Just How Important Is Leadership in Professional Services’ Success?

The proof is in the numbers
by David Hofferberth, Service Performance Insight

It’s nearly impossible to read any article on leadership and come to the conclusion that leadership does not matter. Therefore, most of us already acknowledge leadership’s importance, but few of us have been able to truly quantify its benefit.

SPI Research leadership indexLeadership 02 2014

For the past seven years, Service Performance Insight has analyzed leadership metrics in our annual Professional Services Maturity Benchmark. We ask eight core questions, which are subjective in nature yet provide significant insight into the importance of something as nebulous as leadership.

We asked professional services executives to rate the following aspects of their organization in terms of how well they operate on a 1 to 5 scale (1: not well to 5: very well). The questions include:

  1. The vision, mission and strategy of the professional services organization is well understood and clearly communicated.
  2. Employees have confidence in PS leadership.
  3. It is easy to get things done with the PSO.
  4. Goals and measurements are in alignment for the PSO.
  5. Employees have confidence in the future of the PSO.
  6. Leadership effectively communicates with employees.
  7. Leadership embraces change; we are nimble and flexible.
  8. Leadership focuses on innovation and is able to rapidly take advantage of changing market conditions.

The net result of these questions is a score ranging between eight and 40. We analyzed the results of the 2014 survey thus far with more than 100 responses and segmented the responses into those organizations that averaged at least four out of five on all questions against those averaging less than four. In other words, we put the organizations into two groups: those with strong leadership characteristics and those lacking them. Table 1 compares some of the most important key performance indicators between the two groups and how much it changed from the previous year.

Table 1: Key Performance Indicator Comparison

t1 01 2014

The table highlights some distinct advantages of strong leadership. PSOs with leaders who truly lead the organization — with high levels of communication and collaboration — grow their organizations at a much higher rate than those lacking these qualities.

With strong leadership, employees understand what’s required of them, and can go about conducting their daily business with the confidence their work meets corporate objectives. Strong leadership helps employees get on the same page working toward a common goal. With this knowledge, employees are more productive, ultimately delivering higher levels of client satisfaction and profitability to the organization.

Communication is key

While all KPIs are important, some tend to be more so than others. Table 2 shows how organizations where leadership does a good job of communicating with the workforce outperform the others. These organizations excel in the area of communicating the PSO’s vision, mission and strategy.

Table 2: KPI Comparison Between Effective Communicators and All Others

t2 01 2014

Also notable in this table is that those organizations with the strongest leadership achieve leadership KPIs better than all the others by more than 16 percent.

One area not covered is that as organizations grow in size, the effects of leadership become less statistically significant. Obviously, large organizations need strong leadership. However, communication suffers when large organizations are dispersed globally and employees have minimal exposure to the core leadership team. To compensate, leaders in large organizations must ensure their regional executives have the skills necessary to translate corporate goals and strategies to their workers, and have strong listening skills to give remote employees the feeling they’re an important part of something special.

Seven years of research has shown that executives must offer a clear and consistent strategy, backed by explicit expectations and goals that every employee can aspire to meet. The greater the clarity, the easier it is for employees to interpret the underlying meaning and then work to meet them.

Professional services remain employee-centric

The survey process results indicate the importance of continuing to strive for new and innovative solutions to problems. Innovative organizations provide employees with the confidence to know the organization will be around for many years to come, and they will be continually challenged and personally grow as the organization expands.

The broader economy, such as manufacturing and retail, may be just beginning to improve, but the professional services market has now had three consecutive years of more than 10 percent growth. This growth, while good for the bottom line of PSOs, will ultimately come at the price of higher attrition levels, as employees — with skills in demand — see a vibrant economy for themselves. Therefore, they will look to make more money and for greater challenges. This aspect of the work is another reason why leadership is vital.

Happy employees, who might otherwise believe there are other options available to them, will more than likely stay at their current organization if they are confident in its future, and see a path for them to personally develop and grow. Leaders must continue to offer that vision of the future, which excites and motivates the workforce to continue with the organization.

The importance of leadership

Leadership styles continue to be debated and analyzed for their effectiveness. Research thus far shows that leadership does matter, and it can be quantified. PS has many other attributes that allow some firms to perform better than others. This annual benchmark attempts to provide PS leaders with the insight to improve all aspects of the organization. However, there’s no doubt that success begins with leadership, and leaders must perform at high levels for the organization to succeed and move ahead.

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

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

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

The talent factor

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

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

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

Five Service Performance Pillars

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

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

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

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

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

Leadership

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

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

Client relationships

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

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

Human capital alignment

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

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

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

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

Table 1: Age of Professional Services Workforce

t1 01 2013

 

 

 

 

 

 

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

Service execution

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

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

Finance and operations

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

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

2014 crystal ball

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

Five Dimensions of Leadership

Leading from the front is critical
by Jeanne Urich and Dave Hofferberth, SPI Research

0310 1

What are the five dimensions of professional services leadership? How can you apply them to create and lead a great services organization? How does the importance of each dimension change based on organization size and company lifecycle stage?

The role of Professional services (PS) is changing, and consequently, the talents PS leaders need to be successful are changing. As PS has become a more significant differentiator and revenue source, the role of PS leaders is becoming more strategic. The software as a service (SaaS) model places the company’s entire revenue stream on the shoulders of PS executives since leaders and their team must convert bookings to revenue by successfully deploying new users.

Today’s PS executives have to have superior leadership, sales and operations skills. Technical competency and domain knowledge are important, especially in smaller companies, but the ability to “lead from the front” — to identify, recruit and motivate top performers is crucial.

Professional service leaders must excel in five critical dimensions:

  1. Strategy, vision and creativity: The ability to forge partnerships, to motivate and inspire peers, employees, partners and customers. The ability to create new ideas and methods in response to changing requirements.
  2. Finance and operations: The ability to manage profit and loss. The ability to generate revenue and profit while developing repeatable processes.
  3. Human resources: The ability to attract, retain and motivate employees.
  4. Technical and domain knowledge: The ability to provide product and domain knowledge and feedback to clients and the company. The ability to develop a “trusted advisor” relationship with clients and develop this capability within the consulting organization.
  5. Sales, marketing and communications: The ability to effectively communicate with peers, employees, partners and customers to generate and close business and win deals.

PS leaders develop a playbook, a set of orchestrated moves guaranteed to put points on the scoreboard. Here are two “sure-fire” moves for your playbook.

1.    Strategy, vision, and creativity — Ensure alignment between corporate and services strategy.

PS leaders must have a thorough knowledge and understanding of how to play the game, and the ability to envision how to play the game in the future to win. They must also have a vision of building the program to meet the demands of stakeholders. That vision must be in sync with their goals and realistic achievements in the short and long-term.

So where do you start? Start at the beginning! The most important and probably the hardest professional service leadership challenge is developing a compelling vision and strategy and then ensuring the executive team aligns with it. An annual strategy “tune-up” and business plan is a critical first step along the road to performance excellence.

Answer the following key questions.

Service positioning:

  • Who are our target customers?
  • What is the business problem they want to solve?
  • How does our solution solve their business problem?
  • Why do they buy our products and services?
  • Why do they buy from us instead of our competition?
  • How are we different (and better)?

Now rank the importance of the following service roles.

Service roles:

  • Building referenceable clients.
  • Assisting the sales organization in new client acquisition.
  • Providing service revenue and margin.
  • Supporting and training partners.
  • Providing product feedback.
  • Selling additional products and services to the installed base.

If disconnects exist, now is the time to facilitate a dialogue and come to closure on the service charter and strategy. The strategy may change over time as products and markets mature, so an annual “strategy alignment check-up” is essential to keep the organization focused on the “right” priorities.

2.    Sales, marketing and communication — Communicate clearly corporate and services strategy.

Successful leaders must communicate effectively with their team and clients to persuade them that their approach will be successful and beneficial to all. The team has to win as often as possible, minimize losses and learn from mistakes. Successful leaders know their competition and develop winning strategies to defeat them.

Effective sales, marketing and communication never go out of style. Effective sales skills can overcome a host of weaker dimensions. The most important sales and marketing skills required at all lifecycle stages are the ability to effectively articulate the service value proposition, to showcase marquee accounts through customer testimonials and to demonstrate thought leadership through presentations and white papers.

Creating loyal, referenceable customers is one of the most important elements for any company’s future success. Making every client “wildly satisfied” should be a top priority. Client satisfaction is based on setting proper expectations during the sales, proposal and contract process and delivering high-quality solutions that meet or exceed those expectations. Do what you say you will do and always let your client know what to expect — how you will conduct the project, the roles of the project team, timelines, deliverables and the escalation path. Clear and open communication — for good and bad news — is essential.

Another key ingredient is the proper handoff from all customer-facing personnel. Finally, customer satisfaction that results in clients you can reference must be a primary goal for all employees. It is important to consistently and effectively measure customer satisfaction and make it an essential part of client engagements and employee measurements.

Do you know who your best clients are and why they buy? Do you know what it takes to ensure they will continue to buy from your company? Do you make client meetings a priority? Do you solicit feedback and proactively respond?

Create a “top client” program to gain their feedback and commitment. Top client executive advisory boards are a great way to provide connection with your best clients. Each cross-functional executive team member should become an executive sponsor for up to five key accounts and plan to meet with his or her client counterparts at least twice a year. Annual or semi-annual top client executive advisory board meetings provide invaluable feedback. Create a “premier” account program with special benefits — access to engineering, beta programs and premium account management to build client loyalty.

Required leadership traits

There are many other ways for PS leaders to excel. They don’t need to have superior skills in every dimension, but they must be clear, deliberate, fair and consistent. Their most important job is to ensure PS professionals  align with the overall strategy, direction and goals, and performance measurements support that vision. Services is a game of nickels and dimes so the effective leader must constantly monitor and improve every facet of the operation.

Great service leaders must be multi-dimensional — able to drive strategy and execution at the same time — but they cannot do it alone. Leaders are only as good as their teams. Their singular focus is always on the improvement and enrichment of their team. They must convey their message to their top performers and hold those persons accountable to deliver. They must rely on sound practices and measurements to improve and document their performance, and to allow them to focus on the problems and issues only they can solve.