed at equipping client organizations to take full advantage of new solutions. In turn, professional services organizations are adding more strategic service capabilities, while moving away from commoditized staff augmentation and product installation.

Within the hardware and software technology sector, services is now viewed as the new growth engine, with services revenue outstripping product revenue. CEOs have awakened to the opportunity to leverage services as an instrumental growth driver for the business, and as an engine for value creation. They have charged professional services executives to build an integrated, high-performing and global PSO. This article outlines growth strategies that will empower professional services leaders to build and sustain a high-performing services operation.

The growing importance of professional services firms
Services is the fastest growing segment of the global economy. Companies in all other industries are increasingly outsourcing and out-tasking non-core business processes to specialized professional service firms. Table 1 shows 2014 IT service spending is now approaching the pre-recession growth rates of 2008.
Table 1

Services organizations are hired at all levels of the enterprise because they can perform work better (knowledge), faster (specialized) or cheaper (out-tasking) than internal employees.
The reasons for using a PS provider include:
• Outside industry expert specialist perspective.
• Expertise too expensive to retain as full-time employees or only needed short term.
• Short- and medium-term expertise to complete specialized projects.

The primary assets of any PSO are knowledge, experience, skills and reputation. The key to staying competitive in today’s market is effectively managing and using these assets.

Types of technology professional services providers:
Independent professional services organizations. Pure-play PSOs provide strategic advice, innovation and specialized knowledge to help drive performance improvements for their clients. Clients hire systems integrators to implement or integrate technology based on their strategic competence, specialized industry and product knowledge, cost and references. Management consultants are hired to provide strategic insight, guidance, facilitation and coaching.

Embedded services organizations. ESOs operate much like PSOs; however, they are part of a product-driven organization. The majority of ESOs focus exclusively on their company’s own technology. The largest ones (IBM, HP, Fujitsu, etc.) provide a complete range of hardware, software, networking, managed services and outsourcing services not associated with their company’s products.

For the small to mid-size ESOs, their primary charter is to successfully implement their company’s products. While they may be focused on professional services revenue and profit, they are often asked to perform non-billable presales, proof of concept and customer satisfaction services at little to no charge.

In product-driven organizations, running professional services as a profit center is a fairly new phenomenon. While product vendors have provided services for years, only recently have vendor-supplied professional services become of greater strategic value as a means to more successful client outcomes. Professional services within technology-oriented organizations have become a client success generator, a source of revenue and profit and an innovation platform for growth.

Defining the professional services vision, mission and strategy
To establish their charter and strategy, PSOs must answer three fundamental questions to position their organization for growth.

Why? The services vision defines the desired future state in terms of the fundamental objective and strategic direction. A vision statement outlines what the organization wants to be, or how it wants the world in which it operates to be. It concentrates on the future. It is a source of inspiration. It defines the purpose or broader goal for being in existence and can remain the same for decades if crafted well.

What? The mission defines the fundamental purpose of an organization by succinctly describing why it exists and what it does. A mission statement answers the question: “What do we do?”
For example, “Accenture’s mission is to become one of the world’s leading companies, bringing innovations to improve the way the world works and lives.”
The typical independent technology professional services charter is essentially to “Delight clients and provide meaningful careers for employees, resulting in profitable growth.”

For ESOs, establishing the appropriate charter is trickier, because their primary role is to support the product sale to ensure client success in using their products. There may or may not be a profit motive. Embedded PSO charters include product extension, market share expansion, partner enablement, footprint expansion or harvesting knowledge and ensuring client success and adoption.

How? The strategy translates mission into execution by defining the markets, customers, service portfolio, partners and competitors the organization is targeting. Strategy defines the path to achieve desired objectives.

A PSO’s strategy includes defining the business and operating models. Many organizations are aligned by geographical regions. However, there are a variety of other ways in which the organization can be structured to improve client intimacy and services execution. The business may be structured around skill-based competency centers, lines of business, specific customers or vertical markets.
Independent versus embedded mission and strategy

For independent PSOs, the initial establishment of a mission and strategy is fairly straightforward. The organization focuses on the types of business problems it can address, the types of clients who have those problems and the vertical industry and geography they will operate in.

Executives must assess the market and determine where their strategic value lies. From that point, they can assess market rates and prepare a strategy that optimizes successful client outcomes with commensurate pricing, staffing and selling to maximize the potential of winning business and producing excellent client results.

Setting strategy for an embedded services organization is more complex. In fact, professional services executives within product-driven organizations might not have a say in the company’s overall direction. Traditionally, ESOs have been utilized for implementation and to assure high levels of quality, customer satisfaction, references and repeat product sales. Profit margins were typically an afterthought.

In the new world of embedded professional services, profits are becoming increasingly important, as is the breadth of the service portfolio. Many of these organizations are moving away from lower margin implementation services and toward more strategic services such as business process reengineering, change management, analytical reporting, managed services and outsourcing. These organizations are starting to use lower-cost subcontractors or partners to supply simple implementation and customization services. Software providers typically cap PS revenue at 20 percent or less of total revenue to minimize the dilutive effect of lower margin PS revenue on the overall company income statement.

Defining Technology Services Charters
How much control and responsibility services organizations are willing and able to take for successful client outcomes determines their services portfolio. For example, if the PSO is an adjunct to product development, the charter is to successfully implement the product and provide feedback to engineering. This charter dictates a focus on implementation, customization and testing services. Successfully implementing the product is the goal, and services profit may not be a motive. Table 2 maps typical service charters to required service offers.
Table 2
Mapping portfolios to client impact
The reality for most complex technologies is that the cost and value of the services required to design, build and run the application far outweigh the cost of the product. The rule of thumb for enterprise software is the initial implementation services will cost three times the product. The aftermarket services for product extension, migration, reporting, analysis and management typically exceed six times the initial cost of the product.
With cloud technologies — because the software is easy to use and easy to install — the service to product ratio is closer to 1:1, meaning the cost of implementation services is about equal to the first year cost of the product. SaaS software providers make their money on multiyear subscription contracts. In SaaS companies, the role of PS is to drive client adoption (and continued use of the product).

In many product-driven enterprises today, services are outstripping product revenue and at much higher margins. This situation bodes well for organizations that learn how to exploit services, as the additional profits can be plowed back into product innovation and sales. It also provides a more consistent, recession-proof revenue stream, which facilitates improved planning and financial control.

As the level of client impact goes up so do the complexity and value of services required to achieve that impact. The services provider’s ability to control and achieve desired client outcomes drives up service value and price.

Figure 1 maps services portfolios to client impact. Lower-level services designed primarily to implement products and drive product revenues are characterized by low to negative margins. Higher-level services produce higher margins because the provider assumes more responsibility for successful client outcomes, thus providing significant business value.
Picture1
How to ensure professional services success
The role of professional services continues to evolve. Intense competition for clients and skilled resources continues to escalate. Winners are simultaneously becoming more specialized and more global. Successful providers can quickly assess and capitalize on technology shifts while increasing their level of client accountability and control.
To succeed, professional services executives must become more focused and more deliberate in developing and implementing a clear service strategy that can be understood and followed by both clients and employees.

They must then translate their strategy into an operating plan, which takes advantage of new applications to enhance productivity and improve visibility and control. They also need to use all their assets including people, intellectual property, information technology and structured business processes to succeed. Without proper tools, few strategies will succeed over the long term.

What’s Changing the Professional Services Industry in 2014?

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

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

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

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

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

How SMAC is changing professional services

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

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

Social media’s impact

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

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

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

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

The move away from legacy apps to mobile

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

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

Making sense of analytics and big data

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

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

The cloud overtakes legacy applications

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

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

The transformation of businesses

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

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

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

An opportunity for independent services providers

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

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

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

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

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

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

The talent factor

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

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

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

Five Service Performance Pillars

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

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

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

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

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

Leadership

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

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

Client relationships

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

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

Human capital alignment

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

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

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

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

Table 1: Age of Professional Services Workforce

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.