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

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

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

The talent factor

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

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

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

Five Service Performance Pillars

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

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

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

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

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

Leadership

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

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

Client relationships

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

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

Human capital alignment

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

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

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

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

Table 1: Age of Professional Services Workforce

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

Service execution

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

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

Finance and operations

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

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

2014 crystal ball

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

The End Is in Sight – Now What?

Preparing for economic growth and decline
by Jeanne Urich and Dave Hofferberth, SPI Research

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The economy is showing signs of life. The stock market has jumped about 50 percent since the market bottom in early 2009. If you’re like most businesses, you have lowered headcount, cut costs and worked harder than ever in your marketing and sales efforts in the past year.

You know that this economy will rebound eventually, but you’re not positive when it will happen and how long it will last. The professional services (PS) sector tends to be made up of long-term optimists with the means to create innovative products and services that will help their clients increase their potential for success — ultimately helping economic conditions improve everywhere.

While it is impossible to determine whether the economy truly reached rock bottom earlier this year and is improving, PS executives should embark on initiatives sooner, rather than later, to prepare for its eventual turnaround.

These are exciting times in the market, but they also contain increased levels of uncertainty. Market leaders will be the first to capitalize on new markets and new services offerings, while laggards will fall further behind and ultimately fail.

Should we pursue things we haven’t done?

Did you want to do some things while the market was down but didn’t do them? Should you do them now?

It seems executives should spend more time planning when the work slows down, but we don’t. Human nature can’t help but dwell on the negative. As we see some light at the end of the proverbial tunnel, it’s a perfect time to do everything we didn’t do during slow times.

Don’t wait because the economy and your competitors are planning diligently for the future, and you should be prepared to out-maneuver them as business improves.

Things to consider

Your to-do list might be extensive, but don’t try and bite off too much. Now is the time to plan, prioritize and perform. From discussions with our peer network, we have pulled together suggestions that might help your organization as the transition to a better economy begins.

We bet you can add more to the list of four action items below.

1. Business planning

For some reason, when the economy tanks, many executives fail to take a hard look at their business plans. Yet, as the economy improves, they find they must rapidly create new business plans based on the new economic reality. Several executives have told us that their organizations create three business plans:

A. Aggressive — The economy will rebound rapidly; therefore, the organization will take additional action to boost headcount and secure the capital necessary to fund new and expanded operations.

B. Most likely — The organization assumes slow but steady growth and manages resources and capital in a conservative way to ensure profitability and long-term viability.

C. Downturn — Perhaps the economy is not rebounding as projected, and the organization must make further cuts to ensure viability until the true recession end is in sight.

No matter whether management dusts off or creates the plan from scratch, they must act with a sense of urgency to get their hands around their plans and budgets for the next several periods. The PS organization can no longer run in a month-to-month mode.

It is also a great time to shed practices that don’t offer long-term strategic value or are ready for retirement. Each recession brings new opportunities but tends to shrink the need for products and services in demand just a few years ago.

Stock your service portfolio with solid investments in the future, and communicate your strategic direction out of the recession throughout the PS ranks.

2. Watch for employee turnover

Over this prolonged recession, very few employees have left a company on a voluntary basis. As the economy picks up, firms target employees for recruitment, or employees decide that it’s the right time to try something new. This increased turnover can disrupt operational processes and negatively impact client satisfaction and profitability.

During this time, PS executives should consider initiatives to maintain a manageable attrition rate. These initiatives could include offering the ability to make additional money, additional vacation time or pay for some type of training that would appeal to the employees.

Regardless of which action executives take, they must seriously manage attrition as the company goes back into growth mode.

3. Cash for clunkers

It’s not just automobiles that need recycling. During periods of economic downturn, smaller services firms (and sometimes larger ones) reach a point where they no longer have sufficient long-term viability.

Now is an excellent time to engage in merger and acquisition (M&A) activity as the industry realigns itself and firms can garner economies of scale as they rapidly grow in size through M&A. This activity can add people, practices and geographic coverage to firms — making them more appealing in the global economy.

4. Make sure your information systems stay in alignment

When economic conditions deteriorate, many PS organizations cut costs across the board. One of the first cuts tends to be new information systems and upgrades. Unfortunately, as the economy improves, this area tends to impede growth if firms do not manage it correctly.

To increase operational excellence, PS organizations must implement projects or upgrades that take advantage of new technologies or business processes soon. Many organizations get behind the curve, and struggle to catch up, which shows up poorly in the bottom line.

Companies in every industry realize the importance of information systems and keeping up with the benefits of greater integration and business intelligence.

What’s next?

Despite whether or not the economy has turned the corner, every PS executive must plan for its eventual turnaround. This time might be different. Economists are split on how soon the rebound will occur, but PS executives who don’t prepare for its eventual recovery will put their organization at a competitive disadvantage. This could lead to failure for the next economic boom.

No one wants to be the first to call an economic bottom, but those who fail to prepare for it will ultimately fail to benefit from it. So now is the time to take that first step toward future success.