The Struggle to Align Human Capital in Professional Services

Successful professional services executives know employees are the most critical asset. Finding great employees, hiring them and helping them grow, work and stay engaged largely affects the organization’s long-term success.

employeesIt has become increasingly difficult to find new employees with the requisite science, technology, engineering and math skills the technology consulting industry needs. The problems this situation has created have become more apparent in the last year. For instance, professional services industry growth shows signs of slowing since its five-year peak two years ago, as firms struggle to find the right people to sustain momentum. In a market accustomed to annual revenue growth rates higher than 15 percent, slowing growth puts additional pressure on the organization. The industry feels the impact, but it shows up most in dramatically lower net profit.

Table 1. The Effects of Attrition on Delivering Work on Time
Table 1
In the past year, annual attrition has also increased, placing more pressure on the professional services organization’s ability to grow and prosper. Table 1 highlights some of the critical issues facing professional services organizations due to increased attrition. As attrition rises in professional services, the ability to deliver work on-time and on-budget declines.

Mergers and acquisitions are taking place at a near-record pace. Why? They have become one of the best avenues for expansion while also augmenting the skills and talent of the workforce. However, unless the acquirer can find a way to keep talented employees, M&A does not necessarily guarantee future growth and success. Mismatched skills and nervous employees tend to leave the newly combined organization.

Billable utilization declines
The 2014 PS Maturity Benchmark shows that billable utilization has dropped for the first time in five years. This decrease, while not significant, mirrors some of the issues associated with lower profit margins. Professional services organizations should strive for at least 75 percent billable utilization.

Table 2 highlights the correlation between billable utilization and other key performance indicators. It reveals that organizations increase billable utilization to achieve higher revenue per billable consultant. While this correlation might seem obvious, it provides professional services executives with a clearer understanding of just how important focusing on billable utilization is for the firm. The table also shows how billable utilization impacts the professional services organization’s ability to meet both revenue and margin targets, which fuel future growth.

Table 2. Connection Between Billable Utilization and Other KPIs
Table 2Source: Service Performance Insight, June 2014

What should PS executives do?
To optimize human capital, PS executives must focus on several key areas:

1. Focus on employee acquisition and retention. Understanding the organization’s strategic and tactical goals enables the entire organization to focus on hiring the right type of individuals with the right skills to drive the organization forward. Once on board, retention is critical. PS executives must balance utilization and revenue targets with training and career development to ensure employees stay and prosper with the firm. As the economy has grown in the past three years, professional services attrition has risen with it, making it one of the most critical issues facing PS executives. Watch for burnout. Due to senior-level employees spending more time on client interaction and business development, younger consultants are required to deliver much higher billable utilization than their more experienced peers. They can burn out easily if they work too many hours. You don’t want to better prepare them to work at their next company. Your goal is to keep them employed at yours.

2. Balance revenue versus cost for each employee. Having good people is one thing, having people with the necessary skills that are offset by their ability to generate revenue is another. Individuals with high price tags need to bill at high rates. Individual productivity and margin are important to understand to ensure each consultant generates sufficient profit to help the firm grow and prosper.

3. Provide the right tools and infrastructure. Employees who have access to specialized tools and training are less apt to move on. They see an investment in tools as an investment in them and their productivity. Employees’ ability to gain expertise in the tool not only makes them more valuable to the PSO, but also provides them with a higher degree of self-confidence.

4. Training is worth the cost. Younger employees are happier if their organization invests in the training necessary to make them more valuable. Organizations that don’t invest in training often show much higher attrition rates. Training doesn’t have to occur during working hours. It could be on nights and weekends, which won’t affect potential billable hours. Consultants are continuous learners, they are motivated by knowledge and skill development.

Looking ahead
In the next decade, the professional services market must do a top-to-bottom analysis of how it builds and maintains a high-caliber workforce. Changes in the educational system and lifestyle preferences of younger employees will determine how PSOs go to market. Devoting more attention to recruitment, training and retention processes goes a long way to determining the success of the organization.

Times have changed, the employees coming out of college just a decade or two ago are different than those of today. Understanding and meeting the needs of the new workforce, how they are developed and how they are motivated will be a big factor in the overall success and prosperity of the Professional Service industry.

Real-time Visibility is the Secret Sauce for Professional Service organizations

Data proves real-time visibility works
by David Hofferberth, Service Performance Insight

For decades, information technology providers have touted the benefits of how their solutions improve real-time visibility. They say their solutions access data faster to improve decision-making. But talk is cheap. While few would argue with this construct, the question is, “How much more efficiency does real-time visibility provide?” We’ve explored this question for the past seven years in our annual Professional Services Maturity Benchmark. Now we can quantify the advantages of real-time visibility.

Cover_2014PSMB_smIn the latest benchmark, 238 professional services executives shared the level of information visibility they had across their organization. The figure shows that approximately 10 percent said they had complete information visibility for making decisions in real time. Still, what does this do to improve the bottom line in professional services?  Level of visibilityWe decided to consider only those 10 percent of the organizations (about 30 firms) who said they had complete information visibility and compare them to the rest. Table 1 highlights a few differences.

The data shows that organizations with high levels of visibility grew and expanded their client base much faster. They accomplished this feat by having a better win-to-bid ratio. This means that for every 10 bids they submitted, they won about one more bid because of a more efficient and effective bidding process.

Real-time visibility comparisonWhen an organization grows and expands the client base faster, it also improves in other aspects. Employees want to work for fast-growing organizations because they feel secure in their jobs, and they should be able to take on more responsibility, learn more and get paid more as they move up within a growing organization. Because these organizations expand faster, there’s less time for administrative overhead. As a result, the percentage of billable time increases significantly. This leads to a much higher revenue yield per employee of over $25K annually. Higher per person revenue helps the organization expand and grow profitably. No one wants to work for an organization that faces financial challenges or loses market share.

The table also shows professional services organizations (PSOs) with high levels of visibility wasted less money on overhead because they stayed aligned and focused. Employee attrition went down significantly for these organizations. And we all know that knowledge workers are the true assets of a PSO. The net effect is a much more efficient organization, resulting in fewer cost overruns and 3 to 5 percent more in net earnings.

How to improve real-time information visibility

What is the potential for information visibility within professional services? Most departments have their own solutions which offer real-time visibility for particular tasks. For instance, sales and marketing personnel use client relationship management (CRM) solutions to manage the pipeline and better understand the services being sold and the price.

Likewise, those responsible for delivering services use professional services automation (PSA) solutions in order to better manage resources and service delivery. It ensures they meet timelines and project profit margins.

The problem is that PSOs only operate at maximum efficiency and effectiveness if the information available to one department — such as sales, marketing or services delivery — is also available to others. This helps departments work together to make sure the entire organization realizes more success.

No doubt, the department responsible for services delivery and human resources would prefer to see what deals are in the pipeline and what their potential bid price is. This information helps ensure they have trained resources available at the right cost to deliver the services. If this information isn’t available at a detailed level, the organization can’t efficiently build its bench in order to start work on time.

Likewise, the sales organization must have visibility into the resources available so it can focus sales efforts on selling projects that best match resource capabilities. Therefore, profits go up.

The impact of real-time information on goals

Having real-time information helps PSOs react faster and make the necessary changes to succeed. It also allows them to more accurately plan long-term initiatives based on the latest information. For example, executives typically look back a quarter or two to determine where they have or haven’t been successful and where they should invest.

Many organizations, however, struggle to look at the prior quarters because the information may not be available for several months. Thus, the lack of real-time information hampers the ability to accurately spot marketplace trends that might impact service strategy. Real-time information prevents surprises. Executives can compare information taken from this week, last week and several prior weeks to precisely determine where to focus future efforts.

Take advantage of the information infrastructure

We believe that using an integrated information infrastructure improves organizational visibility across the entire PSO. It becomes more relevant in light of all the new technologies, such as smart phones and tablets, which provide information access from almost anywhere and at any time. Now, executives, project managers and employees who deliver services have immediate access to any project-related data or changes in priority. They can immediately shift their focus to the most critical issues facing the organization.

No longer do employees have to make multiple phone calls to multiple people to get the message out. The results speak for themselves in Table 2. It reveals a few of the benefits of using integrated solutions.

Integration Drives PerformanceNotice that PSOs without a CRM solution have a deal pipeline of approximately 161 percent of the current quarter forecast. This means they have slightly more than 60 percent more work proposed than is expected to be completed in the quarter. Unfortunately, most of the work in the pipeline won’t be won or will have a start date much later than the current quarter. Therefore, PSOs should have a pipeline of at least 200 percent. This is double the amount of work that could be completed in the quarter.

Those organizations with CRM solutions have a pipeline of 216 percent. But if an organization integrates CRM with a core financial management solution such as enterprise resource planning (ERP), this jumps to 230 percent. It gives the organization a greater confidence margin, which allows the team to craft better proposals.

This analysis applies to PSA solutions in terms of how having integrated solutions further improves the benefits as opposed to having a non-integrated solution. Integrated human capital management (HCM) solutions also yield similar results. The outcome is that this increase in broad, real-time visibility across the PSO helps everyone work with the same information and, therefore, align resources to achieve optimal results.

The proof is in the real-time pudding

Few people doubt the importance of real-time visibility, but they want to see theory backed up by fact before pursuing it. We have monitored this key performance indicator for seven years. All the numbers prove real-time visibility improves performance.

PS executives who want to expand the organization rapidly and operate at high levels of both project margin and organizational profitability will want to do everything within their power and budget to provide the needed visibility to collaborate effectively.

To accomplish this feat, PSOs must use their information infrastructure to their fullest advantage. It’s a powerful tool that lets them adapt to current conditions as quickly as possible to reach and exceed their organizations’ goals.

The 2014 Professional Services Maturity Benchmark

Review 2013 to prepare for 2014
by Dave Hofferberth, Service Performance Insight

We are preparing to begin our seventh annual Professional Services Maturity Benchmark survey. Much has changed in seven years, as the economy went from boom times to bust almost overnight. In the past two years, we have seen the professional services market regain momentum to traditional 10 percent-plus annual growth. While on the surface this growth gives many PS executives optimism about the economy’s future, it comes with a few caveats.

Dealing with lackluster results

2013Review.gifWhile the professional services market has grown more than 10 percent annually for the past two years, many professional services organizations still experience lackluster results. Professional services growth tends to be a leading indicator of the health of the overall economy because PS experts help organizations navigate change and growth while improving efficiency.

Although a long time coming, the North American market is finally stabilizing and recovering while the Europe, Middle East and Africa regions continue to traverse its sovereign debt crisis and China’s turbulent growth slows. Uneven market expansion combined with increased pricing and regulatory pressures have upped the ante regarding PSO efficiency and effectiveness.

Facing the talent cliff

Second, the professional services market is at an interesting juncture in terms of talent. The looming “talent cliff,” in particular. Research shows that professional services organizations are finding it increasingly difficult to find, hire and retain highly qualified staff with the skills necessary to succeed in a demanding market. In the U.S. and other developed countries, workers with requisite science, technology, engineering and math education and skills are becoming increasingly scarce. Furthermore, older workers with these skills are retiring at a never-seen-before pace.

With immigration being a sensitive topic for politicians and business leaders alike, many PSOs are going offshore to less developed regions to find personnel with adequate skills. Regardless, for the professional services market to grow, it will need to incorporate a more active role in the development and retention of its talent. In the upcoming survey, we will closely explore this topic, as it can affect the future of the overall economy.

The combination of a talent shortage and return to double-digit revenue growth have driven both billable utilization and the percentage of employees who are billable to higher levels than the past six years have seen. While these results show PS executives are more focused on eliminating overhead and non-billable staff time, there is a point at which voluntary employee attrition due to burnout and demand for higher compensation and benefits will begin to hurt these organizations.

Packaging services

Another perennial area of concern and attention are all of the activities associated with the marketing, packaging and selling of services. Independent and embedded PSOs constantly look for rainmakers who combine industry and domain knowledge with the ability to grow business relationships and a book of business. These rare individuals are not made overnight. Drive and innate business acumen must be cultivated over years, if not decades, to produce consulting leaders who can effectively develop new business.

While the ability to find and retain qualified consultants is still of primary concern, all PS executives must constantly keep their eye on sales. Their focus is to create services that clearly demonstrate value to their clients, and to do it repeatedly. This evolution has given rise to the demand for packaged services, which our research began to discuss a few years ago. The alignment between marketing, sales and services has never been more important.

Conducting business planning

Another area of concern is professional services business planning. Typically, at this time of year, PS executives begin their focus on next year’s goal setting. While the organizational charter might not change from year to year, each year brings new challenges and opportunities in the professional services industry. Clients combine our annual benchmark with their own assessments of strengths, weaknesses and opportunities. The net result is the creation of a strategic and tactical plan for growth and improvement.

A look at the Professional Services Maturity Model

The core tenet of the PS Maturity Model is that service- and project-oriented organizations achieve success through the optimization of five Service Performance Pillars:

  1. Leadership. Based on vision, strategy and culture, this looks at how executives create a vision and supporting strategy and lead the organization to achieve.
  2. Client relationships. This area is based on how the organization markets and sells services while focused on growth and client retention.
  3. Human capital alignment. This area looks at how the organization hires, develops, manages and retains its workforce.
  4. Services execution. This area considers how the organization delivers services efficiency and quality at the forefront.
  5. Finance and operations. This area is based on how the firm manages itself from a financial perspective, as well as on its reliance on information technology to support all operations.

Within each of the pillars are guidelines and key performance maturity measurements. These guidelines cut across the five service dimensions, or pillars, to illustrate the benefits of business process maturity. This study measures the correlation between process maturity, key performance measurements and service performance excellence.

The Professional Services Maturity Model is specifically targeted toward billable PSOs that either exclusively sell and execute professional services or complement the sale of products with services.

The difference between maturity levels

The model has five levels of maturity. It begins with level one, where the organization operates in a heroic manner. And it goes up to level five, where the organization operates in a structured and repeatable mode of continuous improvement, eliminating much of the uncertainty and waste that negatively impacts other firms. Level five performance is very difficult to attain, as it should be. However, it’s generally worth the effort as highlighted in organizational profitability.

Organizations that operate at levels one and two average approximately 6.7 percent net profit, whereas those operating at levels four and five average almost 30 percent. The difference is significant. Higher levels of profitability naturally allow the firm to hire and retain the highest-quality employees, command the highest billable rates, and have money left to invest in growth, which in professional services is critically important to long-term survival.

Maturity is determined through alignment and focus both within and across functions. For example, although financial measurements are of primary importance, they are equally weighted and correlated with leadership and sales and quality measurements to ensure organizations improve across all dimensions, not just in terms of financial performance. However, if the organization is profit-motivated, as most are, increasing maturity levels do show up in significant bottom-line profit.

The formula for sustainable success

Six years of results and insights gained have confirmed the original hypothesis that services organizations must develop a balanced and holistic approach to improving all aspects of their business as they mature. The emphasis on individual service pillar performance shifts as organizations mature. Excellence in only one particular service performance pillar does not create overall organizational success. Rather, it’s the appropriate balance and alignment within and across performance pillars that ultimately leads to sustainable success.

More than 1,500 firms have participated in the PS Maturity Model Benchmark since its first year. These organizations are global and come in all sizes and shapes. However, the consistency that exists among all of them is their focus on delivering project-based services, and generally all are for-profit or part of a profit-driven product organization.

Many of the firms, especially in the consulting sector, are heavily focused on growth and organizational profitability. But many of the embedded services organizations, such as those responsible for implementing hardware and software sold by the parent company, are more focused on areas such as sales, client retention and expansion. In other words, their mission is not necessarily to drive margin.

Pick up a copy of the survey

For many organizations, completing the annual benchmark is a rite of passage. These organizations’ executives understand the value they gain from its insight. It helps them better prepare their organizations for the challenges that lie ahead. Please take the time to download a copy of the benchmark survey so you can better understand the value this research could bring your organization.

You Can’t Fix What You Can’t Measure

Business Intelligence — A smart move for PSOs
by Jeanne Urich and Dave Hofferberth, SPI Research

brain

Professional service executives keep looking for a magic bullet to improve performance and profit. They invest in:

  • Sales and marketing to properly position and sell their services.
  • Finance and operations to capture time and manage resources.
  • Effective recruiting, compensation and training to create a competitive workforce.

However, they often don’t realize the full benefit of these investments because they lack visibility and actionable reports to measure progress.

In a recent study, Service Performance Insight (SPI) tracked over 165 key performance indicators and correlated them with organizational performance. Obviously, indicators such as project margins; earnings before income taxes, depreciation and amortization (EBITDA); and client satisfaction and projects delivered on-time and on-budget go a long way toward pointing the professional service organization (PSO) in the right direction. We have found that the level of business intelligence (aka actionable management reporting) just might be the magic bullet service executives have been looking for. The findings from our study strongly support the adage, “You can’t fix what you can’t measure” or the corollary, “You don’t get what you want; you get what you measure.” 

Many of the 170 organizations we surveyed have turned to integrated business solutions to provide real-time visibility into the business. We’ve discovered organizations that invested in integrated business intelligence (BI) solutions experience significant improvements in organizational performance.

When we correlate performance indicators with organizational success (defined by high revenue and margin growth with high levels of client satisfaction), an integrated BI infrastructure shows the highest correlation with organizational success (see table below). Other performance indicators that highly correlate to success include: average project overrun, confidence in leadership, ease of getting things done and a well understood vision, mission and strategy. However, even these other leading indicators still have a lower correlation to performance (i.e., average performance has a correlation that is 82 percent of BI).

BI – the icing on the cake

PS executives have invested in a number of information-based tools to drive people, processes and capital in the right direction. Many of them have used departmental rather than company-wide solutions, such as professional services automation (PSA) for managing resources and projects, and client relationship management (CRM) for improving sales. Our study shows that performance improves based on the level of application integration, and overall performance continues to improve when PSOs integrate BI with other business applications. This provides the PSO with an additional level of knowledge to make real-time management decisions and detect potential problems before they become insurmountable. BI takes information from all existing applications and creates a clearer picture of organizational performance.

It also helps PSOs manage the assembly and use of information to improve decision-making — leading to improved profitability, management control and faster growth. Our recent study found PSOs who use a BI solution showed significantly improved results compared to those that did not. Some of the improvements include:

  • Contribution margin: 23.9 percent vs. 20.5 percent for PSOs that use BI versus those that do not.
  • Project gross margin: 35.3 percent vs. 31.9 percent.
  • Project on-time delivery: 75.9 percent vs. 71.1 percent.
  • Billable utilization: 66.3 percent vs. 62.2 percent.

We don’t have visibility into the full extent to which these organizations use BI, but it is important to note that those that do show impressive overall results. As PS organizations mature, BI provides real-time visibility into all facets of the operation — allowing executives to spot trends and take corrective action immediately.

Our study found 70 percent of the PSOs surveyed do not use a formal BI solution. Many use Microsoft Excel, which is still the most popular, albeit informal, BI tool on the market. Microsoft does not market Excel as a BI tool; however, its power, flexibility and ease of use make it a natural for helping PSOs extract, analyze and report data. Most of the BI tools reported in the survey were provided by the enterprise resource planning vendors. BI is rapidly becoming an integral part of their product portfolio.

Use intelligence intelligently

Most BI solutions provide graphical executive dashboards to keep PS leaders informed of the status of deals, resources, projects and customers. Dashboards have been a boon for BI sales, and we believe dashboards should be available for employees throughout the PSO — not just executives. Project managers can use dashboards to monitor every aspect of their projects to make sure the work is high quality and on time, while staff members can use dashboards to make sure they are working on the right projects at the right time with the right skills.

Dashboards provide employees with an understanding of how they are personally performing and can alert them when certain areas of their performance require attention. For instance, consultants can see when their utilization drops to a below-bonus level, meaning they may want to find more work, or when their training and skills fall below the threshold for that promotion they covet.

Survey responses combined with on-time, on-budget project delivery performance and timely invoice payment can trigger real-time client-satisfaction dashboards. These account management dashboards track overall client satisfaction, revenue and margin by product line along with client referral possibilities.

Consider a BI czar

Gone are the days when a PS executive could run the business with one gargantuan spreadsheet. A critical investment every PS executive should make is in a senior financial analyst to drive the budgeting and forecasting process; track utilization, revenue and margin; and design actionable reports.

Information does not magically appear in a BI solution; it comes from understanding the relationship between business applications and designing inputs for timely analysis. Many PSOs have a chief operating officer (and sometimes a chief quality officer) responsible for improving overall efficiency and effectiveness within the PSO. We believe the addition of a senior financial analyst is a critical success factor to improve all facets of operation.

Learn from the software vendors

The BI market is relatively new compared to other core business application solutions. Yet, it is rapidly gaining acceptance in the marketplace. In 2007, the largest independent BI providers — Cognos, Business Objects and Hyperion — were acquired by IBM, SAP and Oracle respectively, signaling a new era of strong business intelligence and analytics as part of most major financial applications.

Perhaps each of these independent software vendors is onto something. With the vast amount of data collected by their applications, it is critical that executives and line managers have the ability to cull the information to help their organizations perform better.

BI’s role in PSOs

PSOs continue to look for new ways to increase performance in every facet of their organization. With the availability of new information applications, many executives are adding business intelligence to their toolkit. Without a lot of statistical mumbo-jumbo, our latest study correlates highly the use of BI tools with better performance in every key PS performance indicator.

BI solutions have emerged as the next “killer app” and may be the answer executives have been looking for to dramatically improve performance. Beyond all the hype, our research into this rapidly emerging market shows BI solutions in PSOs demonstrate significant value and warrant serious consideration to help improve every aspect of the organization.

Accelerate Professional Service Maturity through Transformation

Success beyond change management or re-engineering
by Jeanne Urich and Dave Hofferberth, SPI Research, and Michael Kanazawa, Dissero Partners

0309

Professional service organizations (PSOs) provide one of the highest leverage business models to quickly grow revenues and profits, but can be the most difficult organizations to transform and change.

Learn from history

Think about the once great dot.com eBusiness integrators (Scient, Viant and Sapient) who launched new methodologies and penetrated the Fortune 50 almost overnight. Don’t forget IBM’s massive strategic shift into IT services and consulting, and the rapid dominance of Tata in IT outsourcing.

Now, consider the cold, hard facts. Over 70% of major change programs fail to achieve their desired results.

Why? One major barrier to success: leaders often underestimate the magnitude of change, the need to fully engage the entire organization and the requirement for leadership focus and follow through. By managing change in a more complete way, as a business transformation, the odds of success are greatly increased.

Organizations begin a service transformation because they want to:

  • Accelerate revenue and margin growth either through mergers and acquisitions or internal process improvements.
  • Drive alignment between the service organization and other departments, or improve internal service organization alignment.
  • Assimilate new groups, companies or functions.
  • Capitalize on new markets and create new solution offers.
  • Implement new systems and processes to improve effectiveness and efficiency.
  • Improve quality and client satisfaction.
  • Optimize sales and marketing effectiveness.

In today’s marketplace, the term transformation describes everything from high-risk complete business overhauls to tactical changes in IT systems. For PSOs, transformation often focuses on a wide variety of actions and opportunities required to drive continuous business growth. The reasons for this change may be one of many:

  • Realigning as a new leader “takes charge.”
  • Launching a new phase in the organization’s maturity.
  • Entering new markets.
  • Integrating acquisitions.
  • Breaking down organizational silos.

Put simply, transformation means opening up new possibilities for growth and moving from one state to another. It is tough work, and many change initiatives fall short, or end up as “flavors-of-the-month.” To prevent that from happening, PSOs need to understand the difference between transforming the organization and changing hastily as a reactionary measure to internal or external drivers.

Differentiating Transformation, Re-engineering and Change Management

Failure to differentiate between change management, process re-engineering and business transformation often leads to using the wrong tools at the wrong time. The table below shows how the goals differ among these three types of change.

Table 1: Transformation, Re-engineering & Change Management 0309 1Source: Dissero Partners, March 2009

Typical change efforts that focus primarily on change management and process re-engineering often fall short and do not include two important factors in a successful professional service transformation project:

  1. Benchmarking and using best-practices data to drive fact-based decisions
  2. Following a complete and proven business transformation process that engages the leadership team and cascades input and commitment throughout the organization.

To deliver a comprehensive service assessment and transformation solution, the following framework is essential Figure 1 indicates the scope of this transformation solution and how it compares to typically under-scoped efforts to drive change.

Figure 1: PS Transformation Framework 0309 2

Source: Dissero Partners, March 2009

Often what seems to management as a minor tweak in business process is a major shift disruptive to daily sales, service delivery and operations. Much more preparation and consideration is required for success. Typical service transformation gaps include:

  • Absence of executive alignment and leadership, due to the project being viewed as only tactical.
  • No market, benchmark or customer fact-based data to substantiate decisions on priorities or to describe why the rationale behind the changes. Lack of meaningful engagement of business operations and employees until it is too late for them to have input, investment or engagement in the process.
  • No ongoing process for strategy execution and follow-through, resulting in lack of sustained focus and follow-through.

Leadership and strategic focus make a big difference in bottom line performance. This is especially true in the case of PSOs, which are people-oriented businesses and have the flexibility to become highly fragmented without clear strategic focus. Specifically, Table 2 shows 40 percent faster revenue growth and more than double the profitability when the  team has high confidence in its leadership.

Table 2: Confidence in PS Leadership 0309 3Source: Service Performance Insight, March 2009

Table 3 shows that PSOs with better clarity of vision and mission and strategic alignment drive over 50 percent faster revenue growth and 65 percent greater profit margins. In addition with improved leadership focus the PSO lees less staff turnover and improved on-time delivery performance.

Table 3: Organizational Vision, Mission and Strategy Clarity0309 4Source: Service Performance Insight, March 2009 

A solution that works

Combining a benchmark with a proven process for transformation provides a recipe for success in driving increased revenue, profitability, human capital alignment, and delivery quality.  That’s PS Transformation!

The transformation process consists of three phases:

1.  Launch: A compressed launch phase focuses the organization, aligns staff and gets them fully engaged in driving the changes.

2.  Execute: Having a specific process to cascade the plans puts leaders at each level in a role of re-setting priorities and making firm commitments to action at each level. This is followed by quarterly checkpoints to drive best-practices learning and to serve as waypoints to test the strategic direction.

3.  Extend: Once the PSO has launched and executed full performance for a year, to extend its efforts, the organization must confront reality, focus and continue to align and engage employees (see Figure 2).

Figure 2: PS Transformation Timeline

0309 5
Source: Service Performance Insight, March 2009

Confront reality and focus on the highest impact initiatives for improvement is the next step. Through qualitative and quantitative techniques(1), a comprehensive review and assessment begins and includes:

  • Vision, Strategy, Leadership & Culture; Finance & Operations; Human Capital Alignment; Service Execution; and Client Relationships
  • High-level analysis of business plans, goals and reports
  • Key leadership interviews for all major business functions
  • Targeted customer and non-customer interviews to provide an “outside-in” perspective of the company’s strengths and challenges.

With this information, the leadership team can have an effective and fact-based conversation about priorities for strategic change and improvement. This information provides the catalyst for performance change that is executed through the transformation process.

What are the Financial Results?

Improvements for improvements sake aren’t very interesting. And often incremental baseline trending of budgets and sales forecasts isn’t enough to keep pace with fast-changing markets and the financial demands of the business. PS executives need to show demonstrable benefits from any investments they make. By focusing on the highest leverage areas first, the financial benefits can drive quick wins and solidify support for larger scale changes over time. The results in the following example are for a small PSO, but are scalable to larger organizations and based on the following assumptions:

  • Number of PS employees:  130
  • Number of Billable PS employees:  100
  • Annual PS Billings:  $20.0mm
  • Revenue Leakage:  4.0%
  • Utilization:  68.0%

While PSOs can make literally hundreds of potential improvements  PS firms can target key performance measurements. Small improvements can yield significant results (Table 4).

Table 4: Service Transformation Quantifiable Business Benefits0309 6Source: Service Performance Insight, March 2009

A PSO with $20 million in revenue can improve profitability by a significant percentage. These improvements are realistic if the PS firm follows a proven business transformation process. Change initiatives with full executive team commitment and alignment that incorporate employee input can succeed in driving bottom-line profits.

Effective Professional Services Transformations

Knowing the common causes of failure is the first step to success.   Effective change initiatives have the following in common:

  • The ability of the leadership team to effectively confront the reality of the current business environment with a realistic fact base (and database) and competitive benchmarks.
  • Clear focus (limiting the focus on a few key initiatives without competing or overlapping priorities).
  • Alignment of all parts of the organization around a core set of improvement initiatives.
  • The ability to rapidly engage the full organization in translating improvement plans into operational tactics and job-level objectives.
  • The follow-through necessary to accelerate the learning and performing cycle while creating committed leaders at all levels of the organization.

By leveraging the structure of benchmarks [2] and following a process that keeps the responsibility for leading the transformation squarely in the hands of business leaders, the result is not only quantum improvement in targeted initiatives in a shorter-than-expected period of time, but also a fundamental improvement in leadership acumen from top to bottom. There is no reason that 70 percent of transformation and change efforts should fall short of financial expectations. The tools for success are available and the rewards are great for those who learn to capture that value.

Footnotes

[1] Service Performance Insight (SPI): PS Maturity Model 2009 Benchmark Study provides current and reliable benchmark data from over 200 PSOs.

[2] Dissero Partners: More than 25 years ago, groups of CEOs, division presidents and their executive teams participated in an innovative program at Harvard Business School chaired by one of the founding partners at Dissero Partners, Dr. Robert Miles. The executives worked collaboratively on their top business challenges with peers and key faculty. The biggest and most common problem facing executives was how to generate a tough confrontation of external realities and then fully engage their organization in executing business changes. Now captured in the book, BIG Ideas to BIG Results (FT Press 2008, Michael T. Kanazawa and Robert H. Miles), the process was built on the best practices that surfaced through that program and many years of refinement and streamlining.