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/

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Professional Service Profit and Loss Made Easy

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

Step 2: Analyze revenue and costs

profit and lossThis is the second article in a three-part series examining the metrics that matter for running a professional services business. Part one looks at key metrics, typical targets and the incremental impact of small improvements. In this one, we provide descriptions and industry averages for the critical components of the professional services income statement — both revenue and expense. The third article will reveal the best practices and profit and loss statements of the top PS firms.

Based on eight years of benchmarking more than 2,000 professional service organizations, by far the most important questions and variances come from our income statement analysis. Both revenues and costs show enormous variability — not just for embedded versus independent services providers — wide variances are also seen across professional services verticals and different size organizations. There are no definitive right or wrong answers as services-based businesses are comprised of many different business models with varying sources of revenues and costs.

The secret success formula is based on maximizing the productivity and profit of each business line while limiting unwarranted overhead. Our research continually shows that the most successful services businesses are also the fastest growing. Early-stage service organizations are typically very decentralized while more mature organizations move to centralize critical overhead functions such as finance and operations, IT, PMO and resource management. Centralized overhead activities are typically less costly than decentralized.

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 elsewhere for new opportunities where they will be able to grow their skills and income.

Analyze your income statement
We recommend PS executives begin the process of profit improvement by analyzing their income statement, and comparing it to the 2015 Professional Services Maturity Benchmark. This comparison provides insights into where they can increase revenues or reduce costs to improve profitability. The following sections highlight the various components of the PS income statement.

Revenue sources
• Direct gross PS revenue – Directly delivered PS revenue that does not include re-billable travel.
• Reimbursable travel and expense revenue – The revenue recognized from re-billable travel and business expense.
• Indirect gross revenue – Revenue from subcontractors and other outside resources.
• Pass-through revenue – Revenue from hardware, software, materials, etc.

Costs
• Direct Labor expense – The cost of direct billable labor, not including fringe benefits, vacation, sick time or overhead. Non-billable labor expense for sales, marketing, IT, general and administrative, etc. should be shown in those categories.
• Fringe benefit expense -Typically this expense is based on a percentage of direct labor cost. It is the cost of employer-provided healthcare, pensions, vacation and sick pay for billable personnel.
• Billable travel and business expense – The cost of travel and business expense that can be billed. These costs may be equal to the revenue from rebilling travel and business expense. Most firms are not able to charge a mark-up on re-billable travel and business expense. They may however charge consultant time spent while travelling. Billings for consultant travel time should be shown in direct gross revenue. If the consultant is not engaged in billable work while travelling, travel time is typically charged at a lower bill rate.
• Non-billable travel and business expense – The cost of travel and business expense which cannot be billed to clients. Non-billable travel and business expense for business development should be included in the cost of sales. Costs shown here are typically for non-client related business travel for training, company meetings, etc.
• Subcontractor and outside consultant expense – The cost for non-employee contractors and outside consultants. This cost is offset by indirect gross revenue. Typically firms target 25 percent or more markup on subcontractors.
• Pass-through expense – Expense for hardware, software, materials, etc. that can be rebilled to clients. Typically firms mark up the cost of re-billable hardware, software and supplies to cover their procurement, handling and shipping costs. Typical target markup is 15 percent or more.
• Sales expense – This comprises the cost of sales headcount, bonuses and non-reimbursable sales expenses.
• Marketing expense: This includes the cost of direct and indirect marketing headcount, bonuses and marketing program expenses.
• Education, training and certification expense – The cost of education, training and certification expense across the organization.
• PS IT expense – All IT expense both capital and depreciation for the IT infrastructure including personnel, equipment, software, networking, etc.
• Recruiting expense – Direct and indirect headcount, costs and fees for recruiting.
• All other general and administration – The cost of all non-billable headcount not already shown in sales, marketing, IT or recruiting. Includes facilities, general and administration overhead.

Expense targets
We have found typical overhead expenses — as a percent of total PS revenue — should fall into the following ranges. If your expenses exceed the benchmark averages, your organization is most likely spending too much, which lowers profit.
• Direct labor expense (40 to 50 percent). Direct labor cost as a percent of total revenue.
• Fringe benefit expense (6 to 10 percent). Fringe benefit expense as a percent of total revenue.
• Subcontractor expense (7 to 15 percent). Subcontractor cost as a percent of total revenue. This number varies depending on the percentage of total revenue generated by subcontractors. In the 2015 PS Maturity Benchmark, subcontractor-generated revenue averaged 13 percent of top line revenue.
• Sales (2 to 20 percent).Includes all direct sales headcount and fringe benefits plus non-billable business development travel and expenses, commissions, incentives and sales training. Sales expenses are typically low for embedded PSOs because they rely on the product sales force to generate PS opportunities. Embedded PSOs are typically not allocated a corporate sales charge. There is tremendous variability in the cost of sales as many organizations rely on their consulting staff to develop business. In many cases, PSOs do not capture the true cost of business development; it may be represented as non-billable time for consulting staff.
• Engineering and project management organization (1 to 2 percent).This includes all PS engineering and PMO headcount; fringe benefits and expenses such as labs, tools, delivery training and project reviews. This expense should include the cost of non-billable time for consulting staff spent on improving tools, methods and infrastructure.
• Marketing (1 to 2 percent).This encompasses all services marketing headcount and marketing expenses, such as website, PR, advertising, trade shows, sales training, customer satisfaction survey, references and services packaging.
• IT (1 to 2 percent).Comprises all IT capital expense, depreciation and headcount costs. Embedded PSOs may receive a corporate per headcount IT allocation.
• Recruiting (1 to 2 percent). In today’s talent-constrained market, both recruiting costs and time to find and hire consultants are growing at an alarming rate. Most PSOs use a combination on in-house HR and external recruiters.
• General and administrative (5 to 20 percent).This includes PS corporate management, facilities and non-billable travel.

2015 PS Maturity Benchmark income statement

2014 was a good year for PS profitability. Profit for both embedded and independent services organizations increased as did the profit reported by all geographies. Average net PS profit for the entire benchmark increased to 13.2 percent in 2014 as compared to 11.4 percent in 2013. Embedded service organization (ESO) net profit increased to 19 percent from 15.4 percent in 2013. Independents saw profit increase slightly from 10 to 10.8 percent.

Table 1 compares the income statements of the 2015 Professional Services Maturity Benchmark for 220 professional services organizations. Sixty-seven are from embedded services organizations (ESO) and 153 are from independent professional services organization (PSO).

Table 1: PS Income Statement for Embedded and Independent Consultancies in Percentage
PS Income Statement Source: Service Performance Insight, September 2015

Although still not yet at pre-recession levels, most key financial metrics improved from 2013 to 2014. The bottom line is that profit improved almost across the board for professional services organizations in 2014. The benchmark shows strengthening demand, utilization and bill rates which led to higher revenue yield by consultant and employee.

With improved demand, PSOs did a good job of limiting non-billable overhead and discretionary spending. The overall PS market grew revenues at 10 percent, unchanged from the prior year but firms did a much better job of balancing supply and demand, leading to bottom-line profit improvements.

Focus on both revenues and costs
Above the line, revenue is driven by revenue by account, client or project. Revenue generated is typically based on the number of hours worked at an average bill rate. These are fairly easy numbers to get and report. Below the line, revenue is offset by labor cost and overhead. Yes, your organization can improve revenues while reducing costs.

Here are activities you might consider to improve revenue and cut costs:
• Focus on improving sales and marketing effectiveness to capture more installed base business while keeping a lid on sales and marketing expense.
• Add more strategic services that command higher rates. Focus on selling and delivering larger projects.
• Develop repeatable services packages to demonstrate client value and reduce the cost of sales and marketing.
• Create dedicated consulting sales and delivery roles. Excellence comes from specialization. Immature organizations may be spending more and getting less by employing a jack of all trades model in which everyone sells and delivers.
• Invest in superior talent. Winning and keeping top clients is based on providing top consultants with unique insights. Arm them with proprietary tools, methods and knowledge that enhance client success and ROI.
• Tightly measure and manage consultant billable utilization and bill rates to drive high productivity.
• Provide rewards and recognition to enhance employee engagement.
• Keep a tight lid on overhead and fixed costs by reducing facility costs and limiting non-billable roles while investing in systems and tools to automate time capture and billing.
• Ensure clients are satisfied and willing to be a reference.

Professional services organizations that focus on understanding and improving their income statement generally perform at higher levels and grow faster and more profitably than those that do not. They invest in services that offer both growth and profit potential, as well as in the talent who will ultimately deliver superior results.

Building the Professional Services Income Statement

STEP 1:  THE METRICS THAT MATTER
By Jeanne Urich, Managing Director, Service Performance Insight

This is the first article in a three-part series examining the metrics that matter for running a professional services business. This article looks at key metrics, typical targets and the impact of small improvements. In the second article, we’ll provide descriptions and industry averages for the critical components of the professional services income statement — both revenue and expense. The third article will reveal the best practices and profit and loss statements of the top PS firms.

KPI

We’ll show actual results from the 2015 Professional Services Maturity benchmark, which provides a benchmark of technology professional services organizations — both embedded (within hardware and software technology companies) and independent (IT and management consultancies, architects, engineers, etc.). All three articles share insight, measurements and guidance to help professional services executives improve profitability.

What metrics matter for professional services?
Running a professional services organization, or PSO, is complex. It’s a game that must be won with singles and doubles, not home runs. Thus, it’s imperative to know which key performance indicators are essential, the ones PSOs must continually measure, and the ones that are nice to have but not critical. Figure 1 shows the most important metrics for measuring a professional services organization.

Figure 1: Metrics That Matter for Services Organizations
Figure 1
Source: Service Performance Insight, August 2015

The question is how to continually capture new business while ensuring revenues and costs remain aligned. At the same time, PSOs must provide consultants the tools they need to deliver high-quality projects while growing their skills for the future. Professional services is a balancing act requiring both effective selling and project delivery. Client satisfaction is the ultimate goal to ensure clients pay their bills, continue to buy and provide great references and referrals.

What are typical KPI targets for professional services?
As the professional services market comes of age, standard measurement targets are emerging based on the type of services delivered — software or SaaS implementation; customization and integration; hardware and network installation, configuration and optimization; management and business process consulting; and so forth.

The targets for software consulting differ from those of business and management consulting. More commoditized services garner lower fees that require higher utilization rates to generate profit. However, net margin should be equivalent to more complex services due to lower labor costs. Significant factors affecting profitability include market demand, reputation, workforce quality and skill level, geography, risk and complexity, and depth of intellectual property, etc.

PS targets depend on the charter and mission of the service organization. If the organization’s mission is to “create referenceable customers” at any cost, then the services organization may not be a profit center. If the mission is to “support sales and drive product revenue,” then the organization may run on the low end of billable utilization and revenue per person while accentuating metrics around bid/win ratio, customer adoption and cost of sales.

Measurements for smaller, startup organizations benefit from accentuating “building client references” rather than services profit. Targets for larger, more mature service organizations gain the most from focusing on the highest possible service revenues and margins while ensuring clients are wildly satisfied.

Figure 2 highlights target metrics for a PSO within a software company.
Figure 2: KPI Targets for a Software Company PSO
Figure 2
Source: Service Performance Insight, August 2015

Small improvements can produce big results
In the people-intense world of services, the primary cost driver is labor cost. Small improvements that enhance labor productivity can quickly add up to yield significant profit increases. Figure 3 illustrates how small improvements can produce big results. If the organization makes a 10 percent improvement in four or five key performance measurements, due to leverage and the cumulative effect of the improvements, the organization could improve both revenue and margin more than 50 percent!

Figure 3: Small Improvements Can Produce Big Results!
Figure 3
Source: Service Performance Insight, August 2015

Priority Improvement Recommendations
Now let’s take a look at priority improvement areas. The following suggested tips and tricks will enhance your bottom line:

Revenue. In the revenue quadrant, the best accelerator is to improve sales productivity — through better deal qualification, marketing and stronger references. The best revenue accelerators are increased sales productivity, improved bill rates and larger projects. Improving sales capture rates and sales effectiveness is a much lower cost alternative than chasing every deal that moves because of a weak pipeline.

Improvements in sales productivity also show up in better price realization. Bill rates are market sensitive but can be dramatically improved through better estimating, effective project delivery, change control, references and project quality. Hourly bill rates almost always produce a higher margin than daily rates.

An interesting phenomenon is that a given percentage increase in either utilization or bill rates produces a similar bottom-line impact. The corollary is that services margin cannot be made if the PSO cannot charge twice the fully loaded cost of consultants, or if average billable utilization falls to below 50 percent.

Margin. The best way to improve margin is to lower costs and to make more profit on every facet of the business. Be careful to ensure the organization makes at least a 30 percent margin on subcontractors and offshore resources. Across the PS industry, subcontractor delivered revenue consistently averages 13 percent of total revenue. If subcontractors and offshore resources are overused, it may compromise delivery quality and put client relationships and knowledge capture at risk.

It is surprising to see how many PSOs do not adequately mark up their subcontractors or bind them to the firm’s contract terms. Executives do not want to be in a situation where they are paying contractors on a time and materials basis but charging customers on a milestone basis.

The other key margin lever is to reduce non-billable overhead by running a lean business. One effective strategy is to zealously measure and publicize non-rebillable travel and expense. If organizations spend a fortune in non-billable travel for business development, this clearly indicates a need to improve marketing, lead generation and deal qualification.
Many leading firms like to set a “non-billable” expense target per person, say, $2,500 per quarter. This target may be too low for business development staff, but it is a good number for the overall organization and incentivizes the team to carefully monitor telecom charges and those sneaky free meals! Normally, the organization should have very limited non-billable travel expense for billable consulting staff.

Client satisfaction. No matter the size of the organization, PSOs must keep a master project dashboard and have a mechanism for impartially tracking project quality. Some key metrics are proposed vs. actual hours per task, milestone or deliverable. Catch problems early — an overrun early in a project says it’s time to reset expectations, execute a change order or improve project management. Failed projects ruin a firm’s reputation and can have a devastating effect on profit.

The best way to improve sales productivity and project margins is to sell more projects to existing customers or at the time of initial product sale. Just a 1 percent improvement in services attached to product sales can produce big gains in revenue while lowering the cost of sales.

Invest in services sales compensation to motivate the sales force to include services with every deal. A best practice is to compensate product sales representatives at the same commission level for product and services sales.

Resource plan. An important profit lever is employee retention. Attrition is incredibly expensive. On average, it takes almost a year to recruit, hire and ramp a productive new consultant, which makes replacement hiring costly. Best-in-class PSOs focus on recruiting the best and invest in training to shorten ramp time.

One of the most important levers is to ensure the most productive (and most senior) consultants stay with the firm. Create a compensation plan that encourages them to develop new business, mentor new employees or build infrastructure. Treat them as crown jewels, not billable objects, and find ways to reduce the burden of travel.

With utilization, executives need to run the organization at a target billable utilization, say 75 percent, to cover costs and produce margin. However, running the organization too hot through excessive utilization has the unintended consequence of negatively impacting customer satisfaction and attrition.

The other significant workforce lever is reducing overhead. That said, the non-billable headcount should be less than 30 percent of total headcount with a target ratio of 10 to 1 of employees to management. Pay careful attention to headquarters spend. Through the use of integrated business applications, PSOs are reducing non-billable administrative headcount by automating resource management, time capture and billing.

Next time, we’ll analyze the professional services income statement. Stay tuned to learn about the benchmark averages for revenue and costs across hundreds of professional services organizations, along with best practices for maximizing revenue and profit!

Invitation to Complete the 2015 Global PS Pricing Survey

What You Need to Know About Professional Services Bill Rates
The art and science of services pricing
by Jeanne Urich, Managing Director, SPI Research

Services teams concentrate on utilization and less on rate realization. Focusing on pricing strategy is the key to doing more with less to achieve persistent profitability.  The 2015 Global Professional Service Pricing research helps services organizations understand how they measure up, where they can improve to increase margins and how they can properly position their services in the market.

To participate in the 2015 PS Global Pricing survey, please visit http://www.spiresearch.com/spi-research/2015-ps-pricing-study/
Professional service organizations who complete the survey will receive a free copy of the benchmark.

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The study will provide an analysis of list price and realized bill rates across a broad range of professional services verticals, geographies and job levels around the globe. It will analyze the growing trend toward more offsite consulting delivery and the prevalence of different pricing structures. The report will provide a view of professional services workforce distribution and composition by industry segment through an analysis of organization structures for various service segments including management consulting; IT consulting; software and SaaS; VARs and hardware and networking services.

What the 2011 pricing benchmark revealed

The major takeaway from Service Performance Insight’s 2011 Global Professional Services Pricing study is that success comes from the right combination of pricing policies along with outstanding services delivery quality and workforce efficiency. The two primary profit levers professional services organizations possess are bill rates and workforce productivity, often called billable utilization. PS organizations tend to concentrate more on productivity, often ignoring price improvements. Efforts to enhance price realization can produce both instantaneous and sustainable profit improvements.

The cause and effect of higher bill rates

Price realization based on realized bill rates in combination with billable utilization is a leading indicator of the overall quality and differentiation of the PS organization. Professional services organizations with the highest bill rates and best price realization tend to reinvest profit into their employees, which in turn, leads to a continuing improvement cycle.

Highly skilled, well-trained, motivated and loyal consultants undoubtedly produce the best client results. Satisfied clients provide referrals and buy additional services resulting in improved sales effectiveness.

Based on nine years of benchmark data, one of the consistent themes is the correlation between high bill rates and employee investment resulting in superior project delivery metrics and overall financial profitability. Bill rates, however, only tell a part of the story.

The market, the types of services provided and the reputation of the firm primarily govern rates. Management consulting senior partner daily rates are as high as $8,000 while Indian software development resources are priced as low as $25 per hour.

The top strategic management consultancies don‘t publish their rates, nor do they make them visible to their clients. These rates are justified based on the significant “bet your business” types of projects these firms deliver. High rates indicate the strategic business value top firms provide.

At the other end of the spectrum, the lowest bill rates are shown in commoditized hardware installation and repair, where providers mainly focus on implementation. Staff augmentation garners low rates because the client assumes almost all of the responsibility for successful business outcomes. Clients are buying a body with a specific skillset as opposed to a project based on a measurable business results.

Differentiation, specialization and market growth drive rates upward while commoditization and shrinking market demand drive rates down. The law of supply and demand is clearly evident in the pricing report because software as a service (cloud) services now command a 20 to 30 percent premium over traditional enterprise software bill rates.

Why is pricing important?

In a labor-based business like professional services, profit comes from the right balance of revenue and costs. PSOs have a very high fixed labor cost so the two primary profitability levers are either lowering cost (employee and subcontractor sourcing strategies, limiting benefits and overhead, using virtual business models and restricting discretionary spending on IT, travel, training and recruiting) or increasing revenue (higher bill rates, higher revenue per person, higher billable utilization and a higher proportion of billable headcount).

Throughout the recession, PSOs focused intently on the cost side of the equation. Now with economic improvement, they are concentrating on growing revenue through a combination of rate, market expansion and productivity enhancements.

Professional Service Pricing Strategies

Pricing strategies vary dramatically by market and geography. European PSOs prefer daily rates which may or may not include travel expenses. The percentage of time and materials priced contracts across all markets and geographies was reported to be almost 60 percent.

Every year a greater proportion of contracts across all verticals and geographies are fixed price reflecting client interest in shifting more risk and accountability to services providers. Table 1 shows a comparison of pricing strategies across PS vertical markets. It reveals IT consultancies and PSOs within software companies depend heavily on time and materials based pricing strategies.

Hardware and networking providers and SaaS PSOs have shifted the majority of their work to services packages and fixed price contracts while management consultancies favor time and materials based contracts, but may include performance guarantees.
Table 1. Pricing Structure by Organization Type
2011pic

Future expectations for bill rates
All signs point to an unstable global economy for some time to come. Bill rates are not uniform around the world. Across the board, global consulting bill rates have been relatively stagnant while target utilization rates have continued to climb. The key question is how can the professional service industry sustain a business model where employees and subcontractors must be billable 75 percent or more of their time?
Will the pressure to work excruciating hours subside with the shift to a global and virtual economy? As the reality of increased consulting demand outstrips available supply, expect to see average billable hours to continue to increase, perhaps to a breaking point. Rates for the hardest to find resources are climbing.

Around the world, a significant price disparity exists for the same job skills within the same industry segments. If an organization can establish its brand and reputation as the highest-quality supplier in its market space, it can command the best rates.

Conversely, for services providers stuck in a commoditizing rut, the only viable strategy is to head for higher ground by expanding into a more lucrative market. For example, low-end enterprise resource planning providers will find new opportunities and premium rates if they add vertical expertise or take on new cloud technologies and services. Research indicates the unlimited possibilities for establishing new, exciting and profitable service lines will require significant leadership, vision and courage.

Bottom line, the consulting industry is thriving. Expect not only a heightened focus on bill rates, but also significant labor shortages ahead. Top performing firms will focus on both recruiting and retaining top talent while making sure they take advantage of premium pricing to fund these investments.

How Professional Services Organizations Can Increase Revenues

By Dave Hofferberth

The role of marketing and sales in an organization’s success
Cultivating new and repeat clients is the lifeblood of the services industry. Professional services organizations (PSOs) are in business to provide knowledge, expertise and guidance. Their sales and marketing organizations must define target markets and clients by understanding their key challenges. They are responsible for generating awareness and identifying and closing opportunities. The intangibility of services makes it more difficult to create concrete proof of the firm’s knowledge, experience and differentiation.    CRM

The effectiveness of the PSO’s sales and marketing efforts determines the quality and size of the pipeline, bid-to-win ratios, discounts, client satisfaction and the length of the sales cycle. Effective sales and marketing organizations consistently uncover new opportunities while ensuring existing customers continue to buy and refer. Today’s successful PSO, whether embedded or independent, is increasingly taking charge of its own destiny by investing in sales, marketing and services packaging.

Professional services executives know that, in good times or bad, they must optimize marketing and sales to improve financial performance. They use different marketing and sales approaches to increase revenue while holding down costs. A look at the results of the 2015 Professional Services Maturity Benchmark shows how PS executives can develop strategies to align sales and marketing to achieve superior results.

Develop strategies to optimize growth and margins
With visibility into the right information, PSO executives can develop strategies and tactics that will help their organizations grow profitably. Understanding the needs of their current client base provides insight into additional services that could be initiated and offered.
Services portfolio expansion helps the PSO maintain a consistent presence within its clients’ organizations. It also minimizes the potential for competing PSOs to come in and take business away. This understanding helps the PSO more effectively price services to existing clients, where it has a more intimate understanding of risk, requirements and acceptable price levels.

Focus on adding new clients
The secret to enduring success is to build marquee clients for life while continually adding new clients. This requires adding complementary services for existing customers and new services offerings to drive market expansion while ensuring the PSO remains current with emerging markets and technologies.

Table 1 highlights the impact of new client acquisition. The table shows that nearly 30 percent of the respondents derive between 20 and 30 percent of total revenue from new clients. There is clearly a direct correlation between overall revenue growth and new client penetration.

Firms that derive more than 40 percent of their revenue from new clients grew overall year-over-year revenue more than 14 percent. Smaller organizations tend to show higher growth rates as they are building new client revenue from a much smaller base.

Table 1: Percent of Revenue from New Clients
Table 1
Source: Service Performance Insight, May 2015

Faster growth means more employees. The table shows that organizations with less than 20 percent of their revenue coming from new clients grew the employee base faster than actual revenue. This means the cost structure expanded more rapidly than revenue. It may indicate that the organization is hiring in advance of expected revenue or catching up with current demand.

But in those organizations achieving more than 20 percent of their revenue from new client penetration, employee headcount growth is lower than revenue growth. In this case, the organization is more efficient at resource management, despite the high level of new client growth. The size of the sales pipeline compared to the quarterly bookings forecast increases, leading to more revenue from new clients.

Unfortunately, there is a cost associated with seeking new clients. The slowest-growing organizations reported the highest levels of profitability as they did not incur high costs for recruiting and ramping loads of new clients and consultants. Concentrating too intently on high profit from existing accounts in the short term may signify the organization is foregoing market expansion that would ensure long-term prosperity and success.

Develop a winning pricing strategy
Some PSOs build pricing proposals from costs up by applying approximate cost factors plus risk multipliers. This pricing strategy does not contemplate or take advantage of business impact. Cost plus pricing usually results in low margins as the organization is not able to command a price premium for proprietary tools, techniques and intellectual property, which drive faster, more successful client outcomes.

With the right information, PS executives have the ability to create pricing models that optimize profits along with client benefit. These models balance the probability of winning bids with cost, revenue and expected client benefit as Figure 1 shows. Pricing a proposal too high virtually assures the bid will be rejected.
Figure 1: Pricing Strategy
Figure 1
Source: Service Performance Insight, May 2015

Pricing the proposal too low offers two negative potential consequences: 1) the bid will be accepted but the profit margins will be so low that it will negatively impact overall profits, or 2) the client organization will feel that the PSO does not understand the nature of the work, and therefore, the project will face serious consequences later in its lifecycle.

Leading PSOs have pricing down to a science. They understand their clients’ price tolerance, their competitor’s pricing strategy, their own capabilities and the value those capabilities provide to clients. Understanding cost, the competition, risk and client value all go into successful proposals that exceed margin requirements. Premium pricing comes with quality, repetition and reputation.

Discount at your own risk
Research has shown that discounting can create more problems than it is worth. Discounting diminishes value and may cause negative client perception. The client wonders whether the initial price was too high, or the firm is desperate or it doesn’t truly understand the nature and scope of the work. Any of these circumstances may lead to long-term dissatisfaction.

PSOs need to limit discounting, and only use it in the rarest of situations. Minor discounting may be appropriate for significant additional business or to demonstrate the value of the relationship. Unlike products, there are few economies of scale in the services business. An hour of effort is an hour of effort. The cost of an hour of labor is only reduced if less time is needed, less costly consultants can be used, or fewer non-billable hours are spent in developing client requirements or deliverables. The benefit of additional business with the same client primarily shows up in reduced sales cost and reduced risk but not necessarily in delivery cost reductions.

Table 2 shows approximately 75 percent of the organizations discount less than 10 percent. The comparison between those organizations discounting less than 10 percent with those that discount more is significant. Limiting discounting results in larger projects, shorter sales cycles and more wining proposals.

The major difference is in the average revenue per project, which is considerably higher for those organizations that shy away from discounting. Although counterintuitive, the negative impact of discounting shows up in longer sales cycles and fewer winning proposals. The only positive impact of discounting is in larger sales pipelines, but there is no guarantee that more deals will close as the result of a larger pipeline.

Service organizations must be wary of client demands for price concessions because they are an indication that the service is becoming commoditized, sales are not positioned at the right decision-maker level, or the value of service impact has not been quantified. In services, the lowest-priced provider is almost never the highest-quality vendor with the best reputation.
Table 2: Effects of Discounting on Sales
Table 2
Table 3 highlights some of the impacts of discounting on performance. Both project margins and attrition are improved with lower levels of discounting.
Table 3: Effects of Discounting on Organizational Performance
Table 3
Source: Service Performance Insight, May 2015

What PSOs must do to increase their chances of greater success
While delivering excellent services will always be an important objective of PSOs, increasing sales and maintaining a solid, stable revenue stream greatly contribute to organizational success. There has been a growing emphasis on sales and marketing activities that increase both the breadth and depth of relationships, while expanding markets through existing and new services offerings.

To succeed in the marketplace, PSO executives must align marketing and sales activities to increase both revenue and market margin targets. An initial dive into the bid-to-win ratio as well as the PSO’s pricing strategy will go a long way in helping the organization reach its goals.

Profitability analysis across clients, practices, geographies and service offers assures that each PSO is operating at its highest capability. Understanding revenues and costs helps marketing, sales and service delivery collaborate to improve the types, pricing and quality of the services offered. Through this alignment, the PSO will be in much better position to succeed.

What Professional Services Must Do to Capitalize on Talent

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By Dave Hofferberth

How Professional Service organizations can staff projects with the right talent

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

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

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

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

Why HCM?
HCMPS begins with people, and therefore, on the technology front, we predict HCM systems will increase in importance and usage across the services industry. HCM solutions — also known as talent management solutions — give employers the tools to effectively recruit, manage, evaluate and compensate employees.

By tracking performance, skills and career progression, HCM helps PSOs create a high-performance workforce. Key software modules include employee learning, skills tracking, compensation, performance management, policy compliance and succession planning. Each of these applications helps organizations manage personnel growth and development.

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

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

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

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

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

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

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

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

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

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

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

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.
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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.
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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.

How IT Applications help Professional Services Firms Maximize Profits

By David Hofferberth, Managing Director Service Performance, LLC
Earlier, we discussed the importance of information visibility in professional services for driving profitability. The importance of information visibility cannot be understated. Information visibility comes from your information infrastructure, which can be both comprehensive and complex. Most of the firms we’ve surveyed in the past eight years use core business applications — either as an integrated suite or as best-of-breed — to capture and access timely information for decision-making. We published a report on project-based ERP for professional services in 2014, which highlights the major solutions and some of the key benefits.

Five business applications that support professional services
We’ve identified and tracked five business applications or solutions used in professional services. They include the following:

5FO1. Financial management or enterprise resource planning. This fundamental solution is required to accurately collect and report financial transactions. Approximately 88 percent of the firms surveyed use a financial management application. Clearly, every organization must track its finances. However, some of the embedded service organizations, such as software and hardware providers, use the corporate financial management or ERP solution as opposed to owning and maintaining a departmental PSA or accounting system.

 

 

2CR2. Client relationship management. The automation of client relationship processes improves sales and marketing efficiency and effectiveness. Of the organizations we’ve surveyed, 83 percent use CRM. It’s almost as important in professional services organizations as ERP is.

 

 

4SE3. Professional services automation. PSA helps PSOs with initiation, planning, execution, close and control of projects and services through the management and scheduling of resources that include people (both internal and partners), materials and equipment. Approximately 63 percent of surveyed organizations use PSA. It’s a critical application because it manages the resources and work done, which ultimately is the PSO’s revenue and profit generator.

 

3HC4. Human capital management. Talent management solutions help with recruiting, hiring, compensation, goal-setting and career and performance management. Such solutions need to be integrated with the employee database. About 47 percent of the organizations use HCM especially PSOs with more than 200 employees.

 

1LE5. Business intelligence. With 36 percent of the surveyed firms using BI, it’s an up-and-coming application. Its job is to assemble and use information to improve decision-making. Like HCM, as PSOs grow in size, so does the need for a BI solution.

No doubt, other applications such as social, knowledge management and remote service delivery tools have grown in importance in such a collaborative environment. However, the five primary applications focus on automating core PS business processes. Our numbers might be slightly higher than the true industry averages, as surveyed firms tend to be more technology-savvy, and have a greater appreciation for the value of using such applications to better run the business.

Diving deeper into the applications

Financial management or enterprise resource planning (ERP) is the primary accounting solution required to accurately collect, bill, and report financial transactions. ERP provides the master general ledger database for accounts payable, billing, revenue and cash management. It sets the foundation for budgeting, revenue planning and forecasting by collecting and managing both revenue and cost information.

The ERP system provisions PSA and HCM applications with client, employee and cost information. Billing can occur either within the PSA or the ERP application. Once bills are generated, collection and revenue accounting occurs within the ERP.

Client relationship management supports the management of client relationships to improve sales and marketing effectiveness. Based on a master client database, it records and manages the client opportunity lifecycle. CRM automates lead, contact and campaign management, sales pipeline forecasting and territory management. Opportunities are tracked through sales stages in which leads are converted into closed deals.
CRM may include marketing automation software to capture and automate customer touch points from inbound marketing activities and outbound lead generation campaigns. Organizations can track clients throughout the sales lifecycle, and target specific customer segments by understanding details of the relationship. Table 1 shows that the value of a CRM investment is multiplied when it’s integrated with the core ERP application.

Table 1Professional service automation manages the initiation, planning, resource management, scheduling, execution, close and control of projects and services. PSA includes a resource and project dashboard and demand forecast. It helps manage service delivery by overseeing opportunities, staffing, project management and collaboration, combined with accurate and timely expense and time capture.

PSA manages all aspects of service and project delivery and resource management based on project data. Table 2 shows the value of a PSA investment is amplified when integrated with the core ERP application.
Table 2
Human capital management, also known as talent management solutions, give employers the tools to effectively recruit, manage, evaluate and compensate employees. By tracking performance, skills and career progression, HCM helps companies develop and maintain a high-performance workforce. Software modules may include the employee database or employee database extract, payroll, benefits, recruiting, employee learning, skills, compensation, performance management, career and succession planning. HCM helps organizations manage personnel growth and development.

Table 3 shows the value of HCM solutions burgeons when the HCM solution is integrated with ERP. Management span of control expands. The time it takes to staff projects decreases due to better visibility to in-demand skills, allowing firms to synchronize their recruiting based on demand.
Table 3Business Intelligence, also known as reporting and analysis, aggregates information from primary business applications to improve reporting and analysis, demand and capacity planning, budgeting, forecasting and financial planning. Adoption of BI solutions continues to grow with the advent of powerful graphical reporting and analysis tools.

As organizations mature, BI becomes a more critical tool to provide real-time visibility to all aspects of the operation allowing executives to spot trends and take corrective action early. Trend and what-if analysis, and scenario and capacity planning help increase the accuracy of forecasting, planning and budgeting. Refer to Table 4 to see the effectiveness of integrating BI with ERP.
Table 4
The movement to software-as-a-service applications

The evidence shows that SaaS solutions have taken over in services organizations. Cloud-based applications are a natural fit for the virtual, mobile world of professional services. Some of the pure SaaS application providers no longer support an on-premise offering. Yet many of the more mature application providers still offer both SaaS and on-premise solutions. But make no mistake about it: SaaS solutions outsell on-premise applications by a factor of roughly five to one.

The winner: Integration

Departments purchase applications to fulfill the need to improve internal operations. The process to speed time between quote and money in the bank is the most important business process in professional services. It requires integrated information across the core CRM, PSA, ERP and sometimes HCM solutions. With this information, sales and marketing better understand the resources available, while service delivery understands the time and cost required to deliver services.

The information helps leaders better price engagements that meet margin and time requirements, which in-turn improve client satisfaction because expectations are properly set and deliverables and timelines are met. Human resources can access this information in the HCM solution to ensure the organization has the correct mix of personnel to meet current and future requirements. For a market like professional services, this real-time information is critical as it could take up to six months to find, hire and train the right resources.

As employees deliver the work, the integration of PSA and ERP provides leaders with the visibility to ensure resources are highly utilized, work is completed on-time and on-budget, revenue and profit goals are maximized, and the organization meets its cash flow needs.
In the past eight years of surveying professional services, we’ve seen a gradual rise in the adoption of information-based tools for real-time visibility and better decision-making.

Because these tools have shown proof that integration pays dividends, the integration of these tools also continues to rise.

Merely purchasing these tools is not enough. PSOs must use the tools extensively to maximize benefits. The time and effort to deploy, train and use the information is worth it. The numbers reveal that professional services organizations using these tools almost always improve performance and profit.