Streamline Your Professional Services Firm’s Quote-to-Cash Process

By Jeanne Urich, Managing Director, Service Performance Insight
Speed up the time between quote to money in the bank

This is the first of a two-part series. This article explores breakdowns in the quote-to-cash process for services organizations and how to fix them. Part two will provide recommendations for integrated business applications to streamline and automate the quote-to-cash process.

cashIn today’s economy, cash flow rules. To maintain a solid financial position and maximize profitability and liquidity, every organization must focus on cash flow. In professional services organizations (PSOs), this process begins with a client quote and ends when payment is received, and the money is in the bank.

This macro process of converting sales opportunities into paying customers is often referred to as quote-to-cash, and its optimization is essential for financial well-being.
Many PSOs emphasize the collection process once an invoice is generated and the work has been delivered. They specifically target DSO (days sales outstanding) as a key metric of financial hygiene. DSO is actually the “tail of the dog” that represents the final process of a progression of steps to convert opportunities into cash.

In reality, quote-to-cash is a series of interrelated processes that include:
• Sales pipeline and forecasting.
• Project scoping and estimation.
• Proposals and approvals.
• Contract negotiation and acceptance.
• Project staffing.
• Project execution.
• Consultant time and expense capture.
• Project completion and acceptance.
• Invoicing.
• Collection.

As shown in Figure 1, to optimize these fundamental business processes, many professional services executives rely on the integration of core business applications to provide visibility, transparency and control. These applications include client relationship management (CRM), professional services automation (PSA) and the core financial management application, enterprise resource planning (ERP).
Figure 1: Quote-to-Cash ProcessFigure 1

Source: Service Performance Insight, September 2014

Each manages aspects of the quote-to-cash process. Although these applications are offered on a stand-alone basis, the true power of streamlining the entire quote-to-profit business cycle is best accomplished by an integrated suite of applications, commonly referred to as Project-Based ERP or service resource planning (SRP).
Services challenges

The pressures facing the professional services sector are similar to those in other markets:
• Generate high-quality leads and qualify prospects.
• Win competitive bids.
• Book and schedule orders.
• Deliver high-quality services, products or both in an efficient and profitable manner.
• Collect time and expense efficiently throughout the life of the project.
• Invoice in an accurate and timely manner and expedite the collection of money.
• Maintain and grow existing client relationships to sell additional products and services.

Product-oriented organizations must consider product availability and the efficiency of the supply chain. For professional services, however, the real concern involves people and the interrelationship of different functions: marketing, sales, service delivery, finance and account management. These groups often have competing goals and priorities as companies identify, price, bid, win, perform, collect and expand services projects.

High-performing services organizations develop clear roles and responsibilities, combined with congruent measurements and supported by integrated systems, to effectively manage the quote-to-cash process.

As shown in Figure 2, the services quote-to-cash process begins with the development of winnable proposals that meet or exceed the PSO’s financial requirements. Once won, the PSO schedules the project and staffs it with appropriately skilled resources who can deliver quality services on-time and on-budget. As project delivery proceeds, the PSO closely monitors progress to ensure the project meets the client’s requirements and remains profitable while collecting consultant time and expense.
Figure 2: Service Quote-to-Cash ProcessFigure 2
Source: Service Performance Insight, September 2014

Finally, at various milestones during project delivery, and at the end of the project, accurate and timely invoices must be generated that clearly reflect the work provided and the time and expenses incurred, so that they can be expeditiously approved and paid by the client.

The problem for many PSOs

As in most businesses, without effective leadership and collaboration, PSOs operate in silos, or on a department-by-department basis. They are narrowly focused on succeeding in their given tasks. For organizations to succeed, they must work in partnership, with support across all functions. PSOs will only prosper if business processes are aligned across all departments, teamwork is pervasive, and visibility exists company-wide.

Common breakdowns in quote-to-cash business processes

The underlying cause of poor financial performance often stems from organizational and functional process breakdowns in the quote-to-cash process:
1. Quote (presales). Poor lead qualification contributes to a high cost of sales and a lack of alignment between opportunities and service capabilities.
2. Sell, negotiate and get order (sales). Inability to articulate the service value proposition inhibits calling on the real decision-makers. This can lengthen the sales cycle and may force acceptance of unfavorable contract terms or excessive discounts.
3. Staff (initiate project execution). Inefficient resource management and poor or nonexistent skills tracking can lead to assigning the wrong resources on projects resulting in delays and overruns.
4. Delivery (project execution). Poor alignment and handoffs between services sales and delivery lead to miss-set client expectations and acceptance of unrealistic timelines and/or deliverables.
5. Invoice and collect (billing and reconciliation). The lack of alignment across contracts, statements of work, project plans and time and expense collection can trigger invoicing errors which lead to lengthy collection cycles, rework and lost revenue.

Clients, understandably so, hate repeating discussions, requirements and agreements to disconnected sales, service delivery and finance representatives. Messy handoffs between functions inevitably cause project overruns and lengthy collection cycles which compromise client satisfaction, referrals and future business.

These organizational and process breakdowns are exacerbated by poor or non-existent systems, manual processes and data re-entry caused by a lack of integration between CRM, PSA and ERP applications. The final coup de grâce in a broken quote-to -cash process is the lack of management reporting and visibility to be able to spot problems and fix them before they spin out of control.

How to fix a broken quote-to-cash process

When the quote-to-cash process is broken, the best place to start is with an assessment. Some of the areas that are effective improvement steps include:

• Comparison to industry benchmarks shows the revenue and profit potential if improvements are made and provides the business justification for making an investment.
• Assess competing functional roles, responsibilities, goals and measurements to reveal the underlying causes of friction and misunderstanding.
• Conduct RACI analysis to clarify roles, goals and lines of authority to pinpoint processes where clear ownership, accountability, measurement and rewards are missing.
• Model “as is” and “to be” business processes to lay the foundation for change and clarify roles, responsibilities and handoffs between functions.
• Based on objective analysis, align leadership priorities.
• Develop an actionable business plan which includes budget for new systems and applications.
• Empower project teams to focus on the top improvement initiatives, which will likely include selecting and implementing new systems and business controls with appropriate metrics.

What it takes to get results

To drive profitability levels higher, PS executives are taking a more holistic approach to the quote-to-cash process, perhaps the most critical of all PS processes. Delivering services efficiently and effectively is just one area of importance in improving profit margins. Ensuring the organization is focused from the beginning on selling, delivering and collecting from the best clients who will continue to buy and use the most profitable services is paramount to success.

While there are many collaborative tools organizations can use to inform and educate their employees on which clients to target, what services to sell and at what level of expected return, the use of CRM in conjunction with PSA, each integrated with the core financial solution, offers the best chance of improving profitability.

This article explores breakdowns in the quote-to-cash process for services organizations and how to fix them. Part two will provide recommendations for integrated business applications to streamline and automate the quote-to-cash process.

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Sales and Service: Separated by More than Just Culture

Boosting sales, profits and performance with automation
by Jeanne Urich and Dave Hofferberth, SPI Research

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In many professional services organizations (PSOs), the sales force appears to operate on an island, with a go-go-go attitude and minimal communication as to what each salesperson is selling, to whom and at what price.

During times of economic uncertainty, many professional services executives focus on two core areas of business:

  1. Increasing revenue generation by adding more sales personnel and bidding on more work.
  2. Reducing headcount in non-billable overhead to meet future margin requirements.

SPI Research’s 2102 Professional Services Maturity Model Benchmark shows that most executives spend more time on the former — working to increase sales.

Service tends to react to sales, but unfortunately cannot optimally staff and execute because it doesn’t fully understand the personnel requirements, time commitments and costs until sales officially sells the work.

While there tends to be executive-level communication between sales and service delivery, the sales force is just so busy, and with so much uncertainty, continual communication generally suffers.

To improve communication and sales visibility, many professional services (PS) executives invest in client relationship management (CRM) solutions to provide some level of visibility to executives. However, SPI Research found that very few of these organizations actually integrate the CRM solution with core financials, or the professional services automation (PSA) solution. This lack of integration creates inefficiency within the PSO, as resource managers and consultants alike do not have the visibility into future work in the skills required to assure they can deliver quality services on a timely basis.

For PSOs that do integrate both CRM and PSA with the core financial solution, the benefits are both quantifiable and lucrative. Taking an integrated strategic approach to core information systems within professional services organizations benefits both the PSOs and their clients.

Client generation takes center stage

During economic uncertainty, PS executives increase their emphasis on client retention and new client generation. They typically expand their services offerings to expand billing opportunities. Even when times are good, these executives spend a good deal of time wining and dining existing and potential clients.

New client generation — and its overall importance to organizational growth — is a main driver of client relationship management becoming widespread in the professional services sector. CRM is the second-most popular business application behind core financial accounting in PSOs.

Client generation is just the beginning of the professional services lifecycle. As a PSO finds new prospects and subsequently generates new bids for work, the PSO must plan for potential project execution if the client accepts the bid. Staff with the specific skill sets necessary to complete the work must be available and ready to go. If resource unavailability delays project initiation, the work might go to another firm, or go away.

A smooth transition between winning a bid and beginning the work is paramount in the development of long-term client relations. Ideally, the PS sales force works closely with the service organization. The communication between the two organizations must involve sharing client information that will help improve the odds of a successful engagement.

As the PSO initiates work and begins invoicing, the project scope must be well-defined and approved by both the client and the PSO. This communication increases the assurance that the client will pay invoices in a timely manner.

Lack of communication creates a cycle of inefficiency

Informal lines of communication have existed within the professional services market for decades. In smaller firms, this communication usually does not cause any major issues. However, as a firm grows, SPI Research sees “cracks in the armor” of communication as the PSO bids with greater numbers of people on more projects.

At a certain point in time, inevitably the PSO makes a mistake, and with too few or too many resources available, projects start off on the “wrong foot” and never seem to get on track. This scenario creates unnecessary tension between the PSO and clients. Unfortunately, having projects not run efficiently usually shows up in reduced future business opportunities with the client.

Ideally, both the sales organization and the service delivery organization see the same information and, therefore, understand the resource requirements and timelines for new service projects. If not, the potential for under-staffing, confusion and ultimately frustration tends to lead to employee attrition.

Apply a holistic approach to the information infrastructure

Professional services executives continue to look at their information infrastructure to determine if their application strategy meets the needs of the organization in terms of improving the core business processes, and offering greater visibility and transparency across the organization, along with information that will hold up under the scrutiny of regulatory audits.

Ideally, information flow mirrors that of the organization’s business processes, beginning with client prospecting and going through the subsequent business processes from bid through sale, resources, execution, invoicing and project close. It is critical during each of these project lifecycle phases that the PSO tracks information associated with costs, time and quality, and flags and moves any projects with issues to a higher level of visibility.

CRM and PSA integration drives performance

Over half the PSOs surveyed by SPI Research use both CRM and PSA solutions. However, fewer than 10 percent actually integrate both with their core financial solution. To better understand how the integration of CRM and PSA increases organizational performance, SPI Research analyzed 118 billable service organizations with between 30 and 700 employees. These PSOs are large enough to need CRM and PSA technology, but not so large as to deploy it selectively across different regions and practices.

When comparing those organizations that had both CRM and PSA but did not integrate them, versus those that did, SPI Research found significant improvements in overall performance, including:

  • Annual revenue from new clients: 49 percent with integrated CRM and PSA, 41 percent without integration — meaning the firm sells to a larger client base.
  • Bid-to-win ratio: 6.19 (integrated CRM and PSA) vs. 5.25 (no integration) — meaning a greater win ratio.
  • Billable utilization: 81.4 percent (integrated CRM and PSA) vs. 70.2 percent (no integration) — meaning more hours billed and subsequently greater revenue.
  • Earnings before income taxes, depreciation and amortization (EBITDA): 28.2 percent (integrated CRM and PSA) vs. 26.9 percent (no integration) — meaning increased profitability.

These results, and many others, show the integration of both CRM and PSA makes a dramatic impact to bottom-line operational and financial results.

Add CRM and PSA to your repertoire

Connecting sales and service makes sense, but unfortunately rarely happens due to cultural and incentive clashes. While direct communication is desirable, in many cases, PSOs have little time to provide sufficient information to accurately convey potential project needs and personnel.

At a high level, PS executives should answer important questions associated with sales and service, some of which include:

  • What is the expected of margin of the work?
  • How long will it take to complete the work, and at what points will the firm generate invoices?
  • Is the work on time, and is the client happy with its progress?

Executives and other relevant personnel should track the information from the initial bid through the project completion and invoicing. With this information, both management and consultants can monitor the projects to assure high levels of client satisfaction with acceptable profit margins.

The integration of CRM and PSA has created a channel of communication where both entities can stay informed and up-to-date on potential and current work. This direct communication not only yields higher productivity, but also shows up in higher profits, a more satisfied workforce and content clients

The Best Service Firms Invest in Sales and Marketing

The proof is in the margins
by Jeanne Urich and Dave Hofferberth, SPI Research

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At this year’s Oracle OpenWorld, the shift from a product-driven to a service-driven world was evident. Each year over 60,000 aficionados flock to San Francisco to hear about the latest Oracle developments. In the central exhibit areas, the product-oriented tech titans of the past — Sun, PeopleSoft, JD Edwards, Retek, Siebel, Agile, Hyperion and Primavera —have been gobbled up by Oracle’s voracious acquisitiveness. In their place, the new tech titans — Tata, Infosys, Wipro, Deloitte, CSC, Accenture, Cap Gemini, Cognizant, PWC and KPMG — have raised their banners. The numbers of product-oriented platinum sponsors, including HP, Dell, NetApp, Cisco, EMC, Fujitsu, Motorola and Brocade, have diminished year over year and the remaining product-oriented firms are scrambling to add services and solution selling capabilities.

Companies move from products to services

Due to shrinking profit margins and product commoditization, product-focused firms are emphasizing services and starting to acquire their way to solution-provider status. HP and Dell are recent examples of product-oriented organizations grasping for some of that tantalizing service gold with their acquisitions of EDS and Perot. According to the September 22nd Wall Street Journal, “The deal is Dell’s biggest ever and the most striking move beyond its core personal-computer business, where profits have dwindled. Combining Perot with Dell’s existing services would bring Dell an $8 billion a year tech-services business and a shot at competing better with IBM, Hewlett-Packard Co. and others in selling services …”

As service has emerged as a differentiator and predictable source of revenue and margin, product and service-oriented firms alike have been forced to invest in solution selling and service marketing.  They have found that marketing and selling services is far more difficult than selling products.  Buyers “experience” services and buy based on reputation and relationships.  Product buyers buy based on features, functionality and direct price comparisons.  The product buying relationship ends with acquisition of the product while the service buying relationship really only begins once the sale has been made.  The bottom-line business impact of services is measured after the service has been consumed or the project has ended.

Oracle’s dominance underscores the power of sales, marketing and service. Arguably the ever-vanishing list of tech titans had as good if not better products than Oracle’s, yet they are gone while Oracle thrives. Oracle’s never-ending focus on sales and marketing coupled with over 50 acquisitions has been a constant differentiator. Years ago Oracle made the decision to become a market-maker and forced industry consolidation leaving SAP, its closest rival, in the dust. Oracle invests 20 percent of every revenue dollar in sales and marketing and derives 80 percent of its revenues from support and professional services.  Although Oracle still emphasizes horizontal products it is increasingly going to market by vertical industry and leading with industry-specific business process domain knowledge.

Dedicated solution sales

In the 2009 Professional Services Maturity Model benchmark, out of 170 participating organizations, seven firms significantly outperformed the benchmark average by scoring 4’s and 5’s (on a scale of 1 to 5 with 5 being the most mature) in most service performance pillar dimensions.

The most dramatic difference between the “best” and the “rest” is the focus on a dedicated solution-selling force. The top firms reinvest almost 20 percent of their professional service revenue in sales and marketing. Embedded service organizations (the service arm of product companies) use the product sales force for lead generation, and invest in dedicated professional service (PS) business development experts, arming them with pricing, estimating, proposal generation and contract management tools. The significant investment in sales and marketing pays off with an almost 40 percent better bid-to-win ratio (7.43 wins per 10 bids) compared to the average.

The “best” lead with paid pre-sales engagements – assessments, site surveys, proof of concepts and conference room pilots which reduce their cost of sale while enhancing their understanding of client requirements.

The “best” invest in marketing to establish their thought leadership and domain knowledge and expertise.  They also understand the value of direct marketing and use events, webcasts,  white papers and tele-sales to generate qualified leads.

Benefits of integrated customer relationship management

As we dug deeper into the effect of sales and marketing on professional service organization (PSO) performance, we found 92 percent of the organizations in the study invested in client relationship management (CRM) ) applications. CRM is second only to core financial applications, such as enterprise resource planning (ERP) as a primary IT focus for PSOs. Although most firms recognize the importance of CRM to gauge sales and marketing effectiveness, they predominantly deploy their CRM applications as stand-alone applications, with only 24 percent reporting integration between their CRM application and their core financial applications. For those few firms that have integrated CRM with their core financial system, the performance rewards have been significant.

The effect of a focus on sales and marketing becomes even more apparent as we examine the differences between the firms that have not deployed CRM compared to those that have. The statistics show both the benefits of purchasing and deploying CRM, and more importantly highlight the increased benefits of integrating it with the core financial solution. For example, firms that do not use CRM showed a respectable bid-to-win ratio (number of winning bids out of 10 submitted) of 5. This figure increased to 5.3 when firms deployed CRM, and when they integrated it with their core financial solution, this figure jumped to 5.5.

Priming the pipeline

The performance improvements become even more profound when examining the impact of CRM on pipeline-to-booking percentage. (This is a measure of the size of the qualified deal pipeline to the current quarter bookings forecast.) The recession has caused the pipeline-to-booking benchmark to steadily decline over the past three years, from 240 percent in 2008, to 190 percent in 2009, to 170 percent in our current survey.

PSOs that don’t use a CRM showed the lowest pipeline-to-booking percentage of 100 percent. This figure means the PSO must close and deliver every engagement in the pipeline to hit the current quarter booking forecast. A poor sales pipeline leaves the firm no cushion for error — the organization must win and deliver every single deal in the forecast.

Based on a poor sales pipeline, desperation to achieve the revenue forecast causes firms to commit unnatural acts to win every deal including excessive discounts, concessions and acceptance of unfavorable terms. If the firm is unable to close enough deals, the PSO won’t have enough work to fully engage the staff, which leads to utilization reductions and causes layoffs, poor morale and reduced profits. Firms that purchased CRM showed significant improvement in pipeline-to-booking percentage, with an increase in the size of the pipeline from 100 percent up to 193 percent. This figure climbs to over 200 percent for PSOs that integrate CRM with core financials.

The effect of CRM on margins

Another net effect of purchasing and integrating CRM with core financials is an improvement in overall margins. Research shows that both project gross margins (from 23 to 30 to 37 percent) and contribution margins (from 15 to 22 to 25 percent) appreciate substantially as PSOs purchase and integrate CRM. Integrated CRM and PS applications facilitate the overall business planning process, ensuring opportunities don’t slip through the cracks, and the “right” resources are ready to start the project so firms can generate revenue as soon as possible.

These applications are invaluable for codifying a consistent approach to business development and provide visibility into sales and marketing effectiveness. Enhanced visibility to the number and nature of deals provides a powerful planning tool for service execution. By providing “one source of the truth” about client demand (the types of leads and clients and type of work in the pipeline), the service supply (execution) side of the organization can plan for skills, and engagement location and duration.

Moving beyond seat-of-the-pants selling

The days of solo ‘partner or ‘rainmaker’ seat-of-the-pants selling for complex projects are over. A team approach and well-defined sales methodology are now of paramount importance. Firms consistently report their number-one priority is improving sales and marketing effectiveness to enhance revenue. While cutting costs will never go out of style, the best firms continually expand their service portfolio and constantly add new clients.

The Darwinian pressures of technology consolidation favor PSOs that embrace solution selling. The only survival option for PS firms is to invest in sales and marketing. If one doubts the power of sales and marketing, just look at Oracle’s climb to the top.

There is no time like the present to begin building the pipeline of the future.  Our research shows investments in sales, marketing and CRM provide handsome returns and are a necessary foundation for professional service firm growth and prosperity.