Your Workforce is Changing

Are you ready for it?
by David Hofferberth and Jeanne Urich, SPI Research

0611 1

The professional service industry is in transition. Service Performance Insight’s analysis of over 600 professional services organizations (PSOs) over the past four years has shown significant changes in the market. A handful of Goliath service organizations are no longer the only ones to offer everything from strategy to implementation to business process outsourcing. Now, in addition to the Goliaths, thousands of boutique PS organizations provide a comprehensive portfolio of high-quality services at extremely competitive prices.

Workforce trends

Professional service (PS) clients are changing as well. After years of uncertainty about whether consulting value equaled the money spent, clients now know how to use professional services. They are exerting greater control over consulting projects to ensure high return on their investment dollars. They demand faster response to issues as they arise. Their tolerance for waiting weeks or even days has lessened, leading to immediate problem resolution becoming the norm.

Coupled with industry and client change, the PS workforce is also changing. Employees right out of college or graduate school refuse to work 60 or more hours a week at a remote location with no social benefits. They look for the work type, clients and locations that offer the greatest skill and career potential. They demand a greater say in the type of projects they are assigned to and the amount of travel they will accept.

More experienced consultants look for a work environment that helps them balance career, family and learning objectives. Although consultants generally stay fewer than five years at any given firm, leadership, communication, growth potential, skill-building and long-term benefits are critical for keeping them engaged.

Creating the changing workforce

These changes, as well as many others, drive PSO executives to create a different type of workforce that offers technical and client management competency with equal parts of flexibility, autonomy and accountability. This means one of the most important challenges for today’s PS leaders is competing for top talent in a level, global, web-enabled playing field of “digital natives” who value collaboration and cool, new technologies more than security and remuneration.

Today’s human capital alignment challenges include:

  • Attracting, retaining and motivating top talent.
  • Managing through a technical labor shortage.
  • Managing a global, multi-lingual, multi-cultural workforce.
  • Managing a variable and/or contingent workforce.

Big changes

SPI Research has surveyed 600-plus PS organizations over the past four years and has observed the following:

  • Fewer consultants work from a central headquarters location, mandating the use of technology to support communication, collaboration and knowledge sharing.
  • Every year, a higher percentage of PS employees are billable, which means leaner management and lower administrative overhead.
  • Confidence in leadership and ease of getting things done have declined over the past few years, indicating the recession has had a profound impact on employee trust and confidence.
  • Average time to recruit and ramp a new consultant has increased to over four months, indicating the war for top talent has accelerated.
  • Average guaranteed training days per consultant have increased to five per year.
  • Bill rates for the top PS organizations average 25 percent higher than average rates, indicating clients are willing to pay a premium for superior skills and knowledge.

Some things remain the same

SPI Research notes several areas that should concern PS executives, some of which include:

  • Year-over-year headcount growth is consistently lower than year-over-year revenue growth, which means the PS industry is constantly ratcheting up productivity.
  • Each year, average project staff size and duration continue to decline, mandating effective resource management strategies to rapidly reassign and redeploy consultants.
  • The percentage of work provided by subcontractors and offshore resources has remained constant at 12 percent, which provides insight to the best mix of full-time and subcontract labor.

Effective recruiting, ramping and training make a big difference. Location is no longer as important as finding self-starting employees with good communication and organizational skills. The best firms develop core consultant onboarding and soft skills training to shorten ramp time and ensure consultants are able to listen, communicate and translate client requirements into effective project plans.

This effort helps shorten recruiting and ramping time while providing a sound framework for new hires to rapidly become productive. The best firms require their employees take more than a week of job-related training including a soft skills focus on consulting, communication and negotiating skills.

Happy employees, delighted clients

According to a Towers Watson Global Workforce Study, competitive base pay, an organization’s reputation as a great place to work and a senior management team who is sincerely interested in employee well-being are the top drivers of employee attraction, retention and engagement. Surveys continually show that creating a high-performance employee culture involves leadership, effective teamwork, access to high-quality training and career development plans rather than compensation alone.

One of the more interesting aspects of Service Performance Insight’s most recent research is the importance of an integrated human capital strategy. Finding, hiring, motivating and retaining key employees are just the beginning. SPI Research found human capital alignment metrics contain the highest number of performance indicators with extremely strong correlation to success — meaning how employees perform once onboard dictates ultimate success or failure.

Service Performance Insight’s research shows major growth in the use of flexible scheduling options — 40 percent more organizations have telecommuting programs compared to a year ago. And more than half of all organizations now offer flex-time so employees can adjust work hours to minimize commutes and accommodate required travel and childcare. Remote service delivery has rapidly become standard for PSOs; 40 percent or more of all PS work is now delivered off-site.

Organizations that use offshore resources regularly bring them onshore to accelerate customer knowledge and team communication. Best-in-class PSOs annually bring the global workforce together for training and collaboration-building. Supporting global workforce flexibility comes with a price and makes it impossible to run a PS organization by spreadsheet. Resource management applications are mandatory to accommodate global mobility, staffing and career management.

Take a new approach to workforce management

SPI Research believes you can alter your approach to workforce management in the following ways:

  • Provide career road maps and training to support career progression.
  • Reward beyond individual billable utilization to include “soft skills” like client communication, effective presenting and writing, developing needed methods and tools, contributing to the practice and mentoring.
  • Create balanced employee evaluations and compensation based on a combination of revenue, quality and contributions to improve the practice.
  • Invest in training because training benefits every area of the organization, from reduced attrition and higher growth rates to greater profitability and higher client satisfaction.
  • Invest in remote service delivery. Employees who work remotely, for instance from home, have higher satisfaction levels than employees who are continually on-site.
  • Clients are now acknowledging the benefits of remote service delivery due to the cost, productivity and responsiveness improvements it provides.

You may consider the creation of a “flexibility or adaptability” matrix. This means higher-level skills and openness to engagement options, the greater the potential compensation. This could motivate your workforce to continue personal development, while providing a balance between desire, knowledge and skills, willingness to take on tough assignments and compensation.

The need for change

The industry is changing, your clients are changing, and so is your workforce. Leading firms will adapt to these changes and create an environment where the likelihood of individual and team success is enhanced. The key is to listen to your workforce to understand its demands and make sure they are in alignment with your clients’ needs.

Offering your workforce greater flexibility, access to quality training and a higher variable component of compensation helps keep consultants motivated when the work, clients and location to where they must travel are not ideal. Greater management communication of the strategy and organizational objectives gives employees a context for their work which enhances engagement and commitment to the organization

 

Strategic Resource Management for PSOs

Five approaches to drive up billings and revenue
by Jeanne Urich and Dave Hofferberth, SPI Research

0210 1

As global economic conditions have deteriorated over the past two years, our research shows downward pressure on the billable professional services (PS) market. Annual revenues are still growing slightly, but they are not increasing at the double-digit rates of 2007.

Based on survey responses from 211 professional service organizations (PSOs)in October and November of 2009, 95 independent PSOs averaged meager year-over-year revenue growth of 1.5 percent. Their 116 embedded counterparts (PS organizations within product companies) fared a bit better with year-over-year revenue growth of 6.4 percent.

When the market tightens, professional service executives have two basic choices to increase profitability:

  1. Focus externally to improve sales and marketing effectiveness. Over the past two years, almost every PS firm we interviewed concentrated the majority of their efforts in this area. We expect this to continue for the foreseeable future. In most cases, working to improve sales is not enough.
  2. Turn inward and look for ways to reduce costs and increase profitability. Some have reduced discretionary spending and cut back on benefits, IT and facilities. Others have been forced to reduce staff, particularly in non-billable roles.

Cost cutting is an important short-term survival tactic, but a more effective long-term strategy is to focus on driving up billable utilization and revenue.

Improving billable utilization

To improve margins, PS executives must continually focus on increasing employee billable utilization, as well as increase the percentage of billable employees. This table shows the actual (not theoretical) benefits 211 firms have experienced from increasing employee utilization. The primary gain from increased utilization (in the second column) is a significant increase in revenue per employee.

0210 2Source: Service Performance Insight, December, 2009

Interestingly, companies with higher employee utilization also reported a larger percentage of billable employees. This dynamic combination (high utilization and a high percentage of billable employees) leads to incredible financial performance and expanded overall revenue, as shown in the last column.

Billable utilization challenges

In professional services, a dedicated focus on increasing billable utilization is paramount to success. There are four primary strategic and operational challenges to improving employee utilization:

  1. Employee attrition.
  2. Changing workforce dynamics.
  3. Greater distribution of the workforce.
  4. Changing client demands.

Employee attrition (yes, attrition hurts!)

Yearly attrition in the professional services sector has declined to the lowest level we have ever seen — currently at 6.2 percent. This reduction in attrition is primarily the result of the poor economy and lack of new job opportunities causing employees to “hang-on” to their current position, whether they are happy or not. As the economy starts to pick up, and new jobs open, we expect attrition to climb back to historic levels of 10 percent or higher.

Layoffs and general cost-cutting have reduced bench strength. It now takes management longer to approve positions, and to hire, train and deploy new employees. The current average length of time to hire is 59 days, and it takes an additional 67 days for a new hire to become productive — making it hard to increase revenue and margins when firms must backfill leaving employees.

The following chart shows the correlation between happy employees and satisfied clients.

0210 3Source: SPI Research December, 2009

This table shows the negative consequences of high attrition rates. As attrition rises, the probability of on-time project delivery decreases while average project overruns increase significantly. Remaining employees have to pick up the pieces from exiting workers and must quickly come up to speed and reestablish client relationships. Clients must back-track to reestablish previous decisions and vendor commitments.

Organizations with high levels of attrition often turn to third-party contractors to supplement lacking skills. While subcontractors can help keep costs down, too heavy a reliance on subcontractors has the potential negative consequence of reducing morale, overall productivity and quality — as contract workers have less loyalty to their temporary employers — and communication and collaboration can suffer.

Changing workforce dynamics

The second area of concern for high billable utilization is the changing workforce. Not only is the workforce becoming more global, but Generation X, Y and Z workers are less inclined to make the lifestyle compromises of past generations and are more attracted by “cool” new technology than remuneration and security. Although more technology-savvy, the new workforce is less specialized than in the past and may lack client and business acumen.

Twenty and thirty-year careers with the same firm are a relic of the past so young consultants must quickly learn new technologies and business processes on the fly without the benefit of classic on-the-job training. Increasingly, professional service consultants must work independently and be effective at communicating and collaborating remotely.

Consultants work best when they focus on the type of work they enjoy and have the right skills and personality to deliver quality services. Most consultants are continual learners who thrive on new challenges, so any effective resourcing strategy must support training, mentoring and access to experts and tools.

Workforce distribution

The third strategic and operational challenge impacting employee utilization is workforce distribution. Our research shows the new world of work is increasingly global, making remote service delivery, collaboration and communication tools critical for success. While over 80 percent of our most recent survey participants are North American-based PSOs, over 44 percent of the workforce is located overseas, and only 20 percent is based within the confines of corporate headquarters. Having workers in many locations worldwide can create serious issues in employee productivity and efficiency.

Over the past several years, the amount of work PS consultants deliver on the client’s site has reduced significantly. Based on client and service-provider desire to reduce the cost of travel and the availability of powerful remote service delivery tools, consultants are performing more and more PS work remotely. These changes have caused PS executives to reevaluate their hiring practices, globally sourcing employees with solid core skills and with the ability and attitude to work independently while rapidly “self-learning” new skills. Except for the most difficult technical problems, a “can do attitude” combined with a strong work ethic and great communication skills are the most-prized virtues of today’s consultants.

Changing client demand

The final area impacting utilization is client demand. There is no doubt PSOs are being asked to demonstrate the value they deliver in greater depth than in the past. Each year, clients are less willing to accept time and materials contracts and are shifting more risk and greater accountability for success to their suppliers through fixed-price and shared-risk contracts. This demand increases administrative effort and reduces billable hours, as consultants must spend more time in pre-sales, “proof of concepts” and documentation to prove the worthiness of their services.

To ensure projects meet their value and budget requirements, clients are starting to divide projects into sub-projects, which they can monitor more closely, using tools such as earned value analysis.  Clients also demand the ability to cancel at a moment’s notice if the project fails to fulfill requirements.

Clients and professional service providers have moved to virtual project teams. The benefits of “virtual” projects are reduced travel costs and the ability to use the best available resources, regardless of location. The negative aspect of global project delivery is more hours spent on administration and communication. Often global projects require both an onshore and an offshore project manager. The onshore manager is responsible for client relationships, requirements, budget and timeline, while the offshore project manager keeps the offshore team on schedule and ensures the client requirements are translated into a detailed work plan.

More project overhead and management duality is a necessary component of ensuring offshore teams meet schedules, and client requirements are reflected in the work product. This area cannot be underestimated, as project management and administrative time account for a greater percentage of work-hours than ever before. Over the past year, we have seen the percentage of work monitored by a project management office (PMO) go from 37 percent to 42 percent.

What resource management strategy is best?

To improve utilization, executives must improve resource management effectiveness. As the following chart shows, there are pluses and minuses to all flavors of resource management strategies.  Green shading indicates “Best in Class” and red shading indicates “Worst in class” based on responses from 195 firms.

0210 4Source: SPI Research December, 2009

Our recent research shows there may not be “one magic bullet” resourcing strategy that is clearly superior to all others. The five strategies that follow enable PSOs to manage talent and fulfill client demands.  Although centralized resource management is the most prevalent strategy, each organization must create a resourcing strategy that works best for their business, with the ultimate goal of increasing utilization and client and employee satisfaction.

  1. Centrally-managedMost resource management pundits favor “centralized” resource management. It appears to provide superior management visibility into the entire project backlog and level of skills required both today and in the future. Central control may be best for fast-growing organizations with large projects but may not produce the highest levels of billable utilization because a certain amount of churn and resource and client unhappiness can result from impersonal centralized staffing policies.
  1. Local resource managementLocal resource management is the preferred form of resourcing for young organizations where the workforce is small enough to foster real esprit de corps, and employees wear many hats. Smaller organizations can’t afford the overhead of a dedicated resource management function, and relationships and roles are fluid, requiring more local control and finesse.
  1. By horizontal skill setsManaging resources by horizontal skill sets is useful for developing best practices, repeatable processes and shared knowledge. For example, many firms have project and program managers report directly or indirectly to the PMO. By building affinity around “birds of a feather,” project managers or specialized consultants can more easily share best practices and standardize methodologies, templates, etc. As organizations grow, a horizontal or competency-based overlay reporting structure can help firms develop repeatable best practices and deep, shared expertise.
  1. Account-basedResource management by account may be a good strategy for very large accounts where there is a strong backlog of projects, but account-based resourcing can cause big issues if account revenue dries up. A recent example was Electronic Data Systems’ (EDS) reliance on revenue from General Motors. As the relationship with General Motors soured, and its fortunes began to wane, Electronic Data Systems was left holding the bag.
  1. Centers of excellenceThe current trend towards vertical Centers of Excellence (COE) was pioneered by Accenture over the last decade. The advantage of industry-specific “Centers of Excellence” is the development of deep business-domain knowledge. In theory, each Center of Excellence acts as a clearinghouse for specialized knowledge, expertise and solutions. Clients and prospects delight in seeing a “Vision of the Future” for their “oh, so special” unique industry. The downside of COE can be excessive overhead, the creation of an ivory tower mentality and the inability to learn from emerging new horizontal and vertical trends. Further, use of horizontal skills sets and technologies outside the COE can become cumbersome and inefficient.

And let’s not forget that professional service organizations are based on the unique knowledge, skills and personalities of a highly motivated and compensated workforce. So, erring too far in making resource management more science than art may not take best advantage of hard-to-find experts. Leading firms understand the skills required and available, and work toward providing additional training to improve employee performance.

Investment in people, process and systems allows these organizations to minimize employee attrition and drive utilization to extremely high levels. Our research shows PSOs that create standard job positions clarify the skills their workers must have. And providing additional training helps increase both productivity and morale, both of which improve organizational performance.

Looking inward

Given the economic downturn, and its negative impact on pricing and overall profitability, many PS executives have begun to look at areas to improve revenue and margins. While they have focused plenty of effort on improving sales, executives know they must also look inward at their workforce, and streamline operations wherever possible.

Reducing both billable and non-billable headcount has somewhat improved billable utilization, but going forward, professional service executives must take a proactive approach to their workforce strategy. Perhaps, this is why resource management has become a top priority for PSOs with widespread resources and a reduced bench.

The economy will pick up; the PSOs that have developed a comprehensive workforce strategy supported by a strong resource management infrastructure will be in a much better position to drive revenue and profits upward going forward.

 

Resource Renaissance

Resource management matters to sustain growth and profitability
by Jeanne Urich and Dave Hofferberth, SPI Research

11889736_s

No one disputes the fact that people are the most important asset in the services industry. In the highly billable professional services (PS) sector, where many people charge between $250 and $500 per hour, how companies hire, train and compensate specific skills goes a long way to determining an organization’s long-term viability and success.

Recent trends in resource management demonstrate the balance professional services executives are finding between tactical and strategic resource usage, and how they are increasing the emphasis on building a workforce that optimizes growth and profitability both in the short and long-term.

Strategic, tactical resource management

Like most investments, human resources have both their strategic and tactical characteristics. In professional services, people are essentially “the brand,” and how an organization markets them goes far in meeting the organization’s financial objectives.

The hiring and retention practices of professional services organizations (PSOs) must mirror its strategic goals. The firm’s human capital management strategy should outline the types of people needed, their corresponding skills, their cost and subsequently their revenue potential.

Once the PSO develops its human capital management strategy and hires the resources necessary to carry out its strategy, it must then use the resources in a way that is tactical, as well as strategic. PS executives work to staff projects with people who can adequately meet the needs of the client, but do so at a cost that maximizes profitability.

However, there are cases in which a PSO should not maximize short-term profits due to the strategic nature of the client-consultant relationship. By placing the desired consultant on an engagement (even if it isn’t the most financially desirable alternative) can further build a long-term, profitable relationship, and therefore resource management must play both a tactical and strategic function.

Regardless of economic conditions, optimize resources

PS executives, like their manufacturing counterparts, must optimize resources in a way that maintains utilization levels that meet financial goals. These executives must ensure that their staff’s skills align with the short and long-term work to be completed.

While many PSOs strive to ensure they have adequate staff on-board to meet the needs of their client base, many have either too few or too many people. Neither situation is advantageous. Having too many people on-board limits profitability as well as introduces boredom into the equation. Consultants with low levels of utilization tend to feel underutilized and know they are not generating sufficient profit to warrant their long-term tenure with the company. They might also feel underappreciated and with the extra time, begin to look elsewhere for future work.

Consultants with high levels of utilization, while appreciative of their perceived impression that the organization really needs them, begin to suffer burnout, which manifests itself in other areas not related to their day-to-day activities. Many of these individuals enjoy the work as well as the long hours (if adequately compensated), but suffer outside of work, which in turn causes stress and eventual turnover in the organization.

Neither of these situations is ideal for the PSO. Communicating to staff a stated utilization goal will help them understand the PSO’s expectations. However, no consultant is utilized to a constant percentage as work fluctuations occur. The goal of PS executives is to keep their consultants on a utilization percentage with minimal variance to assure consistency and long-term employment.

Change happens: How you handle it determines success or failure

Regardless of economic conditions, the professional services marketplace continues to evolve. PSOs will offer new services and initiate new geographies, and turnover will occur within the organization. Even in leading PSOs, these phenomena occur every day. PSO executives must build a workforce consisting of people who can handle change in a positive, productive way.

Most people don’t like change, even if they say they do. If they succeed at one type of work, they will become less likely to aggressively pursue new ventures, preferring to continue on a path in which they have flourished. The PSO must work to continually develop attributes that make individuals less susceptible to problems as change occurs. Some PSOs initiate programs that continually have their people working on new initiatives outside of their area of comfort, or do training in areas where their skills and qualities might be a long-term asset to the company.

Initiate processes to optimize resource management

Many leading professional services organizations have implemented automated resource management capabilities that allow practice leaders and resource managers to efficiently deploy their workforce. These tools, in conjunction with project management tools, allow PS management to efficiently deploy the workforce to meet profitability, timeline and utilization targets.

They allow management to look beyond the four walls of their office, and to reach out to other areas within their organization — enabling the PSO to maintain a smaller, yet more nimble workforce. This situation allows staff to work with other people outside their office, creating a more unified and consistent service offering — all of which builds the brand.

Resource management tools let executives continually monitor projects to make sure both costs and revenue are in-line with project objectives. In cases where the project scope changes, PS management can use the resource management tool to realign the workforce to ensure other projects and their revenue goals are not negatively impacted.

Maximizing your unique resources

With changing client demands, PSOs must build a workforce that is intelligent, hard-working and adaptable. Every employee builds both the firm’s corporate brand and his or her own. Firms must utilize employees in a way that optimizes their unique skills while meeting the financial directives of the organization. To account for both the strategic and tactical attributes of each resource, many PS executives turn to integrated resource management solutions to keep utilization consistent while meeting client needs.

For numerous organizations, resource management has been more art than science. With the changing demands placed on PSOs to meet client objectives and profitability goals, it has become increasingly clear that more sophisticated resource management is required for long-term organizational success. PS executives who commit to such tools enable their organization to optimize levels of employee skills, while meeting the demands of their clients.

Resource management tools offer PSOs the ability to accurately look at their workforce to determine skill gaps as well as compensation inconsistencies. Resource management should be at the heart of a human capital alignment strategy that allows executives to more accurately predict and hire individuals who possess the skills necessary for long-term client satisfaction and financial viability.