Building the Professional Services Income Statement

STEP 1:  THE METRICS THAT MATTER
By Jeanne Urich, Managing Director, Service Performance Insight

This is the first article in a three-part series examining the metrics that matter for running a professional services business. This article looks at key metrics, typical targets and the impact of small improvements. In the second article, we’ll provide descriptions and industry averages for the critical components of the professional services income statement — both revenue and expense. The third article will reveal the best practices and profit and loss statements of the top PS firms.

KPI

We’ll show actual results from the 2015 Professional Services Maturity benchmark, which provides a benchmark of technology professional services organizations — both embedded (within hardware and software technology companies) and independent (IT and management consultancies, architects, engineers, etc.). All three articles share insight, measurements and guidance to help professional services executives improve profitability.

What metrics matter for professional services?
Running a professional services organization, or PSO, is complex. It’s a game that must be won with singles and doubles, not home runs. Thus, it’s imperative to know which key performance indicators are essential, the ones PSOs must continually measure, and the ones that are nice to have but not critical. Figure 1 shows the most important metrics for measuring a professional services organization.

Figure 1: Metrics That Matter for Services Organizations
Figure 1
Source: Service Performance Insight, August 2015

The question is how to continually capture new business while ensuring revenues and costs remain aligned. At the same time, PSOs must provide consultants the tools they need to deliver high-quality projects while growing their skills for the future. Professional services is a balancing act requiring both effective selling and project delivery. Client satisfaction is the ultimate goal to ensure clients pay their bills, continue to buy and provide great references and referrals.

What are typical KPI targets for professional services?
As the professional services market comes of age, standard measurement targets are emerging based on the type of services delivered — software or SaaS implementation; customization and integration; hardware and network installation, configuration and optimization; management and business process consulting; and so forth.

The targets for software consulting differ from those of business and management consulting. More commoditized services garner lower fees that require higher utilization rates to generate profit. However, net margin should be equivalent to more complex services due to lower labor costs. Significant factors affecting profitability include market demand, reputation, workforce quality and skill level, geography, risk and complexity, and depth of intellectual property, etc.

PS targets depend on the charter and mission of the service organization. If the organization’s mission is to “create referenceable customers” at any cost, then the services organization may not be a profit center. If the mission is to “support sales and drive product revenue,” then the organization may run on the low end of billable utilization and revenue per person while accentuating metrics around bid/win ratio, customer adoption and cost of sales.

Measurements for smaller, startup organizations benefit from accentuating “building client references” rather than services profit. Targets for larger, more mature service organizations gain the most from focusing on the highest possible service revenues and margins while ensuring clients are wildly satisfied.

Figure 2 highlights target metrics for a PSO within a software company.
Figure 2: KPI Targets for a Software Company PSO
Figure 2
Source: Service Performance Insight, August 2015

Small improvements can produce big results
In the people-intense world of services, the primary cost driver is labor cost. Small improvements that enhance labor productivity can quickly add up to yield significant profit increases. Figure 3 illustrates how small improvements can produce big results. If the organization makes a 10 percent improvement in four or five key performance measurements, due to leverage and the cumulative effect of the improvements, the organization could improve both revenue and margin more than 50 percent!

Figure 3: Small Improvements Can Produce Big Results!
Figure 3
Source: Service Performance Insight, August 2015

Priority Improvement Recommendations
Now let’s take a look at priority improvement areas. The following suggested tips and tricks will enhance your bottom line:

Revenue. In the revenue quadrant, the best accelerator is to improve sales productivity — through better deal qualification, marketing and stronger references. The best revenue accelerators are increased sales productivity, improved bill rates and larger projects. Improving sales capture rates and sales effectiveness is a much lower cost alternative than chasing every deal that moves because of a weak pipeline.

Improvements in sales productivity also show up in better price realization. Bill rates are market sensitive but can be dramatically improved through better estimating, effective project delivery, change control, references and project quality. Hourly bill rates almost always produce a higher margin than daily rates.

An interesting phenomenon is that a given percentage increase in either utilization or bill rates produces a similar bottom-line impact. The corollary is that services margin cannot be made if the PSO cannot charge twice the fully loaded cost of consultants, or if average billable utilization falls to below 50 percent.

Margin. The best way to improve margin is to lower costs and to make more profit on every facet of the business. Be careful to ensure the organization makes at least a 30 percent margin on subcontractors and offshore resources. Across the PS industry, subcontractor delivered revenue consistently averages 13 percent of total revenue. If subcontractors and offshore resources are overused, it may compromise delivery quality and put client relationships and knowledge capture at risk.

It is surprising to see how many PSOs do not adequately mark up their subcontractors or bind them to the firm’s contract terms. Executives do not want to be in a situation where they are paying contractors on a time and materials basis but charging customers on a milestone basis.

The other key margin lever is to reduce non-billable overhead by running a lean business. One effective strategy is to zealously measure and publicize non-rebillable travel and expense. If organizations spend a fortune in non-billable travel for business development, this clearly indicates a need to improve marketing, lead generation and deal qualification.
Many leading firms like to set a “non-billable” expense target per person, say, $2,500 per quarter. This target may be too low for business development staff, but it is a good number for the overall organization and incentivizes the team to carefully monitor telecom charges and those sneaky free meals! Normally, the organization should have very limited non-billable travel expense for billable consulting staff.

Client satisfaction. No matter the size of the organization, PSOs must keep a master project dashboard and have a mechanism for impartially tracking project quality. Some key metrics are proposed vs. actual hours per task, milestone or deliverable. Catch problems early — an overrun early in a project says it’s time to reset expectations, execute a change order or improve project management. Failed projects ruin a firm’s reputation and can have a devastating effect on profit.

The best way to improve sales productivity and project margins is to sell more projects to existing customers or at the time of initial product sale. Just a 1 percent improvement in services attached to product sales can produce big gains in revenue while lowering the cost of sales.

Invest in services sales compensation to motivate the sales force to include services with every deal. A best practice is to compensate product sales representatives at the same commission level for product and services sales.

Resource plan. An important profit lever is employee retention. Attrition is incredibly expensive. On average, it takes almost a year to recruit, hire and ramp a productive new consultant, which makes replacement hiring costly. Best-in-class PSOs focus on recruiting the best and invest in training to shorten ramp time.

One of the most important levers is to ensure the most productive (and most senior) consultants stay with the firm. Create a compensation plan that encourages them to develop new business, mentor new employees or build infrastructure. Treat them as crown jewels, not billable objects, and find ways to reduce the burden of travel.

With utilization, executives need to run the organization at a target billable utilization, say 75 percent, to cover costs and produce margin. However, running the organization too hot through excessive utilization has the unintended consequence of negatively impacting customer satisfaction and attrition.

The other significant workforce lever is reducing overhead. That said, the non-billable headcount should be less than 30 percent of total headcount with a target ratio of 10 to 1 of employees to management. Pay careful attention to headquarters spend. Through the use of integrated business applications, PSOs are reducing non-billable administrative headcount by automating resource management, time capture and billing.

Next time, we’ll analyze the professional services income statement. Stay tuned to learn about the benchmark averages for revenue and costs across hundreds of professional services organizations, along with best practices for maximizing revenue and profit!

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.

Get a Free Copy of the 2015 PS Maturity Model Report
Take the survey!
It’s that time of year again – time for the 8th annual Professional Services Maturity Benchmark! More than 1,500 professional services organizations have participated in this important research over the past eight years.

If you are running a service organization:
• Do you know how your organization stacks up against industry metrics?
• Do you have the industry data you need to support your strategy?
• Can you objectively quantify your organization’s strengths and weaknesses to create an actionable business plan?
• Do you know where you should invest to yield the highest impact?

The 2015 report promises more insight and analysis into the market with a view of the key success factors that drive exceptional performance.
Click here to take the survey

Complete the survey by Dec. 1, 2014 to get a free copy of the 2015 PS Maturity Benchmark Report ($995 retail) when it is published in February 2015.

Blurring the Lines Between Products and Services

Business is changing. Everywhere you see product-driven organizations counteracting product commoditization through the addition of value-added services. Services-driven organizations are packaging their services into repeatable service offers and products to shorten time to value. The line of demarcation between products and services has become very blurry. Is software-as-a-service software or a service? Is Google selling software or a service? What about Linkedin and the host of e-commerce and social media applications are they products or services?
products and servicesOne thing is clear. Across all industries, firms are placing a premium on the total customer experience — lifetime value — not just the worth of the product sale. Aftermarket services are the cash cow of the automotive industry where product margins are thin, and competition is intense. This trend is good for customers because it means the days of selling and running are over.

Today, it’s about customer value creation. This means consumers expect usable products that actually help them do a job. They don’t want shelf-ware. This trend has also emerged in the professional services sector, as increased global competition has made it necessary for services-driven organizations to offer service packages and products, with tangible deliverables.

For the past five years, we at Service Performance Insight have tracked the percentage of total revenue generated by products in independent professional services organizations. Until recently, independent service providers reported about 5 percent of total revenue came from the sale of pass-through hardware and software. In the 2014 Professional Services Maturity™ Benchmark, this figure nearly tripled to 12 percent, and this is just for independents, such as IT and management consultancies. Figure 1 shows the percentage of service provider revenue coming from products.

Figure 1. Percentage of Revenue from Products in Independent Services Organizations
Percentage of revenue from productsNot all of the revenue comes from proprietary packaged services, as many independent professional services providers also sell additional off-the-shelf hardware and software. However, an increasingly higher percentage of revenue comes from their own internally developed products such as dashboards, report packages, data loaders and integration tools.

Is this an anomaly? We doubt it. Just like product-driven organizations have moved to services as a source of differentiation, now services-driven organizations are doing the same.

The good news: Products help differentiate services
Given the commoditization of many types of professional services, a packaged solution including products can help professional services organizations distinguish themselves from the competition. When hiring a service provider, customers look for demonstrable outcomes. The product could be hardware and software combined with services to create a unique solution. These solutions offer a proven complement of hardware, software and services that together solve a complex business problem.

This is especially evident in the IT consulting sector, as systems integrators are increasingly developing their own proprietary software to better help their clients use the technologies they implement. As the market moves towards greater industry specialization — with unique business processes, data and analytics — this trend will become increasingly popular.

The bad news: Both Products and Services are complex
Many products, while providing a competitive advantage, are very complex to develop and manage over time. It brings a whole new host of factors into play as services-driven organizations begin to develop and sell products. Complex products require additional infrastructure for long-term development and support, something many professional services organizations are not accustomed to providing.

In the past, it was all about implementing a product with a defined, albeit time and materials, statement of work, without any long-term support or ongoing commitment. Now there are upgrades, staged roll-outs and re-implementations of the product in addition to managed services and hosting. This new scenario keeps the service provider engaged with the customer for the life of the solution, demanding long-term contracts and relationships.

Profit margin of products versus services
Products and services generate very different profit margins. For instance, traditional software vendors sell software with a 90 percent margin, whereas their consulting services might only produce a 10 to 20 percent margin as shown in Table 1.
Table 1. Services Provider Percent of Revenue and Margin from Products and Services

Service Provider Revenues and MarginsObviously, executives prefer 90 percent product margins as opposed to 20 percent for services. Unfortunately, as products become more complex, the services component also becomes more complex and mandatory. Product executives must carefully consider the desired profit margin of services without degrading overall corporate profitability all while maintaining high levels of customer adoption and satisfaction.

An approach to consider
Products must be developed with specific services in mind and include the potential for additional service and support revenue over time. Executives need to agree on the specific goal of the product, as it might be a sales enabler for more services, and thus carry a minimal cost or margin. Or it could be intended to generate high levels of product profit with minimal service margin.

We have worked with organizations on both sides of this spectrum. The biggest issue is confusion regarding the realistic amount of services required to bring the product to life. Immature products or products that solve complex business problems may require loads of services. The question is: Can the required services be sold at a profit, or must they be discounted to garner the product sale?

When the goal of the product is to generate profit
In general, most technology products deliver high profit margins. However, as products become more complex, so do services. Failure to implement the correct services strategy could ultimately doom the success of the high-margin product if customer use and adoption are low due to poor implementation and training.

When the goal of the product is to generate additional services sales
Develop a services strategy that incorporates service importance at the time of sale. Most products require additional training. If this service is offered for free, then executives must closely monitor it, as it can eat into both product and service margins.
Conversely, services firms that have already begun to develop products need to watch their cost and the perceived value they deliver. Many firms that have had initial success developing a product get caught up in the “develop a product at all costs” mindset. Unfortunately, improperly managed products tend to eventually cost more than the value they deliver. Do not lose focus on the intended goal of the product.

Questions to consider
Before working on the development of a product to enhance overall revenue, all parties involved need to answer key questions and accept the answers.
1. What is the intended goal of the new product?
2. What are the projected margins for products and services?
3. Will the combination deliver the desired overall profit margins?
4. Is the services workforce required to sell, given the technical nature of the product?
5. What is the upgrade strategy, and how often will upgrades be delivered?

All firms care about bottom-line profitability. Whether it comes from products or services may not be the primary consideration. In many cases, products are more predictable than services, but without required services and enhancements, product revenue could quickly dry up.

What does it take to succeed in selling both products and services?
If men are from Mars and women are from Venus, then products are from Pluto and services are from Saturn. The development and sale of both is very complicated. Companies with strong skills in manufacturing products cannot easily begin selling services. And of course, the opposite is true.

A team must be developed with specific skill sets and a collaborative framework to ensure the synchronicity between products and services. The IT infrastructure is especially important, particularly the enterprise resource planning (ERP) solution, which should be able to manage both products and services in the same sales order.

As the economy strengthens, one thing has become abundantly clear: Product manufacturers are investing heavily in professional services, and services organizations are investing heavily in building products. Both of these are unfamiliar territories to the executives running their respective organizations. Managed correctly, both offer the potential for greater growth, client satisfaction and profit.  A complementary product and service strategy requires leaders on both sides of the aisle to learn from each other and collaborate to develop real solutions which solve real client problems.

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.

The PS Maturity Scorecard – your prescription for success by Jeanne Urich

Keyboard with Improve Your Performance Button.For seven years, we at SPI Research have been benchmarking various levels of operational control and process maturity to determine the characteristics and appropriate behaviors for professional services organizations based on their organizational lifecycle stage. The primary questions we sought to answer when we first conceived the PS Maturity Benchmark in 2007 remain our primary focus today:

  • What are the most important focus areas for PSOs as their businesses mature?
  • What is the optimum level of maturity or control at each phase of an organization’s lifecycle?
  • Is it possible to build diagnostic tools for assessing and determining the health of key business processes?
  • Are there key business characteristics and behaviors that spell the difference between success and failure?

What it takes to become a high-performing Professional Service organization

Iss1205SPIimage

The original concept behind our PS Maturity Model was to investigate whether increasing levels of standardization in operating processes and management controls improves financial performance. The benchmark demonstrates that increasing levels of business process maturity do result in significant performance improvements as shown in Table 1.

In fact, we found that high levels of performance have more to do with leadership focus, organizational alignment, effective business processes and disciplined execution than “time in grade.” Relatively young and fast-growing organizations can and do demonstrate surprisingly high levels of maturity and performance excellence if their charters are clear. Further improvements accrue when an organization’s goals and measurements align with its mission, and investments are made in talent and systems to provide visibility and appropriate levels of business control. Of course, it helps if it’s well-positioned within a fast-growing market.

The core tenet of the PS Maturity Model is that services- and project-oriented organizations achieve success through the optimization of five pillars:

  1. Leadership: vision, strategy and culture.
  2. Client relationships.
  3. Human capital alignment.
  4. Service execution.
  5. Finance and operations.

The PS Maturity Model describes maturity guidelines and key performance measurements at each performance level. These guidelines illustrate examples of business process maturity while providing directional advice to move to the next level. This study measures the correlation between process maturity, key performance measurements and service performance excellence.

Taking the first step toward recovery

We’ve all heard about recovery programs. The funny thing is that they all start with you realizing you have a problem, and you’re sincerely interested in doing something to fix it. Recovery is a process that involves several steps. You can’t get to the next one without taking the first one.

The formula for improving professional services business performance has a lot in common with health improvement plans, weight loss plans and alcohol recovery programs — they all rely on an accurate diagnosis of the underlying issues that led to the problem in the first place. Lasting recovery depends on taking measurable steps toward an improvement goal, typically with the help of an expert coach.

One of my favorite expressions comes from Lewis Carroll’s “Alice in Wonderland.” “If you don’t know where you’re going, any road will take you there.” Here’s the conversation between Alice and the Cheshire Cat.

“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where —” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
“— so long as I get SOMEWHERE,” Alice added as an explanation.
“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”

Obviously businesses have more important things to do than wander aimlessly to prove they’re going somewhere. Having a destination and a route in mind is a much better recipe for success.

Building an improvement roadmap

To create lasting PS business performance improvement, here are five simple steps to follow:

1. Realize you have a problem.

Denial is one of the dominant attributes of lackluster business performance. Acknowledging there is a problem is the first step to recovery. The problem may lie in new, fierce competitors who have changed the playing field. It can be rooted in technology shifts which have commoditized cash cow services. The inability to see or seize new market opportunities may be another cause. Or the heart of performance issues may be due to dysfunctional executive relationships and lack of alignment.

You can create an improvement plan after you’ve first assessed the root causes of the problem. Benchmarks are a powerful tool for problem identification. A good benchmark provides an apples-to-apples comparison to other professional services organizations in the same business.

2. Learn about recovery.

Finding a solution is the next step toward solving a problem. In this case, the solution involves learning about possible ways to advance. Diagnostic tools like the PS Maturity Scorecard help firms understand where they are now and what it will take to move up to the next level of maturity as shown in Figure 1. Each firm’s improvement path will be unique, but visualizing the road peers have taken and the timeframes and investments they have made helps chart an improvement roadmap. Processes like the the PS Maturity Scorecard program help organizations avoid unnecessary potholes while focusing on the highest impact strategies.

Figure 1. PS Maturity Levels

Levels

Source:  Service Performance Insight, May 2014

3. Seek expert advice.

Enrolling in any improvement program involves discipline and determination. Expert coaching and advice reinforce positive steps while preventing back-sliding. Having an impartial yet knowledgeable business adviser can help reduce the emotional stress of change.

Organizations are best served by seeking expert advice to develop valuable new growth opportunities before competition or lack of alignment has cornered the firm into a death spiral. Here again, having an empirical benchmark standard provides a fact-based reality check and objective yardstick of the value of improvement. A scorecard like the one shown in Figure 2 is one way to do it.

Figure 2. Measure Service Performance Progress with a Scorecard

Measure-service-preformance

Source:  Service Performance Insight, May 2014

4. Prevent relapse.

As with all programs that require change, participants often don’t allocate the time, money or attention to fully develop and fund improvement priorities. Day-to-day business and tactical issues get in the way of long-term growth strategies.

Let’s face it. It’s hard to change old habits, so the temptation to resume business-as-usual behaviors is strong. This is a crucial stage for long-term, sustainable business enhancement because it defines the future path, whether change is possible and if the executive team is willing to see it through. Cement and reinforce improvement plans with quarterly check-ins and annual check-ups with the help of a coach and roadmap.

5. Maintain business improvement efforts.

Developing a lasting, sustainable growth strategy is hard especially when it involves change and building new management disciplines. The thirst for continuous improvement must become part of the organization’s DNA. Progressing through maturity levels depends on adopting repeatable and sustainable methods, tools and measurement systems.

Permanent business improvement does not happen overnight. The maturity model is not static as it reflects the dynamic and ever-changing PS industry and emerging best practices. Each year, the bar has been raised. Best-in-class performance five years ago may now be considered average. Maturity advancement requires continuous effort to take advantage of changing market dynamics. Preventing business setbacks requires maintaining healthy business measurements and controls.

About Service Performance Insight

Over the past seven years, more than 10,000 PSOs have used the concepts and KPIs from SPI’s PS Maturity Model to pinpoint their organizations’ current maturity and develop improvement plans to advance in lagging areas.

SPI Research works with PS firms to create a maturity scorecard to compare to the benchmark maturity definitions. It analyzes current performance and helps prioritize future improvement initiatives. At the end of the project, leaders not only understand the maturity model, but also have the tools to identify, frame and prioritize strategic improvement priorities required to accelerate performance.

To learn more about SPI Research services and how SPI can help your company, please contact Jeanne Urich at jeanne.urich@spiresearch.com or phone (650) 342-4690

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.

What’s Changing the Professional Services Industry in 2014?

You need to know about a new acronym that’s smack dab in the middle of it all
by Jeanne Urich, Service Performance Insight

Get ready for some SMAC! No, it’s not some new designer drug. It’s a new acronym for the technology trends dominating the services landscape in 2014:

  • S: Social media
  • M: Mobility
  • A: Analytics and big data
  • C: Cloud

Mar PSJSMAC and its underlying technologies have caused a seismic shift in technology buying. It moves power and control to consumers and business executives and away from the IT domination of the past. New buying centers mean big business for nimble service providers.

It also means traditional IT product and feature selling has been eclipsed by social media-fueled buying behaviors and perceptions. These new technologies usher in a wave of consumer and line of business buying power, making both the sale and delivery of consulting services more complex.

How SMAC is changing professional services

End users and line of business buyers lack the sophistication of IT buyers, as they tend to be highly influenced by market perception, referrals and references. They want straight talk around business benefits as opposed to technical mumbo jumbo. They need demonstrable proof that the solution will actually be used and provide an immediate, positive business impact.

No more multi-year projects, no more extensive customization. These new buyers want proven out-of-the-box functionality, effortless integration with legacy applications and an easy-to-use, intuitive user interface with robust, graphical reporting. Applications must — with minimal modification — work on any device with a focus on mobility.

Social media’s impact

The focus on social has a much greater impact than massive IPOs and market caps for Google, Facebook and Twitter. Buyers expect applications to be socially aware, with Facebook-like functionality for crowdsourcing, instant messaging and telling a friend. Built-in connection and integration with the major social channels is mandatory. This means service providers must expand the social media knowledge and skills of their consulting workforce to ensure new applications provide social connections.

User adoption is of paramount importance. What user group wants a new application if no one else uses it or contributes to it? This means service providers can no longer sell, install and run. They need to provide training and incentives for users to quickly adopt and embrace new applications. Projects must now include early adopters in pilots with a greater emphasis on effective rollout campaigns designed to secure the hearts, minds and loyalty of new user groups. Another trend is gamification, which compels applications to create scores and offer prizes to get and keep users engaged.

Social has made a major impact on buyer behavior and knowledge. Buyers have a wealth of information available at their fingertips, empowering them to research and select services providers based on clarity of messaging and proven reputation. Referrals remain important, but prospective buyers can easily circumvent the vendor’s sales and marketing teams to find out whether past clients are satisfied.

Clear, compelling services provider websites must provide all the needed information for prospective buyers to research and compare capabilities and competencies. The days of in-person, local or regional selling and service aren’t dead. Rather, they’re under increasing siege from global competitors that offer a greater breadth of capabilities at competitive rates based on lower labor costs.

The move away from legacy apps to mobile

Because mobile technologies have eclipsed the use of applications, providing access to apps from a variety of mobile devices is no longer a “nice to have,” but a “gotta have.” This means consultants need knowledge and experience with all major iOS and Android devices while keeping up with emerging standards.

It also means the amount of real estate for user apps and the number of clicks must be minimal. This trend is a major force in streamlining overweight legacy applications with a premium on ease of use and compelling graphics. Mobile skills are in short supply. To recruit and retain mobile experts, services providers must invest in training and knowledge transfer.

Making sense of analytics and big data

Much has been said and written about big data, especially as a means for legacy enterprise application providers to remain relevant. The answer lies not only in access to massive, virtual storage, but also in developing a workforce that can understand and use statistics to power business decisions. Analytic engines and technology often surpass the analytic skills and competencies of business users who have to make sense of it all.

Nonetheless, whenever there’s smoke, there’s fire. The critical shortage of analytic skills represents a significant opportunity for service providers, whose consultants combine technical knowledge with vertical industry acumen, to create the reports and data access corporations need. Stay tuned for an ongoing database and analytics war as SAP uses Hana to wean its users from Oracle.

The cloud overtakes legacy applications

Last, but not least. The cloud has created a whole new oligarchy of monster application providers such as Salesforce, NetSuite and Workday. It seems like these companies have grown overnight in producing multibillion dollar revenue streams by stealing enterprise clients from IBM, SAP and Oracle. Continued advances in software-as-a-service (SaaS), business-process-as-a-service (BPaaS) and infrastructure-as-a-service (IaaS) have created a shift towards configurable, cloud-based delivery models where services are enacted directly within technology platforms.

These standardized platform-based services will gradually replace traditional labor-intensive transactional models and expensive, waterfall projects. Legacy application service providers have been slow to react and jump on the cloud bandwagon. However, cloud applications will increasingly dominate and overtake enterprise legacy applications because they offer accelerated time-to-value and superior return on investment.

The transformation of businesses

Next-generation service providers will focus on transforming businesses and business processes through technologies like cloud, social media and mobility, and applying analytics across the end-to-end services platform to deliver insights and create new value. Power has shifted away from IT to consumers and business executives, allowing operating executives to reach their clients and employees in new and exciting ways.

Social media has created a new services vision — in which buyers and service providers seamlessly interact by building shared learning communities centered on business process improvement and streamlined business interactions. This empowers end users to select, buy and implement self-service applications, thus transforming their interactions with their clients. Increasingly, organizations are demanding access to management and reporting capabilities for their outsourced business processes through mobile devices — anytime, anywhere. Because of this, smartphones and tablets make up the new primary mode of application access.

Never has the promise of technology as a powerful force for business transformation been so close to reality. But the real power lies within service providers that can apply this tsunami of technology to solve real-world business problems. Expect the services industry to grow in 2014, exceeding overall IT spending growth as it has for the past 10 years. However, look for winning services organizations to be those that focus on specific vertical industry business problems yet are savvy enough to build horizontal skills in social, mobile, analytics and cloud. They’ll apply technology and industry knowledge to streamline and transform the way the world does business.

An opportunity for independent services providers

The good news for independent services providers is that the venture capital community and Wall Street are forcing technology companies to outsource professional services to independent service providers. As a result, multibillion dollar service provider channels have been created overnight. Witness more than 1,400 Salesforce.com service providers and a vibrant developer community based on the Force.com platform.

All the major enterprise cloud software companies, such as Workday, SuccessFactors (SAP), NetSuite and Oracle, lead with partner-centric service strategies. During a recent earnings call, Workday co-CEO Aneel Bhusri said, “I do think that what we need is to find local service partners, much like we have — we’ve got the big companies like Accenture and Deloitte and IBM working with us on a global basis. So we also have companies like a DayNine, Collaborative and OmniPoint that are more, I would guess, home boutiques. We need to find those same boutiques in Europe and in Asia. And that’s pretty much what we are doing.”

2014 is the year of SMAC, powered by independent service providers that harness social, mobile, analytics and the cloud to deliver real-world business value.

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.

The Truth About Services Selling

How to pick the right ones out of hundreds of possibilities
by Jeanne Urich, Service Performance Insight

The race is on to outsell, outmarket and outpackage the competition with profitable growth as the prize. The professional services industry has switched from “controlling costs” to “growth” due to the economic recovery. Around the globe, services providers are re-examining their approaches to the market. They’re looking at the most effective sales, marketing and packaging techniques to determine the optimum investment formula with the greatest payback.

Truth Green ArrowsSPI’s 2013 PS Sales and Marketing Maturity Model Benchmark report analyzes professional services industry spending on sales, marketing and packaging. A total of 187 global professional services organizations participated in the study conducted in July 2013.

Prior to starting the research

When we began this research, we knew that most professional services organizations were dissatisfied with their sales effectiveness. For the past eight years, more than 1,500 PS organizations that have completed our benchmark surveys have consistently given their sales efforts failing marks.

The benchmark seeks to answer the following questions:

  • What are professional services organizations spending on sales, marketing and packaging?
  • What results are they achieving?
  • Which investments yield the most benefit?
  • Which investments are not worth the effort?

The benchmark report attempts to answer these questions while providing insights and guidance into the best practices used by the most mature professional services organizations to enhance their sales, marketing and packaging efforts.

The current facts:

  • The discipline of professional services selling is still in its infancy. Very few firms have well-established solution selling methods or trained and dedicated services sales teams.
  • Current expenditures on PS sales are significant. As a percentage of total PS revenue, the average investment in selling is 8.6 percent.
  • The results for the very few firms that have successfully implemented a PS sales discipline are extraordinary, with 47 percent of all services sold as packaged solutions, 29 percent net profit and $255,000 annual revenue yield per consultant.
  • The majority of firms have a dedicated solution selling team with an average annual PS sales quota of $1.6 million per person. Only 67 percent of PS sales representatives achieve their annual quota — yet this figure improves to 75 percent for the best organizations that significantly invest in sales training, systems and tools.

Market challenges

Based on the survey, the results revealed that the pressures facing PS executives primarily revolve around accentuating services differentiation and improving sales effectiveness. Accelerating client project time to value is also a principal concern. We looked at the differences between embedded services organizations and independent services organizations. ESOs are services organizations within product companies, and INDs are firms whose primary charter is to provide profitable consulting services.

Table 1 compares the survey responses of ESOs and INDs on a scale of 1 to 5, with 5 being the most challenging.

Novt1

With the return to a healthy economy, firms have started to focus on new market penetration and expansion of their services portfolios. Fewer firms fear commoditization of their services. PS organizations make investments in sales and marketing as they face increased global competition, strategic sourcing adoption, technological complexity and pressure to accelerate time to value.

Firms adopting a well-coordinated plan to amplify their sales and marketing investments are reaping significant rewards. This report shows that although there is wide disparity in the amounts spent on sales and marketing, these investments pay for themselves in larger sales pipelines and better bid-to-win ratios. Ultimately, this translates into achievement of PS revenue and margin targets and higher levels of net profit.

PS sales effectiveness

In “The New Solution Selling,” Keith M. Eades provides the definition of a solution: “So what is the definition of the word solution? The typical response is, ‘An answer to a problem.’ I agree with this response but feel it’s important to expand the definition. Not only does the problem need to be acknowledged by the buyer, but both the buyer and salesperson must also agree on the answer.

So a solution is a mutually agreed-upon answer to a recognized problem. In addition, a solution must also provide some measurable improvement. By measurable improvement, I mean there is a before and might be an after. Now we have a more complete definition of a solution; it is a mutually shared answer to a recognized problem, and the answer provides measurable improvement.”

Common signs of services selling failure:

  • Client “pain” is not adequately identified or pervasive. The services portfolio does not resonate with the sales force or prospective clients, resulting in a weak sales pipeline and limited market penetration.
  • Wrong assumptions about product to services mix. Product companies want to increase product revenues and reduce services revenues, which mean they want to move solutions to partners to reduce the cost of services delivery. Without proper planning and solution testing, partners are ill-equipped to deliver new solutions.
  • Unreliable sales forecasts. Consistent misses in sales forecasting accuracy ripple through the PS organization, showing up in consultant over- or underutilization or poor resource scheduling and planning combined with the inability to achieve planned revenue and margin targets.
  • Poor sales effectiveness. Inability to generate enough interest and qualified leads to fill the sales pipeline. Poorly articulated services value proposition resulting in not enough qualified opportunities to support the sales forecast, along with poor win-to-bid ratios.
  • Lackluster sales results. Fewer than 60 percent of the services sales representatives surveyed achieve quota, resulting in failure to achieve revenue and profit objectives.
  • Poor estimating. Underscoping and underbudgeting projects results in project delays, overruns, poor project margins and dissatisfied clients.
  • Few reference clients. The PS organization is unable to convert clients into references and evangelists, resulting in lackluster repeat sales and referrals.

PS sales effectiveness metrics

Many firms want to know how to define sales effectiveness and what metrics they should use to measure the effectiveness of the services sales force.

The benchmark focuses on the following sales effectiveness areas:

Services sales quotas.

  •  Services sales quotas by person, by PS vertical market and by size of organization.
  • Percentage of services salespeople who achieve quota.

Spending on services sales.

  •  Total cost of the services sales organization as a percentage of total services revenue.
  •  Total number of services salespeople.

Sales effectiveness.

  • The size of the sales pipeline as compared to the quarterly sales booking forecast.
  • Win-to-bid ratio.
  • Average closed deal size.
  • Average services revenue by account.
  • Percentage of revenue from new clients.
  • Sales forecasting accuracy.
  • Services pricing accuracy — proposed price compared to actual delivery cost.
  • Length of the sales cycle from qualified lead to contract signing.
  • The number of qualified leads that are closed.
  • Percentage of reference clients.
  • Percentage of annual services revenue target achieved.
  • Percentage of annual services margin target achieved.

Sales enablement.

  • Sales methodology followed.
  • Days of sales training taken per rep per year.
  • Percentage spent on sales enablement, training and support.
  • Marketing mix and expenditure on supporting the sales effort.

Sales organization structure.

  • Charter of the services organization.
  • Sales reporting structure.
  • Sales focus: geography, industry, major accounts or competency.

Table 2 provides an overview of sales effectiveness metrics and shows the differences between embedded services organizations and independent services organizations. Embedded PS organizations reported lower sales quotas but a higher percentage of salespeople who achieve them. ESOs reported better forecasting and pricing accuracy than their independent counterparts.

ESOs have shorter sales cycles, but their average closed services deals and revenue by account are significantly lower than for independents. ESOs generate more business from new accounts and have higher win-to-bid ratios than independents, yet they posted lower sales effectiveness scores and have significantly fewer referenceable clients.

novt2

The nonexistent sales and marketing silver bullet

Almost every PSO surveyed or interviewed in the past seven years has committed to the importance of the sales and marketing of professional services. However, the role of professional services within each company is different. Services can be used for profit, product enrichment, client intimacy or some combination of each.

Regardless, very few sophisticated product organizations can survive without a strong emphasis on professional services. For independent firms, PS sales and marketing are the lifeblood of the firm, for without them, new business cannot be developed nor can the firm expand its presence within its existing client base.

Unfortunately, both embedded and independent PS organizations often think of effective sales and marketing as a magic bullet. They believe all their problems will be solved if they can just find an amazing rainmaker. Not so! Finding rainmakers is not easy. Even if it were, business development efforts would fail without a compelling services go-to-market strategy and clear differentiation.

A couple of surprises

Our study focuses on PS sales, marketing and packaging to gain insights into the best practices and realities of how PS organizations are approaching the market. The biggest surprise was how many organizations are not adequately investing in sales and marketing. Many don’t have a cogent plan or dedicated resources or funding to support business development. Without an effective front office — no matter how compelling an organization’s services delivery and experience are — the firm simply cannot properly address the market and will be doomed over the long term to lackluster growth and ultimately failure.

The other surprise is the poor levels of services sales quota achievement. Classically, fewer than 60 percent of salespeople achieve quota. The figure is a bit better in services industries, with 67 percent average quota attainment. However, underlying this figure, the reality is stark.

Fully 25 percent of the organizations surveyed reported fewer than 50 percent of their services salespeople achieve quota, while fewer than 20 percent of services salespeople attain more than 90 percent of their annual quota. The other surprising fact is that 30 percent of the firms surveyed offer no formal sales training. The fallout from inadequate sales enablement shows in their poor results!

A final word about effective services selling

According to the 2013 PS Sales and Marketing Maturity Model Benchmark report, effective services selling is very difficult to achieve. Few traditional product salespeople successfully transition to solution selling without significant consulting and domain-specific background and experience. However, investments in building charter clarity, differentiation, marketing and packaging pay off handsomely in terms of sales effectiveness. Sales enablement activities are well worth the effort and provide measurable impact.

Bottom line, the services market is in a major growth phase. Revenues and juicy margins are there for the taking. However, they require a consistent, well-organized approach to the market and emphasis on improving all aspects of sales effectiveness.