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.


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

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

Client relationships

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

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

Human capital alignment

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

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

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

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

Table 1: Age of Professional Services Workforce

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

Service execution

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

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

Finance and operations

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

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

2014 crystal ball

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

Stop the Bleeding!

Get back to profitability through focus, analysis and action
by Jeanne Urich and Dave Hofferberth, SPI Research

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The past few years have been tough on professional service (PS) providers. A changing economic climate, lost clients, project changes and cancellations have taken their toll on the professional service sector and its clients.

During these turbulent years, many PS firms have taken on greater proposal risk to keep the firms moving along and to generate cash flow. Now that there are signs the economy is moving out of its doldrums, it is time for many of these same firms to take a serious look at their project portfolio and determine where they stand.

The goal of this exercise is to evaluate both projects and clients to determine how to increase profitability by removing risk, eliminating underperforming work and ensuring any new work meets stringent guidelines for strategic organizational alignment, a preferred client base and greater profitability.

Evaluate your portfolio

It sounds easy, but sometime PS executives fail to evaluate their portfolio of ongoing and proposed work on a regular basis. Every current and potential project should be analyzed (using a portfolio management tools and project reviews) to see where potential issues might lie.

With the turbulence of the past few years, executives may be shocked to learn they have imbalance in their project portfolios. While even the best firms have a few dogs and legacy skeletons in the closet, losers might see more than expected — with serious negative consequences for margin and cash flow.

Every dollar lost on a runaway project actually represents at least 1.2 (assuming a 20 percent profit run-rate) times that in future opportunity costs.

The devil is in the details

A high-level evaluation of your portfolio might uncover which projects are out of sync, but it probably won’t provide the necessary (why) detail on how the work moved in a negative direction.

The next exercise should be evaluating the project to determine where it went wrong, and take corrective action if necessary. Sometimes work is proposed to meet longer-term strategic goals — new client acquisition, new market entry, expanded competency or client share of wallet and therefore, profitably might not have been the primary goal when work began.

In many cases, the work initially became unprofitable due to miss-set client expectations or poor estimates with too many hours spent in the early phases, or later on through scope changes, underlying product issues or taking on client tasks with little consideration as to their overall margin impact. In any event, PS executives should immediately embark on a process to “right-size” client expectations and deliverables, perhaps shedding some of the work, or subcontracting to another partner with a lower cost infrastructure.

In other cases, PS executives should conduct a series of meetings with the client to remediate the problems and get more money. Legal action may be the last resort, but legal advice is an important consideration if the project has fallen too far out of scope, time or cost. When projects run amuck, chances are slim client satisfaction will ever improve so it is often best to cut losses by terminating the contract.

Bring in a financial analyst

Many PS executives have turned to financial analysts as their firms have grown and become more complex. Financial analysts are responsible for developing and implementing policies and procedures to help PS organizations more efficiently and profitably operate business. Initially, just one competent financial analyst can bring structure to financial reports, and also bring in the tools to help PS managers at all levels better run their practices.

Once reporting is in place, PS management should continually monitor specific key process indicators (KPIs) for improvement, and take appropriate action when necessary. Obviously when projects go awry, or when the work proposed entails too much uncertainty and risk, management should pay immediate attention to fix the issue and to determine if a systemic issue caused the problem in the first place.

The PS organization should routinely (once a month) evaluate the overall portfolio and specifically focus on the 5 percent of projects that offer the most risk and complexity. Follow-up to these meetings is also critical to ensure corrective action has been taken and remind all management that every project must be profitable. With a serious monitoring, initiative chances are fewer projects will become problematic.

Getting back on track

Getting back to profitability is job number one! Even if your organization is marginally profitable, working to improve profits should be of continual concern to PS executives.

While most PS executives routinely meet with their management team to evaluate overall performance, few get down to the details often enough. These details can take a firm from slightly profitable to very profitable. The key is continual focus and dedicated resources to make it happen.