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