Five KPIs for Service Delivery Excellence

By Dave Hofferberth

Valuable insights from the latest professional services benchmark

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

What the latest benchmark reveals about professional services

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

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

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

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

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

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

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

Why focus on KPIs?

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

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

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

Five KPIs to measure and improve service delivery

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

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

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

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

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

A proven way to effectively build your business plan

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

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

Plan by department, build up to organization

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What the Leaders Do

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

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

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

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

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

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

Table 1

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    To get a FREE copy of the 2016 PS Maturity Benchmark – please complete the benchmark survey before December 1st, 2015



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.

• 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

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.


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
Professional service organizations who complete the survey will receive a free copy of the benchmark.


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

What the 2011 pricing benchmark revealed

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

The cause and effect of higher bill rates

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

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

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

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

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

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

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

Why is pricing important?

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

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

Professional Service Pricing Strategies

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

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

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

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

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

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

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

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


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.

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

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.

• 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.