Money Ball

How professional service bill rates drive profit
by David Hofferberth and Jeanne Urich, SPI Research

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In 2002, the Oakland A’s, the nation’s lowest-paid Major League Baseball team, cracked an 11-game losing streak, coming back to win 20 games in a row. The team set a new American League record and won the American League West Division championship.

The premise of Money Ball — both the book and movie — is about changing the rules of the game by using statistics instead of intuition to hire and ramp undervalued baseball players. The idea is to wring the maximum number of wins out of every player dollar by identifying value based more on “on base percentage” than subjective characteristics like good looks and drive.

That sounds a lot like the PS Maturity™ Model. The original and continuing foundation of Service Performance Insight’s PS Maturity™ Model is that overall performance is not based on home runs. Instead, it’s a combination of singles and doubles in the form of winning business processes, systems and people. The PS Maturity™ Model measures, analyzes and correlates 180 Key Performance metrics to create a Maturity scorecard for each participating organization. Like baseball player statistics, the Maturity scorecard helps diagnose strengths and weaknesses and what it takes to advance to the next level of maturity.

The Maturity scorecard diagnoses maturity based on five dimensions, called Service Performance Pillars:

  • Leadership.
  • Client relationships.
  • Human capital alignment.
  • Service execution.
  • Finance and operations.

Grounded on input and participation from more than 800 PS organizations in the past five years, the PS Maturity Model™ itself has continued to evolve and improve. Business practices and measurements considered best in class in 2007 when SPI first created the model appear lackluster and outdated today.

With this as a backdrop, Service Performance Insight (SPI) has published the “2011 Professional Services Global Pricing Report” with input from 200 PS organizations representing a global consulting workforce of nearly 12,000 consultants.

The major takeaway from the largest technology professional services (PS) pricing study is that success comes from the right combination of pricing policies combined with outstanding service delivery quality and workforce efficiency. The two primary profit levers professional service organizations possess are bill rates and workforce productivity, frequently called billable utilization. PS organizations tend to concentrate more on productivity, often ignoring price improvements, which can produce instantaneous and sustainable profitability.

The cause and effect of higher bill rates

Price realization based on realized bill rates in combination with billable utilization is a leading indicator of the overall quality and differentiation of the professional services organization. Professional services organizations (PSOs) with the highest bill rates and price realization tend to reinvest profit into their employees, which in turn leads to a continuing improvement cycle.

Highly skilled, well-trained, motivated and loyal consultants undoubtedly produce the best client results. Because of this, satisfied clients provide referrals and buy additional services, resulting in improved sales effectiveness.

One of the consistent themes in five years of benchmarking is the correlation between high bill rates and employee investment resulting in superior project delivery metrics and overall financial profit. Yet, bill rates only tell a part of the story. The market, the types of services provided and the reputation of the firm primarily govern rates. SPI Research has seen management consulting senior partner daily rates as high as $8,000, while Indian software development resources cost as little as $25 per hour.

The top strategic management consultancies don’t publish their rates, nor are they visible to their clients. These rates are justified based on the significant “bet your business” types of projects these firms deliver. High rates indicate the strategic business value top firms provide.

At the other end of the spectrum, the lowest bill rates are shown in the hardware and networking sector, where providers mainly focus on implementation. They haven’t yet moved to more strategic consulting services. Staff augmentation garners low rates because the client assumes almost all of the responsibility for successful business outcomes. Clients are buying a “body” with a specific skill set as opposed to a project based on a defined business outcome.

Differentiation, specialization and market growth drive rates upward while commoditization and shrinking market demand drive rates down. The law of supply and demand is evident in the pricing report by the fact that software-as-a-service (cloud) services now command a 20 to 30 percent premium over traditional enterprise software bill rates.

Bill rate sensitivity chart

As part of this pricing study, SPI created Figure 1 to demonstrate the important role bill rates play in generating profit. This figure depicts a 100-billable-person PSO and shows the effect bill rates have on profit (the left axis in $millions). SPI has normalized consultant cost to reflect a 100-person workforce with an average loaded cost per person of $135,000. ($100K base salary, $20K in fringe benefits, $10K bonus and $5K in non-billable discretionary spending).

The figure allows an organization to analyze the effect of bill rates on profit. This organization will be profitable at an average bill rate exceeding $250 per hour with average utilization of only 30 percent (600 hours per year per person). Conversely, with average rates below $175 per hour, average utilization must be 60 percent (1,200 hours per year per person) or higher to achieve a minimal amount of profit.

Figure 1. 100-Billable-Employee PSO — Bill Rate / Utilization / Profitability Sensitivity

BillSensitivity
Source: Service Performance Insight, October 2011.

Why is pricing important?

In a labor-based business like professional services, profit comes from the right balance of revenue and costs. PSOs have a very high fixed labor cost, so the two primary profitability levers are either lowering cost (sourcing strategies; limiting benefits and overhead; using virtual business models; restricting discretionary spending on IT, travel, training and recruiting) or increasing revenue (higher bill rates, higher revenue per person and higher billable utilization).

For three recessionary years, most PSOs have focused intently on the cost side of the equation and run very lean. Now with a glimmer of economic improvement, it is time to concentrate on growing revenue through a combination of rate, market expansion and productivity enhancements.

Published versus realized rates

This study compares PSOs’ published bill rates versus realized bill rates — in other words, the actual hourly bill rate firms receive. In general, realized rates are approximately 80 to 90 percent of published list rates. The difference between published and realized rates reflects both discounts and written-off consulting hours.

The report looks at four primary job categories:

  • Management.
  • Project management.
  • Business consulting.
  • Technical consulting.

And it assigns three corresponding experience levels per job family. Of the 12 job titles SPI Research analyzes in this report, technical consultants achieved the highest percentage of realized rates, with a realized rate of 90 percent of the published rate.

Interestingly, SPI Research found the greatest disparity between published and realized rates associated with the most senior-level positions in each job category. The most senior resources in any job category commanded the highest list rates but reported the highest levels of discounting.

Key questions around lower price realization are Is the high level of discounting due to an excessively high target bill rate? Is there more room for discounting because of a higher list rate? Is it hard to establish incremental value for more senior resources? SPI Research suspects the answer is a combination of these factors.

Pricing Strategies

Pricing strategies vary dramatically by market and geography. European PSOs prefer daily rates, which may or may not include travel expense. The percentage of time-and-materials-priced contracts across all markets and geographies was reported to be 58.8 percent. Each year a greater proportion of contracts across all verticals and geographies are fixed-price, reflecting client interest in shifting more risk and accountability to service providers. A comparison of pricing strategies across PS vertical markets reveals IT consultancies and PSOs within software companies depend heavily on time-and-materials-based pricing strategies.

Hardware and networking providers and SaaS PSOs have shifted the majority of their work to service packages and fixed-price contracts, while management consultancies favor time-and-materials-based contracts but may include performance guarantees.

Table 1. Pricing Structure by Organization Type in Percentages

2010FeeStructure
Source: Service Performance Insight, October 2011.

Consultant resource mix is changing

Worldwide, the traditional consulting pyramid is alive and well, with the percentage of resources in management (7 percent), project management (19 percent), business consulting (16 percent) and technical resources (58 percent) still reflecting that project managers and technical resources perform the bulk of the work and generate the majority of profit.

The shape of the pyramid varies dramatically by vertical market and geography, with management consultancies supporting a top-heavy partnership structure while traditional outsourcing destinations like India rely on a high constituency of technical resources.

Across the technology consulting industry, SPI Research has seen a significant change in employee job skill distribution. In the past, 70 to 90 percent of resources were technical consultants. Now 30 to 50 percent of consultants are focused on project management and business consulting, reflecting the underlying technology shift to easy-to-use-and-configure products. Today’s consultants spend more time analyzing and improving their clients’ business problems and processes than doing software development or writing code.

With more than 53 percent of the work delivered off-site, more consultants are working virtually. Even the smallest consultancies have started taking advantage of offshore and near-shore skilled labor to reduce cost and to fill hard-to-find competencies.

Signs point to an unstable global economy for some time to come. Bill rates aren’t uniform around the world. Across the board, global consulting bill rates are rising slightly while target utilization rates have plummeted.

In general, this is a good trend for service providers and consultants because it signifies a greater demand for their most valuable services and people, while the pressure to work excruciating hours may be subsiding. However, as the reality of increased consulting demand outstrips available supply, expect to see average billable hours increase beyond the low targets set.

Around the world, a significant price disparity exists for the same job categories within the same industry segments. If an organization can establish its brand and reputation as the highest-quality supplier in its market space, it can command the best rates.

Conversely, for service providers stuck in a commoditizing rut, the only viable strategy is to head for higher ground by expanding into a more lucrative market. For example, low-end enterprise resource planning providers will find new opportunities and premium rates if they add vertical expertise or take on new cloud technologies and services. SPI’s research indicates the unlimited possibilities for establishing new, exciting and profitable service lines will require significant leadership, vision and courage.

The use of a global workforce isn’t limited to the largest service providers, as small boutique consultancies have begun taking advantage of labor arbitrage. Firms that offer management consulting (strategy, IT, etc.) along with implementation (new applications, business process re-engineering, etc.) are in greater demand and can charge higher rates.

The bottom line is that the consulting industry thrives. Expect not only increased bill rates, but also significant labor shortages ahead. Top-performing firms will focus on both recruiting and retaining top talent while making sure they take advantage of rate increases to fund these investments.

Money Ball puts forth the notion that undervalued teams and players can compete and win by focusing on “getting on base” while leaving richer teams to “swing for the fences.” SPI’s research proves the winning formula is to focus on productivity and quality combined with high-value pricing strategies.

Measuring the right statistics to find untapped gold can be translated into improved productivity and higher rates wins in the end. Both Money Ball and the PS Maturity™ Model prove statistics don’t lie. Using them intelligently to field the best possible team at the lowest possible cost puts not only runs on the scoreboard, but also profit into shareholders’ wallets.

 

Let’s Talk About Bill Rates

The current state of professional services pricing
by David Hofferberth and Jeanne Urich, SPI Research

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If professional services bill rates are rising, the economy must be improving, right? Service Performance Insight (SPI) has drawn this conclusion in the first two weeks of surveying more than 50 global professional service organizations for our third annual consulting bill-rate study.

Based on history, SPI expects more than 200 firms to participate. Please visit www.spiresearch.com in September to purchase a copy of the report. Early analysis shows significant improvement in realized hourly bill rates from the 2010 survey.

Why are bill rates important?

Professional services organization (PSO) executives continue to ask about bill rates. They need this information to understand how their organization is positioned from a pricing perspective relative to the market, and to make decisions on how much more or less they should charge, depending on their own and their clients’ perception of how they are viewed in the market. They need bill-rate information to push back on their sales and finance counterparts when asked for price concessions or professional services margin improvement.

Pricing information also provides insight into the health of the overall service market and a gauge for expansion or contraction. And finally, pricing is one of the most visible and controllable levers service organizations have when seeking to improve profitability.

In the past three years, as the market suffered from global economic doldrums, companies experienced significant pressure on bill rates, causing many firms to discount heavily and make pricing concessions to win business. The economy appears to be growing again, although in the early stages, and SPI Research expects bill rates will also rise.

In fact, the greatest challenge reported from recent client phone interviews is growth. After two years of layoffs, headcount cuts and salary freezes, many firms have switched the hiring spigot back on but find few qualified resources available to fill new positions. Firms are reinvigorating their recruiting pipelines and reinvesting in new-hire training and ramping programs.

Increasingly, firms are expanding their recruiting horizons to include recent college graduates, home-based consultants, subcontractors, and offshore and near-shore resources. The war for talent is driving increased resource management and pricing complexity, which means firms must constantly re-evaluate their pricing and staffing strategies.

Is the market recovering?

SPI Research is receiving positive feedback from around the world. PSOs, especially those in IT consulting and management consulting, have experienced significant growth over the past 12 months.

While executives interviewed by SPI Research remain cautiously optimistic, most feel the difficult times are behind them, and they predict a period of sustainable growth lies ahead.

Key bill-rate findings in the North American market

Initial research shows bill rates rising across the board. In North America, current rates are approximately 5 to 15 percent higher than a year ago. Interviews with several survey respondents have shown their greatest concern is hiring well-qualified consultants, not finding more work. This scenario allows them to adjust rates upward as the demand for their services starts to outstrip supply.

The only area where SPI Research found year-over-year bill-rate erosion is in that of managers and executives. Apparently, client organizations are less apt to pay high rates for executives than in the past. However, for those managers primarily in a billable client-facing role, rates have risen somewhat.

Interestingly, few managers and executives are no longer nonbillable. On average, today’s managers not only run the business, but also bill about one-third of their time. The recession caused both big and small PSOs to re-evaluate their nonbillable headcount and shift many managerial roles to at least partial billability. SPI expects this trend to quickly reverse as management focus shifts from cost-cutting to expansion.

Published vs. realized rates

This study compares PSOs’ published bill rates versus realized bill rates. In other words, the actual hourly bill rate firms receive. In general, realized rates are approximately 80 to 90 percent of published list rates. This difference between published and realized rates reflects both discounts and written-off consulting hours.

The report looks at four primary job categories (business consulting, management, project management and technical consulting), with three corresponding experience levels per job family. For the 12 titles SPI Research analyzes in this survey, executives achieved the highest percentage of realized rates, closely followed by technical consultants, with each having a realized rate of more than 90 percent of the published rate. SPI Research found the greatest disparity between published and realized rates for business consultants with a published rate of $200 per hour but with an average realized rate slightly above $160 per hour.

The survey also shows independent PSOs, such as those in IT and management consulting, have both higher published rates and higher realized rates than their peers within embedded service organizations (i.e., services divisions of hardware and software organizations).

Embedded service organizations are being forced to discount more, as well as write-off more of their billable hours for presales and client concessions. The survey results to date show embedded service organizations achieved a realized rate of 81 percent of their published rate, whereas independents averaged 90 percent of their published rate.

More off-site work

For the past several years, SPI Research has seen a noticeable increase in off-site consulting delivery. For instance, the survey results thus far show business consultants average slightly more than 50 percent of billable work on-site, while project managers average slightly less than 50 percent on-site.

Technical consultants spend the most time on-site (more than 60 percent), while managers spend the least (33 percent). The trend toward more off-site service delivery is important because it offers a host of benefits for both service providers and their clients. By definition, on-site work requires significant nonbillable wasted travel time.

Excessive travel has consistently been the primary reason for consulting employee dissatisfaction and burnout. Combined with the trend toward greater specialization, the probability that the most qualified consultants are conveniently located near their clients is low.

SPI research also shows on-site consultants are less productive than off-site consultants, due to interruptions and not being able to multitask. On-site presence is still required to establish rapport, develop client requirements and model client business processes. However, if consultants clearly understand client requirements, expectations and deliverables, much of the actual work can be performed off-site.

Finally, both service providers and clients benefit from taking advantage of the best available resources, regardless of location. This trend means more consultants work from home, which translates to lower facility costs. Furthermore, more service providers are taking advantage of subcontractors and offshore resources, which results in a positive margin impact from labor arbitrage.

Targeted utilization rates much lower than expected

One of the biggest surprises — so far — in the survey is that the 50 organizations surveyed are targeting fewer than 1,400 billable hours annually per role, which equates to less than a 70 percent utilization rate (on the basis of a 2,000-hour work year). On average, executives and other management have billability targets of less than 50 percent, but with the exception of senior business consultants — who average slightly more than 1,400 hours annually — every other consultant type is targeted to bill fewer than 1,400 hours annually.

Also shocking is the small difference between billing targets for juniors compared to the most senior resources. In past surveys, junior technical resources typically had higher billability targets while senior project managers and solution architects had lower targets. As more survey responses come in, it will be interesting to see if billability targets increase and a greater gap appears between junior and senior resources.

Consultant resource mix is changing

Another big revelation is that the percentage of resources in business consulting roles (31 percent) is equal to the percentage of technical resources (31 percent). Across the technology consulting industry, this represents a sizable change and reflects the underlying technology shift to easy-to-use-and-configure products. Resources can spend more time analyzing and improving their clients’ business problems and processes as opposed to writing code.

Also unexpected is that the remaining job categories of management (19 percent) and project management (21 percent) are almost equal. Before beginning this survey, SPI expected that technical resources would represent a significant majority, followed by business consultants and project managers, while management would represent less than 10 percent of the workforce. To date, the staff associated with all other roles (69 percent) outnumbers technical resource staff (31 percent).

The near future expectations for bill rates and opportunities

Signs point to an improving economy, but bill rates are certainly not uniform around the world. Across the board, global consulting bill rates are on the rise, while target utilization rates appear to have plummeted.

In general, this is a good trend for service providers and consultants because it signifies a greater demand for their most valuable services and people, while the pressure to work excruciating hours may be subsiding. However, as the reality of increased consulting demand outstrips available supply, expect to see average billable hours to increase far beyond the low targets that appear to have been set.

Around the world, there is a significant price disparity for the same job categories within the same industry segments. Service providers should price for what the market will bear. If an organization can establish its brand and reputation as the highest-quality supplier in its market space, it will be able to command the best prices.

Conversely, for service providers stuck in a commoditizing space, the only viable strategy is to head for higher ground by expanding into a more lucrative market. For example, low-end enterprise resource planning providers will find new opportunities and premium rates if they add vertical expertise or take on new cloud services. SPI’s research indicates the unlimited possibilities for establishing new, exciting and profitable service lines will require significant leadership, vision and courage.

Currently, most industries are planning for expansion, and therefore, consultants who can help them grow will be in demand. The use of a global workforce is not constrained to the largest service providers as small boutique consultancies start to take advantage of labor arbitrage. Firms that offer management consulting (strategy, IT, etc.) along with implementation (new applications, business process re-engineering, etc.) are in greater demand and can charge higher rates.

The bottom line is that the consulting industry is thriving and improving every day. Expect not only increased bill rates, but also significant labor shortages ahead. Best-performing firms will focus on both recruiting and retaining top talent while making sure they have ample increases in bill rates to make these investments.

Bill Rates Are Increasing!

2010 Professional Services Maturity Model Benchmark survey early results
by Jeanne Urich and Dave Hofferberth, SPI Research

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The technology professional services industry is recovering from the worst recession of a lifetime. The good news: With recovery, bill rates are returning to previous levels and aggressive discounting has begun to subside.

The early results from the 2010 Professional Services (PS) Maturity Benchmark survey show significant growth in year-over-year technology professional services revenue and achievement of 2010 PS revenue targets. The significant improvement in revenue achievement is the direct result of increasing bill rates accompanied by a lower level of discounting.

Across the board, average bill rates for most technology consulting job titles have improved moderately to significantly. Bill rates for almost all job categories have returned to pre-recession 2007-2008 levels after two years of decline.

The average business consultant bill rate showed the greatest percentage improvement (110 percent), from $171 to $188 per hour. Only the average senior manager/partner bill rate category is showing a year-over-year bill-rate decline — from $232 to $222 per hour.

Establishing a rate sheet

Competitive pressures in the technology professional services industry have created “mini-markets” for technology skills. The most prolific technologies — Oracle, SAP and Microsoft — have well-established bill rates for specific skill sets. Most technology services providers that focus on these platforms understand the unwritten “market rate” for consultants, but huge variances in price ranges occur, depending on services provider reputation, specialization, industry knowledge and skill sets.

Bill rates in emerging technology areas are far less predictable, but a best practice for all services providers is to establish a rate sheet based on skill level with uplifts for risk, complexity, geography or terms. Base your rates on analysis of market rates combined with consultant cost.

In the technology professional services industry, the “rule of thumb” is to establish rates at a minimum of two times (2X) the fully loaded average cost of all the consultants in that job category. In many other professional services specialties such as legal or accounting, the bill rate rule of thumb is four times (4X) the average base salary for all specialists in that job category.

For project managers, here’s a simple example for establishing a published bill rate:

  • $100K average annual salary for all the project managers at a particular skill level.
    • Add $20K for 20 percent average uplift for benefits; selling, general and administrative costs, and overhead plus IT and facility cost allocations.
    • Add $10K for 10 percent average annual bonus.
    • $130K average loaded cost.
    • $260K required average revenue per project manager (2X loaded cost).
    • 1,400 billable hours per year (70 percent billable utilization).
    • $186 per hour required average bill rate.
    • $205 per hour published bill rate accommodates an average 10 percent discount.

Average bill rates flat for the past five years

The interesting news is that domestic rates in the U.S. ($200 per hour on average) have remained relatively constant since 2000 because of increased global labor arbitrage and pressure from low-cost offshore providers. Another factor influencing the billable labor rate is enhanced product quality and ease of use, enabling technology professional service providers to use lower-skilled and less expensive resources.

Premium rates still exist (more than $250 per hour) for highly skilled management consultants and technology gurus — particularly in the areas of business process design, business intelligence, security, service-oriented architecture and enterprise integration.

Flat bill rates have placed pressure on professional services organizations to increase utilization and reduce overhead and benefit costs to produce margin. Increasingly, organizations are investing in labor-enhancing technology and tools — remote services delivery, knowledge management, collaboration, mobile solutions, professional services automation and quality control to wring the greatest productivity out of their work forces.

Many factors influence bill rates, but companies experiencing the highest growth also reported the highest rates. This correlation indicates that demand (and scarcity of qualified resources) significantly influences rates.

Increasing bill rates

Our research shows an increase in bill rates can have a dramatic positive impact on both profit and the employee work environment. Best-in-class professional services organizations tightly control pricing by carefully managing estimating, discounting and contract terms.

Leading services providers charge premium rates because they are recognized as specialists in their focused competency areas and have a demonstrated track record of producing excellent client results. The leading firms tend to pay more than average to ensure they hire only the best and brightest. They protect their rates by limiting discounting while providing employee incentives for achieving quality and profit targets.

Time after time, we have seen leading firms create a “circle of excellence” where their hiring practices contribute to building a quality work force that consistently delivers successful client outcomes. This leads to an excellent reputation, which supports a premium rate structure and ongoing investments in employee development.

Unfortunately, the exact opposite “circle of commoditization” is seen in “me too” services providers that compete on price. Bottom-feeders treat both their clients and their work force as commodities. Because they have a low rate structure, they cannot pay enough to attract or retain a premium work force, which means they must compete on price. Once a services provider becomes known as “the low-price leader,” its only successful strategy is to run a lean and mean organization with no frills and limited investment in employees or skill building.

Services providers should carefully review their market positioning and pricing to ensure they have not become “staffing providers” when they intended to be “solution providers” because the level of accountability for superior client outcomes directly influences pricing strategy.

The effect of bill rates on financial performance

Table 1 shows the impact on financial metrics as professional services organizations (PSOs) increase bill rates. Firms with average consulting bill rates of less than $150 per hour tend to be much smaller than organizations billing out at more than $200 per hour. The firms with higher bill rates can afford the luxury of more overhead and greater investments in employees and sales and marketing than those that bill less.

Table 1: The effect of bill rates

BillRateEffects

Source: Service Performance Insight, November 2010

The table shows organizations achieve significantly higher professional services contribution margins as bill rates increase, as well as significantly higher annual revenue per employee. Firms that sell services at higher bill rates control discounting and produce greater levels of profitability. Obviously, firms that charge more should make more. But firms can only attain higher bill rates by continually providing high-quality services that offer significant value to clients.

The cause and effect of higher bill rates

Bill rate combined with utilization is a leading indicator of the overall quality and differentiation of the organization. The fact that organizations with the highest bill rates tend to reinvest profit into their employees leads to a continuing improvement cycle.

Highly skilled, well-trained, motivated and loyal consultants undoubtedly produce the best results for clients. In turn, satisfied clients provide referrals and buy additional services resulting in improved sales effectiveness.

The correlation between high bill rates and employee investment that result in superior project delivery metrics and overall financial profit is one of the most dramatic findings from the early results of the 2010 PS Maturity Benchmark survey.

How to Create a Billable Consulting Culture

What makes service transformations succeed?
by Jeanne Urich and Dave Hofferberth of Service Performance Insight

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One of the hardest, but most rewarding change efforts, is building a “billable consulting culture.” Sure, every professional service (PS) firm wants to increase the number of billable consultants, the number of billable hours and the consultant’s hourly rate. But how do PS firms build a culture so these behaviors are intrinsic?

According to a McKinsey 2010 survey of 2,512 executives, successful organizational transformations share the following characteristics:

  • Clear, measurable and aspirational targets to guide the transformation plan and initiatives.
  • A clear transformation structure or plan based on a thorough current-state assessment.
  • Employees engaged in the “need for change” and involved in identifying detrimental underlying mind-sets; employees empowered to develop and participate in the change effort.
  • Clear leadership focus on building capabilities while changing mind-sets and culture.
  • A sense of urgency maintained through clear, positive communication.

Why change?

Every PSO has a unique culture, typically reflecting executive leadership style and values. As the organization matures, people who stay take on aspects of the culture and accept it as the standard. If the current culture isn’t fostering company growth and encouraging employees to reach “billable” goals, the culture may need a renovation.

In our experience, there are three primary levels of service organization transformation or change, and each level represents significantly greater complexity and organizational culture change:

  1. Straightforward performance improvement. This typically involves maturing business processes and systems to improve repeatability and scalability while reducing costs. It does not require significant change in the business model or the way people work; instead, it focuses on streamlining and improving core business processes and systems.
  2. Significant new growth. At the next level of complexity, the organization seeks to expand into new service lines, geographies or capabilities, either organically or in combination with acquisitions. This transformation involves developing a growth strategy and adding new skills and capabilities along with new business processes and systems to accommodate and accelerate growth.The hardest part of this type of transformation is developing a clear and compelling strategy. If the strategy is sound, execution will be exhilarating and will continually build momentum.
  3. Organizational cultural change. Service organizations undertake a major transformation when the current business model no longer fits the required new business model or when dissatisfaction with current sub-par performance starts to reach crisis proportions. PS organizations undertake this type of transformation when they move from cost centers to profit centers or from on-premise to software as a service (SaaS) business models.

The company’s original staffing model may be changing to become a high-value consulting model. Or perhaps the embedded PS organization started as an adjunct to product development and is morphing into a true billable PS model. Or maybe the organization began as a sales enabler or customer support organization and is now becoming a profitable billable consulting organization.

Whatever the reason for the change, one of the most difficult and rewarding service transformation efforts is shifting the way people behave and work. To undertake a significant transformation effort, the amount of pain from continuing with the status quo must be substantial enough to warrant and drive a cultural change effort.

Creating a billable consulting culture

Leaders of most PS firms know that the most powerful predictors of overall PS success are not bill rates, discount levels or utilization. In fact, the SPI PS Maturity Benchmark results prove it is “confidence in leadership,” “strategic alignment of goals and measurements,” “ease of getting things done” and a culture that empowers creativity and collaboration that marks the difference in high-performing organizations.

Organizational culture is the unwritten customs, behaviors and beliefs that determine the “rules of the game” for decision-making, structure and power. Culture is based on the shared history and traditions of the organization combined with current leadership values. In effect, culture dictates “the way we do business here” and models the organizational survival tactics that facilitate assimilation and personal success.

When organizational culture is strong, employees do things because they believe it is the right thing to do and the company will reward them for their actions. However, if the current culture was developed to support an anachronistic business model, which must be changed, getting at and changing the underlying employee mind-set can be a daunting task.

Because service organizations are 100 percent people-based, creating a billable consulting culture in sync with the new mission and charter of the service organization is of paramount importance in any change effort. Successful service transformations engage the workforce in defining issues and creating and enacting improvement initiatives. “Top-down” improvement programs rarely work in PS organizations unless they engage leaders throughout the organization to define problems and participate in the solutions.

Defining the transformation vision

Humans don’t like change, and the older we get, the more stuck in our ways we become. PS employees are human beings first and billable consultants a distant second or third. They are only willing to alter their mind-sets if they see the point of the change and can envision why it might be good for them and how they might benefit from growing or adapting to take on the change.

Why change? Develop a sense of urgency by confronting reality and realizing the status quo is no longer an alternative. The “why now” must include the benefits of success as well as the penalty for failure.

Leadership must come clean with the sins of the past, which led to the current crisis. If the service organization was originally created to do something different — staffing, adjunct to engineering, sales or partner enablement — and is now aspiring to become a high-value consultancy, transformation leaders should acknowledge the past and explain why it no longer works for the future.

Frankly, too many successful, billable PS organizations delight clients and achieve respectable financial results to operate a money-losing, client-dissatisfying organization. If this is the status quo, the organization must face the very real possibility of going out of business or being replaced.

Where to? This involves painting a clear and compelling vision of the future. If employees cannot visualize the new “promised land,” they will not be willing to undergo the terrors of the journey.

Here, using industry examples and benchmarks help define the possibilities for the future. But, at the heart of every successful service transformation, the organization paints a new and unique future state business model.

Examples include unique partner enablement advisory consulting services to ensure vendor involvement and oversight for partner-led projects; first-mover migration strategies with unique “centers of excellence;” “two-in-a-box” onshore/offshore models to provide the best of on-site accountability and control with the cost advantages of near-shore or offshore resources or leading product sales with strategic business value analysis capabilities.

What’s in it for me? Leaders must translate the “need for change” and the “benefits of change” into a personal and compelling picture of the new work required. This is a typical failure point for many change efforts because employees are not engaged in defining the change or the role they will play in making it happen.

Often, consultants battle a losing product quality war. They face working obscene hours to overcome product defects or to hide missing product functionality. If a not-yet-ready-for-primetime product is the root cause of runaway projects, employee attrition and lackluster financial results, a key transformation initiative may involve creating interlock between services and engineering. In this scenario, senior solution architects may become the core change initiative owners to provide feedback to engineering. As a result, additional investments in pre-release quality assurance or train-the-trainer programs led by consulting experts may produce real change and improvement in both the product and consulting engagements.

Driving behavioral change

Once employees understand what’s in it for them, multiple interlocking elements and structures must all be in sync to drive and support the new behavior of creating a billable consulting culture. PS leaders must:

Empower action. Here is where the rubber hits the road. Employees must be enfranchised in both defining the reasons for change and the scope and impact of the change itself. For change to happen, employees must have the opportunity to practice the new work and see role models of the new behaviors. Employees need to experience and internalize the change personally.

A good example of moving toward a billable consulting culture is for senior project managers from around the world to be part of a service transformation focused on improving repeatability and scalability. This initiative team may be responsible for creating and rolling out a consistent, global methodology or defining how employees will store, share and use knowledge. If the transformation involves moving to a streamlined, centralized resource management model, core managers may own the selection and roll-out of the new resource management application including local training and consistent adoption.

Create pilot wins. Significant and lasting change will not happen overnight, nor do organizations have the luxury of abandoning their current business processes in favor of a new model. This is why successful transformations focus only on a few, critical initiatives.

If a catalyst for the transformation is poor client satisfaction and runaway projects, key solution architects and program managers can become the owners of creating a project management office (PMO) charged with improving quality initially on the largest, highest-risk projects. Once the pilot is successful, the core transformation initiative team can turn the PMO pilot into a new way of doing business to ensure quality and repeatability across all projects.

Communicate constantly. Significant change initiatives run the risk of starting strong, filled with passion but losing steam or dying completely over time. For a transformation to a billable consulting culture to succeed, the reasons for the transformation must be clear, and the PS firm must reward and celebrate consistent progress towards the new state and desired billable consulting behavior.

Quarterly global calls allow staff to review transformation initiative progress and reconfirm why the transformation is critical. Transformation plans and time for initiative teams to accomplish transformation tasks become part of the organization’s fabric. Field rotational assignments are the norm to ensure widespread leadership of key transformation initiatives and projects.

Implement broadly. Companies should only undertake transformations if senior leadership is committed to making significant and lasting change. Once the transformation occurs, engaging employees throughout the organization in understanding, defining and driving change is the only way for a service transformation to succeed. The focus must be on big issues:

  • Lackluster financial performance.
  • Dissatisfied clients.
  • Failure to achieve growth objectives.
  • Ineffective systems, tools and processes inhibiting growth and scalability.
  • Transitioning to a billable consulting culture.

Only a few (no more than three), broad, well-supported transformation initiatives should be part of the first year plan. After defining the key attributes of the new billable consulting culture, the company must support them with reward, recognition and compensation systems as well as recruiting and on-boarding practices.

For the new billable consulting culture to become “the way we do business here,” all of the human capital processes must support and reward the new desired behavior. Managers must give change-resistant employees an opportunity to understand the requirements of becoming billable consultants and enable skill training and mentoring. Celebration and reward for highly billable consultants must become the norm.

Fostering a billable consultant culture

Effective leaders model the values and behavior they expect from their employees. They work with their cross-functional counterparts to develop a shared vision of the future and the role the service organization will play in achieving that vision. They then create clear goals and measurements that drive alignment and empower employees to act and make decisions.

Management must provide clear and open communication to enfranchise employees to become part of the solution rather than the problem. Because employees emulate leaders, it is critical for them to demonstrate and reward a billable consultant culture. That way the culture will not be top-down, it will flourish organization-wide.

The Importance of Service Execution

Consistency and control drive performance and profits
by Jeanne Urich and Dave Hofferberth, SPI Research

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From the beginning of the economic downturn, much has been made of the need to improve client relationships and better manage cash flow. But what about improving service execution? This question is on the minds of many professional services (PS) executives as the economy improves, albeit erratically, and many organizations must focus on service performance enhancements.

To better understand how to improve service execution, PS executives must first analyze the relationship between on-time project completion, billable utilization, client satisfaction and employee satisfaction. Intuitively, one would expect on-time project completion to drive up client satisfaction. But are high billable utilization and high employee satisfaction the chicken or the egg?

Also, if engaged, happy employees are the real catalyst for superior project and client outcomes. Then what are the key factors that drive employee satisfaction? Regardless of whether PS executives truly understand all of these relationships, now is the time to evaluate your workforce strategy to assure you have the people to meet the changing needs of your clients, both current and new.

What levers do PS executives pull to improve performance?

Increasing utilization is the first place everyone looks. But this most popular key performance indicator is primarily driven by workforce planning and capacity, and eventually execution. It is easy to temporarily improve billable utilization by cutting the workforce size, but how do you continue to maintain high utilization?

The SPI Research benchmark shows organizations with average billable utilization of 75 percent or higher also produce better client results. However, this situation occurs more from a result of planning, staffing and selling, rather than just “right-sizing.”

Establish best practices

To increase organizational performance, PS executives should implement many improvements that will lead to a more efficient and effective workforce and higher-quality services. SPI Research has found professional service organizations (PSOs) have been able to increase capacity and service quality in many areas through these best practices:

  • Establish a project management office (PMO): Creating the PMO allows your organization to improve both the efficiency and quality of the work through standards, methodologies and tools.
  • Do performance reviews: Conduct periodic performance reviews at least once a year. Spend time with employees on areas where they can expand their skills to remain valued employees. This process provides them with greater long-term job stability, and leads to greater company loyalty.
  • Use professional services automation (PSA): Most firms surveyed by SPI Research use PSA solutions. To improve the benefits of PSA, these organizations integrate it with the core financial solution as well as client relationship management to better plan and execute services.
  • Manage resources: A critical component to any PSA solution is resource management. Given the wide distribution of the workforce and a movement toward increased remote service delivery, resource management will become increasingly important to ensure adequate staffing levels and better cost management related to people.
  • Look forward: Expand the horizon to look out further than you already do. This forward-looking view will improve staffing levels and highlight areas of greatest need. It also helps your organization improve its workforce strategy with a goal of optimizing the balance of internal and external resources.
  • Use external resources where appropriate: Third-party resources are an excellent way to avoid the volatility involved in the hiring and firing of staff. They provide a valuable service because of their rapid deployment when necessary without the long-term costs associated with internal employees.
  • Develop skills internally: While using third-party resources is an effective way to manage the fluctuation in service demand, using too many external resources leads to lower morale and greater turnover. Implementing training programs to improve both the depth and breadth of skills creates a more flexible and adaptable workforce.

Benchmarking many of these initiatives can show you the change in your organization’s performance. With this knowledge, you can further improve or reevaluate your execution strategy to accomplish more.

Watch out for landmines

Inevitably, as the demand for services improves, PSOs relax with a false sense of security. This situation can have negative long-term effects that can lower profitability and create an environment where employees lose confidence in management. This leads to higher turnover, unhappy clients and lower profits.

Issues to consider: Don’t over-staff just because the workload appears to be improving. Revisit your subcontractor strategy as you grow. Eventually, you can reduce it. While every PSO has a different strategy for its external workforce, keep it consistent and communicate well internally. As a result, the workforce gets on board, which improves their morale.

Just because you might see increased profitability and margins, don’t take your “foot off the pedal.” Stability in your financial performance is very important to your growth strategy. It allows you to more accurately plan and implement policies to improve overall organizational financial performance by carefully evaluating everything from pricing and project management to invoicing and collections.

Continually benchmark your organization to find both the hidden gems and under-performing assets. Work to better understand why some of the practices in your organization perform well, and implement policies and procedures that other organizations can use. Also, look at your practices that have not fared so well, and consider implementing changes to bolster performance, or eliminate the practices altogether.

Stay on track

Slowly, but surely, the economy is picking up steam. After all of the downsizing or right-sizing, your employees will appreciate growth. But even with the pickup in demand, growth will remain unsteady for the foreseeable future. And the services in demand just a few years ago might not seem as important as they used to be. Your organization must be prepared for both new clients and the new types of work.

Focus on improving both the quantity and quality of the services you deliver. What changes in your clients’ needs have you seen, and how will you address them? There is little doubt that the past few years have left scars on many, if not most, of your clients. How can you both change and help them going forward?

Set targets for performance improvement and benchmark your organization to assure staff is on the right track. It is also essential that you report these improvements so that the workforce understands your commitment to improve the overall performance of your organization. When the next downturn occurs, this should lead to greater job stability.