2011 Best-of-the-Best Professional Services Firms – Part 2

Firms excel in all service performance pillars
by Jeanne Urich and Dave Hofferberth, Service Performance Insight

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In the last issue, we highlighted and analyzed several key performance indicators from our 2011 Professional Services Maturity Benchmark report. We also focused on leadership, one of the five service performance pillars. The top firms excel not only in leadership but in the other four service performance pillars of finance and operations, human capital alignment, service execution and client relationships.

Making money is the outcome, not the goal

Few consider a professional services organization (PSO) successful if it’s not making profit. Even the embedded service organizations — where the primary charter almost solely focuses on customer satisfaction — still profit.

Through our interviews with this year’s best-of-the-best, we found that profit was an outcome not a primary goal. Every best-of-the-best winner relentlessly focuses on employee and client satisfaction and “referenceability.”

Because this is their primary focus and they back it up with quality assurance processes and high-touch, personal relationships with clients, they attract new clients primarily through referrals. This leads to spending less on sales and marketing and demanding more from their consultants, which results in extraordinary profit.

The best professional services (PS) firms favor “time and materials” pricing. About 73 percent of their work is based on time and materials pricing, compared to 58 percent for average firms. The best firms are very rigorous in their estimating, pricing and discounting policies. They provide an average discount of 9 percent compared to 12 percent for other firms.

Another reason they are financially successful is that they do not waste valuable resources on excessive management overhead or administrative activities. Top-performing organizations have almost no fat; they operate with a high percentage of billable employees (80 percent billable employees for the “best” compared to 70 percent for the “rest”) and are extremely frugal. The top 12 produce significantly higher revenue per billable employee ($250K compared to $180K for the rest) resulting in Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) margins of 22.9 percent, three times higher than the 6.4 percent net profit for all other firms.

People focus

One of the defining characteristics of the top firms is their focus on taking care of employees. Throughout the recession, the top firms did not lay off employees. They had faith business would improve and where necessary, assigned employees to internal projects — building out methodology and tools or developing a training curriculum. Their focus on employees first manifests in trust, confidence and loyalty so as business improves, employees are willing to put in extra effort.

The top firms reported very low attrition (5.2 percent compared to 6.9 percent) despite the fact that their employees average over 1,575 billable hours (and higher) per year compared to 1,411 billable hours for average firms. They focus on hiring “A” players and in general pay more in base and leveraged compensation than the benchmark average.

Because of staff quality and specialized vertical and business process focus, they command significantly higher bill rates. In most cases, top-performing organizations command a 25 percent bill rate premium resulting in much higher revenue and margin yield per consultant. A higher proportion of their compensation is leveraged (variable), which provides consultants a vested economic incentive to generate revenue and up-sell engagements.

A noticeable difference in the “best” compared to the “rest” is their focus on training, performance and career management. Investments in the care and growth of their employees manifest in loyal, happy employees who are proud to work hard for an organization that cares about them, which produces satisfied clients.

The top-performing firms try to provide life-work balance for their employees. Although consultants work tortuous hours with grueling travel schedules, PS leadership insists on employees taking vacations and time off. The best firms report 183 hours of vacation, holidays and time-off compared to 164 hours for the rest, which means best firm employees work hard and take time off to rejuvenate.

Service execution

The leading firms invest in methods and tools. They have made a significant investment in a consistent, published methodology and use it on 76 percent of engagements compared to 57 percent methodology use for the rest. Many of them provide published best practices, tools and templates for their consultants, partners and clients.

They have a constant focus on quality service execution and delivering projects on-time and on-budget, and follow-up each engagement with a satisfaction survey. They use their back-office and professional services automation solutions to help reinforce service execution consistency. Their focus on project excellence results in on-time project execution of 89 percent compared to 77 percent on average, and 78 percent of clients provide references compared to 76 percent on average.

Client relationships 

Interestingly, the best firms invest less in sales and marketing (6.5 percent of total revenue compared to 10.1 percent for the rest) because they are so well-known and respected within their narrow vertical markets. Most deals come to them from references.

The leaders of the independent PS firms are industry-recognized experts. The majority of their new clients come from referrals, industry associations and speaking at conferences. They credit their success on references, references and more references.

The embedded service organizations use the product sales force for lead generation while investing in dedicated PS business development experts.  They and arm them with estimating and contract tools. For the embedded top performers, in every case the product sales force receives compensation for PS. In most cases, they receive compensation at the same rate as license sales. However, we need to mention that embedded PS organizations do not pay for either product sales or corporate marketing in the PS profit and loss statement.

A key determinant in the 2011 top performers was year-over-year revenue growth. Both the parent product company and the PS organization reported twice the benchmark average in annual revenue growth at 18.6 percent compared to 7 percent.

Because most of the top performers specialized in a vertical market, they were able to weather the recession because their solutions provided cost reduction and business optimization for their clients. Now that recessionary pressures are easing up, they forecast 20 percent and higher growth in 2011. Their greatest challenge is attracting, hiring and ramping superlative new consultants to meet future demand.

What it takes to be the best-of-the-best

The best performing organizations in our four years of PS maturity benchmark analysis have remained consistent in their approach to building, managing, selling and delivering services to clients.

They begin with strong leadership and a clear vision, mission and strategy for the types of services they offer and the types of clients they want. They create a culture of excellence and are not satisfied with lackluster results in any service performance dimension. Leaders “lead from the front” modeling the behaviors, culture and results they expect. When things go wrong or their market or the economy shifts, they take aggressive action to get projects and clients back on track.

In every other area of the organization, they work tirelessly to deliver high-quality services that are in demand and very profitable for their organization. But profits do not sacrifice client loyalty, as these organizations show the highest client satisfaction and retention rates in the industry.

If you look at your organization, you will find areas of improvement. Surprisingly, improvements in one area of your organization can also positively affect other areas. The best of the best focus on overall performance, not necessarily being the best in one particular area.

2011 Best-of-the-Best Professional Services Firms – Part 1

Leadership affects organizational performance
by Jeanne Urich and Dave Hofferberth of Service Performance Insight

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According to our 2011 Professional Services Maturity Model Benchmark report, out of 214 participating organizations, 12 firms (5 percent) significantly outperformed the benchmark average by excelling in all five service performance dimensions of leadership, finance and operations, human capital alignment, service execution and client relationships.

The top 12 firms significantly outperformed their peers and the benchmark average with almost double the revenue growth and 258 percent higher net profit.

Best-of-the-best PSO comparison

The chart below provides a comparison of professional services organizations (PSOs), based on the data we received.

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SPI Research interviewed the top firms to discover their best practices and reasons for their superlative performance. Although each firm has a different business model and operates in different industries, we discovered fascinating similarities in several key areas.

Professional services maturity excellence starts with leadership

The leaders of the top 12 firms had significant prior experience creating and running PSOs. Many of them started as consultants with the Big 5 or in professional services (PS) for large technology companies. Based on years of experience, they bring deep vertical industry business process and consulting domain knowledge to their current leadership role.

Almost all the leaders of the top organizations have been in their current role for many years. They were either responsible for creating the organization or turning it around. Every leader relentlessly focuses on client and employee satisfaction. They “lead from the front” by setting an example of the types of relationships they value with ingrained respect and support for their clients and employees. In smaller organizations, the leader is the chief rainmaker and may bill a considerable number of hours at the firm’s highest rate.

A clear differentiator between the “best” and the “rest” is that PS has a seat at the executive table. PS is an integral part of the company’s strategy, regardless whether the PS organization is embedded within a product company or run as an independent service business. In all cases, PS leaders operate at a peer level, not a subordinate level, with their sales counterparts. Furthermore, in every single situation, the primary product sales organization is compensated for selling PS.

SaaS PS organizations lead the way

In the 2010 benchmark report, independent firms significantly outperformed captive service organizations. However, embedded service organizations have come roaring back in the 2011 benchmark report!

A big change this year is that the best-performing embedded PSO is Workday, a fast-growing software as a service (SaaS) provider of human resource management solutions. Dave Duffield co-founded Workday. He’s also the legendary founder of PeopleSoft and widely known for his attention to the people-side of both his business and the industry.

But the bigger news is that the 19 embedded SaaS PS organizations in the benchmark produced the best overall earnings before income tax at 23.1 percent, compared to eight other industry segments (software, hardware and networking, IT consulting, management consulting, accounting, marketing and advertising, architects and engineers, and other PS) that have an average net profit of 6.4 percent. As we predicted, the shift to running PS as a profit center within SaaS organizations is well under way. It is only a matter of time before all SaaS PS organizations shift to a profit focus.

Leaders are very specialized

One of the most noticeable differences in the top 12 PS organizations is their deep vertical or business-process focus. The top performers focus on narrow and highly specialized vertical industries or business processes. Examples include research and publishing for architects and engineers, merger and acquisition analysis, enterprise portals and intranets, retail price optimization, supply chain asset management, professional service automation, higher education learning systems and financial service investment management solutions.

We believe this intense focus around specific vertical business processes and deep business domain knowledge is the wave of the future for PS organizations. Geographically-focused, horizontal solution providers will find their markets increasingly commoditized and will be forced to compete on price and staffing. Firms of all sizes should start thinking about vertical and business process specialization. Specialized firms offer highly differentiated services, which give them a market advantage. Specialization allows them to command the best rates.

Leaders take advantage of subcontractors and partners

Leaders use subcontractors to a slightly greater extent than the benchmark average (14.5 percent of total revenue versus 11.3 percent), but the big advantage is that they earn 42 percent compared to the average of 29 percent margin on their subs. These leaders have developed tight, mutually beneficial relationships with their subcontractors and partners by treating partner employees the same as their own and insisting on the same level of training and certification.

Leaders provide their methodologies and tools to partners to ensure they deliver every engagement with high quality. This symbiotic relationship results in delighted customers, loyal partners and the ability to quickly and profitably scale as demand increases. Leaders who use offshore resources insist on significant onshore customer-facing time to ensure their offshore resources are knowledgeable of and sensitive to client requirements.

IT investments pay big dividends

A clear differentiator for the top 12 organizations is their investment in IT applications to run their business. Every leading organization has invested in a PSA solution, and they are twice as likely to have integrated their PSA application with their core financial application. This level of integration between their PSA and core financial applications provides excellent visibility to resource scheduling and project profitability so they can quickly respond to changing requirements while delivering best-in-class margins.

In next month’s edition, we’ll discuss the four other performance pillars: finance and operations, human capital alignment, service execution and client relationships.

Secrets of the Best-of-the-Best

Lessons from the top 12 professional service organizations
by Jeanne Urich and Dave Hofferberth, SPI Research

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The 2010 Professional Services Maturity Model Benchmark reports that out of 225 participating organizations, 12 firms (5 percent) significantly outperformed the benchmark average by excelling in all five Service Performance Pillars:

  1. Vision
  2. Finance and operations
  3. Human capital alignment
  4. Service execution
  5. Client relationships

The top 12 firms outperformed their peers and the benchmark average with almost double the revenue growth and 30 percent higher net profit.

Best-of-the-best PSO comparison

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The top 2010 performers

The following professional services (PS) firms have superior PS Maturity benchmark scores: 

  1. The Parker Avery Group is an advisor to retail and consumer packaged goods companies.
  2. OMNI Consulting Group LLP provides an economist strategy focus for global companies facing technology decisions, from acquisitions to valuation models.
  3. Accruent provides a comprehensive suite of enterprise location management solutions that help organizations operate their real estate and facilities portfolios as a competitive advantage.
  4. Verint® Systems is a provider of Actionable Intelligence® solutions and services for enterprise workforce optimization and security intelligence.
  5. Siemens PLM Software is a global provider of product lifecycle management (PLM) software.
  6. TOP Step Consulting improves business efficiency and productivity for professional service operations.
  7. Campus Management provides software solutions for higher-education institutions.
  8. RightNow® delivers cloud-based software solutions that create superior experiences for customers across the Web, social media and contact center.
  9. Blackbaud is a global provider of technology and services designed specifically for nonprofit organizations, to improve operational efficiency, build strong relationships and raise more money to support their missions.
  10. Stellar Solutions is an engineering services company providing end-to-end technical expertise and problem-solving skills to national and international aerospace programs.
  11. Thot Wave Technologies provides consulting services to help organizations get more value out of information by turning information into thinking data®.
  12. Maconomy is a global provider of enterprise resource planning business solutions for project-based and knowledge-intensive organizations.

According to Marc Chardon, Blackbaud’s CEO, “Blackbaud partners with nonprofits to accomplish their mission, and our professional services team is a critical part of delivering our complete solution. The 2010 PS Maturity Model Benchmark is an extremely comprehensive study, and we are proud to be named among the best-of-the-best.”

SPI Research interviewed the top firms to discover their best practices and reasons for their superlative performance. Although each firm has a different business model and operates in different industries, we discovered fascinating similarities in several key areas.

PS Maturity excellence starts with leadership

The leaders of the top 12 firms had significant prior experience creating and running PS organizations. Many of them started as consultants with the Big 5 or in PS for large technology companies. Based on years of experience, they bring deep vertical industry business process and consulting domain knowledge to their current leadership role.

Almost all the leaders of the top organizations have been in their current role for many years; they were either responsible for creating the organization or turning it around. Every leader relentlessly focuses on client and employee satisfaction. They “lead from the front” by setting an example of the types of relationships they value with ingrained respect and support for their clients and employees.

Top firms focus on specific vertical business processes

One of the most noticeable differences in the top 12 PS organizations is their vertical business-process focus. In almost all cases, the top performers focus on narrow and highly specialized vertical industries or business processes. Examples: Commercial real-estate management, retail price optimization, professional service automation and call center optimization.

Other top-performing firms focus on recession-resilient industries: not-for-profit fundraising, education learning systems, and aerospace and defense. Only one firm in this year’s best-of-the best is a broadly focused large system integrator. We believe this intense focus on specific vertical business processes and deep business domain knowledge is the future for PS organizations. Geographically-focused horizontal solution providers will find their markets increasingly commoditized and will be forced to compete on price and staffing. We believe firms of all sizes should think about vertical specialization. Specialized firms create market advantage and command the best rates.

PS Leaders have a seat at the executive table

A clear differentiator between the “best” and the “rest” is that PS has a seat at the executive table. PS is an integral part of the company’s strategy, regardless whether the firm embeds the PS organization within a product company or runs it as an independent service business. For the embedded PS organizations, several PS executives have moved into a quasi-COO role and have taken on additional responsibilities for support, engineering or alliances. In all cases, the PS leader operates at a peer level, not a subordinate level, with the sales counterpart. And in all cases, the primary product sales organization is compensated on selling PS.

No partner channel conflict

Another striking characteristic of the “best” firms is that they are often the sole supplier of PS for their company’s products. In other words, they don’t have to deal with partner channel conflict. For the embedded PS organizations within product companies, the percentage of PS revenue as a percent of total company revenue is well over 20 percent and in some cases, as high as 75 percent of total company revenue. These product companies rely on rich PS revenue and margin to fund research and development and/or sales.