The Struggle to Align Human Capital in Professional Services

Successful professional services executives know employees are the most critical asset. Finding great employees, hiring them and helping them grow, work and stay engaged largely affects the organization’s long-term success.

employeesIt has become increasingly difficult to find new employees with the requisite science, technology, engineering and math skills the technology consulting industry needs. The problems this situation has created have become more apparent in the last year. For instance, professional services industry growth shows signs of slowing since its five-year peak two years ago, as firms struggle to find the right people to sustain momentum. In a market accustomed to annual revenue growth rates higher than 15 percent, slowing growth puts additional pressure on the organization. The industry feels the impact, but it shows up most in dramatically lower net profit.

Table 1. The Effects of Attrition on Delivering Work on Time
Table 1
In the past year, annual attrition has also increased, placing more pressure on the professional services organization’s ability to grow and prosper. Table 1 highlights some of the critical issues facing professional services organizations due to increased attrition. As attrition rises in professional services, the ability to deliver work on-time and on-budget declines.

Mergers and acquisitions are taking place at a near-record pace. Why? They have become one of the best avenues for expansion while also augmenting the skills and talent of the workforce. However, unless the acquirer can find a way to keep talented employees, M&A does not necessarily guarantee future growth and success. Mismatched skills and nervous employees tend to leave the newly combined organization.

Billable utilization declines
The 2014 PS Maturity Benchmark shows that billable utilization has dropped for the first time in five years. This decrease, while not significant, mirrors some of the issues associated with lower profit margins. Professional services organizations should strive for at least 75 percent billable utilization.

Table 2 highlights the correlation between billable utilization and other key performance indicators. It reveals that organizations increase billable utilization to achieve higher revenue per billable consultant. While this correlation might seem obvious, it provides professional services executives with a clearer understanding of just how important focusing on billable utilization is for the firm. The table also shows how billable utilization impacts the professional services organization’s ability to meet both revenue and margin targets, which fuel future growth.

Table 2. Connection Between Billable Utilization and Other KPIs
Table 2Source: Service Performance Insight, June 2014

What should PS executives do?
To optimize human capital, PS executives must focus on several key areas:

1. Focus on employee acquisition and retention. Understanding the organization’s strategic and tactical goals enables the entire organization to focus on hiring the right type of individuals with the right skills to drive the organization forward. Once on board, retention is critical. PS executives must balance utilization and revenue targets with training and career development to ensure employees stay and prosper with the firm. As the economy has grown in the past three years, professional services attrition has risen with it, making it one of the most critical issues facing PS executives. Watch for burnout. Due to senior-level employees spending more time on client interaction and business development, younger consultants are required to deliver much higher billable utilization than their more experienced peers. They can burn out easily if they work too many hours. You don’t want to better prepare them to work at their next company. Your goal is to keep them employed at yours.

2. Balance revenue versus cost for each employee. Having good people is one thing, having people with the necessary skills that are offset by their ability to generate revenue is another. Individuals with high price tags need to bill at high rates. Individual productivity and margin are important to understand to ensure each consultant generates sufficient profit to help the firm grow and prosper.

3. Provide the right tools and infrastructure. Employees who have access to specialized tools and training are less apt to move on. They see an investment in tools as an investment in them and their productivity. Employees’ ability to gain expertise in the tool not only makes them more valuable to the PSO, but also provides them with a higher degree of self-confidence.

4. Training is worth the cost. Younger employees are happier if their organization invests in the training necessary to make them more valuable. Organizations that don’t invest in training often show much higher attrition rates. Training doesn’t have to occur during working hours. It could be on nights and weekends, which won’t affect potential billable hours. Consultants are continuous learners, they are motivated by knowledge and skill development.

Looking ahead
In the next decade, the professional services market must do a top-to-bottom analysis of how it builds and maintains a high-caliber workforce. Changes in the educational system and lifestyle preferences of younger employees will determine how PSOs go to market. Devoting more attention to recruitment, training and retention processes goes a long way to determining the success of the organization.

Times have changed, the employees coming out of college just a decade or two ago are different than those of today. Understanding and meeting the needs of the new workforce, how they are developed and how they are motivated will be a big factor in the overall success and prosperity of the Professional Service industry.

Are your organization’s numbers moving in the right direction?

2014 Professional Services Maturity benchmark preview
by David Hofferberth, Service Performance Insight

Based on completed Professional Services Maturity benchmark surveys to date, we at SPI Research expect 2014 to be a strong year for professional services growth. So far, year-over-year revenue growth in the market is 12.6 percent, compared to 11.5 percent last year. If this rate holds, it will be the third consecutive year of annual growth in excess of 10 percent, showing the professional services market has fully recovered from the recession and is in the midst of a big growth surge!

The talent factor

profit 12 2013But we wouldn’t say everything is rosy in professional services, as PS executives continue to convey their difficulty in finding, hiring and retaining highly qualified professional services employees. Last year, we identified a talent cliff as a result of the market losing baby boomers and the struggle to replace them with a supply of qualified individuals with the appropriate science, technology, engineering and math (STEM) skills.

We expected this to be an issue for the next five to 10 years, and nothing has changed in last year’s assessment. For years to come, talent management will be the number one issue. In 2011, only 76,376 engineers and 43,072 computer and IT majors graduated from U.S. universities — not nearly enough to fill demand.

So far in this year’s benchmark, the average number of PS employees is 359. This figure is significantly higher than in the last three years, when organizations averaged approximately 220 employees. We haven’t had a higher average professional services size since 2009. All indicators show that PS firms are hiring and growing at an unprecedented rate.

Five Service Performance Pillars

Before digging into the latest findings, let’s review the key functional areas that we call pillars. Our hypothesis is that professional services organizations consist of five pillars that drive organizational performance.

The core tenet of the model is PSOs achieve success by optimizing five Service Performance Pillars:

  1. Leadership. This pillar represents the unique view of the future and the role the service organization will play in shaping it. Leaders develop a clear and compelling strategy, providing a focus for the organization to spur action. They also set the tone and direction for the organization.
  2. Client relationships. This pillar includes sales, marketing and partner relationships and effectiveness.
  3. Human capital alignment. This pillar focuses on recruiting, hiring, retaining and motivating a high-quality consulting staff.
  4. Service execution. Execution represents all aspects of project execution: resource management, project management, knowledge management and delivery methods and tools.
  5. Finance and operations. The financial backbone of a services firm that addresses planning, revenue, margin, billing, collections and IT infrastructure.

Five levels of maturity are defined to show progression for each pillar. It starts with Level 1, where processes are immature and employee roles are broad, and progresses up to Level 5 where the organization, methodologies, tools and governance are synchronized and structured. Level 5 optimizes and aligns all elements of the PSO for continuous improvement. On average, only 5 percent of PS organizations achieve Level 5 performance.

Each Service Performance Pillar has guidelines and key performance measurements that correspond to levels of maturity, which provide a roadmap to service performance excellence. The following sections highlight some of the latest survey findings.

Leadership

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

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

Client relationships

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

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

Human capital alignment

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

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

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

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

Table 1: Age of Professional Services Workforce

t1 01 2013

 

 

 

 

 

 

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

Service execution

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

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

Finance and operations

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

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

2014 crystal ball

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

Your Workforce is Changing

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

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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

 

A Comprehensive Human Capital Alignment Strategy

The dollars and cents add up
by Jeanne Urich and Dave Hofferberth, SPI Research

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Most professional services (PS) executives monitor a handful of key performance indicators (KPIs) to determine the success of their organization. Some of these metrics include growth rates, earnings before income taxes, depreciation and amortization (EBITDA) or contribution margins, days sales outstanding (DSO) and client satisfaction. However, these indicators are the tip of the iceberg — they are a result of successful planning, development, sales, service delivery and invoice management. If done well, client satisfaction will also be at an acceptable level.

Popular KPIs are easy to see

To make sure that these, and many other high-level KPIs, meet organizational goals, PS executives must look at the details behind these indicators for the root cause of their success or failure. Across professional service organization (PSOs), indicators appear in each of the five Service Performance Pillars:

  1. Vision and Strategy: A unique view of the future and the role the service organization will play in shaping it. A clear and compelling strategy provides a focus for the organization and galvanizes action.
  2. Finance and Operations: (CFO) The ability to manage services profit and loss — to generate revenue and profit while developing repeatable operating processes. Elements of this pillar provide long-term financial stability.
  3. Human Capital Alignment: The ability to attract, hire, retain and motivate employees. With changing workforce demographics, human capital strategy has increased in importance.
  4. Service Execution: The methodologies, processes and tools to effectively schedule, deploy and measure the quality of the service delivery process.
  5. Client Relationships: The ability to effectively communicate with employees, partners and customers to generate and close business and win deals.

By doing things “right” in each performance pillar, firms can measure PSO success. The impact of activities in one pillar can positively or negatively impact the activities in another. Successful PS executives understand the balance required to achieve their ultimate success.

Profits matter, and they start with people

One of the more interesting aspects of research focused on billable PSOs is the importance of an integrated human capital strategy. Finding, hiring and retaining key employees are just the beginning.

SPI Research has analyzed over 160 performance indicators and correlated them with the leading KPIs used by many PS executives to determine success or failure. The model we built segments organizational maturity into five levels, where Level 1 is the base level for beginning firms or those that do not operate efficiently or effectively. Level 2 is for average performance, and increasing performance continues on to Level 5, where less than 5 percent of the PSOs surveyed meet the stringent criteria to be market leaders. Most of the performance indicators in this study trended up or down, depending on their positive or at negative impact on performance.

We have found that the number of performance indicators with extremely strong correlations to success are within the human capital alignment pillar — meaning, the employees, and how they perform once onboard in the firm (Table 1) dictate ultimate success or failure. The problem is that there are many KPIs associated with human capital. So which ones should PS executives consider?

Table 1: Human Capital Alignment performance indicators tied to performance levels0709 2Source: Service Performance Insight, February 2009

We have learned that some of the more notable performance indicators include:

  • Non-billable project hours: Leading PSOs (Level 5 performers) averaged only 80 hours per year per consultant of non-billable time. Contrast this figure with less mature PSOs that averaged over 300 hours annually! At bill rates of $150/hour this difference is over $33,000 in reduced billings per consultant per year. Therefore, PS executives should strongly encourage non-billable project hours stay under 2 percent.
  • Standard job descriptions exist for all positions: 100 percent of the Level 5 performers had standard job descriptions versus 62.2 percent of Level 1 performing PSOs. The leading performers keep the descriptions “standard,” which makes it easier to recruit and hire. Reducing the hiring and ramping time also shows up in increased financial performance. PS executives should mandate that HR create standard job descriptions to provide clarity in job positions.
  • Skill profiles exist for all employees: Our research shows 100 percent for Level 5 versus 43.2 percent for Level 1. The leading PSOs have skill profiles for their employees and make them visible to other practices within the company. This visibility increases the overall consultant utilization rates and shows executives around the organization which skills are most in demand, and what their appropriate pricing might be. PS executives should mandate that HR create skill profiles to provide individual clarity to keep employees visible and billable.
  • Performance reviews tied to industry benchmarks: 100 percent of the leading firms tied performance reviews to industry benchmarks versus 25.1 percent of Level 1 performing PSOs. Employees who can see what is expected of them compared to their peer group (inside and outside of the organization) perform better knowing they are treated in accordance with industry standards. Obviously, they must believe the standards are unbiased or performance and satisfaction would suffer. PSOs should maintain a database of industry benchmarks and show it to employees when appropriate.
  • A well-understood career path for all employees: The difference here is quite large, 100 percent for Level 5 versus 26.4 percent for Level 1. It makes sense in that employees who lack a clear understanding of their potential within an organization feel less sense of loyalty and therefore will not perform as well as highly motivated individuals. PS executives should mandate a potential career path guide for employees, which shows where people in their position could end up in the next one, two and five years.

It should be noted that these performance indicators are not overly expensive to implement, and leading PSOs consider this necessary in successfully maintaining a high-quality workforce.

Other performance indicators have a strong correlation with organizational performance, these just happen to be in the Human Capital Alignment pillar. Some of the KPIs don’t necessarily optimize success when they grow too large or too small. For instance, information technology spending as a percentage of revenue tends to show the best results when it’s approximately 4 to 6 percent. Obviously, no spending on information technology would severely, negatively impact performance, as would excessive spending, anywhere over 10 to 15 percent.

Consider programs that improve human capital alignment

We recommend PS executives work with their human resource teams to develop a human capital alignment strategy both visible and understandable by the workforce. Employees should understand management’s expectations and how those expectations will drive compensation, promotions and other areas that impact performance.

When employees understand their performance goals, they can work with their managers to make sure they attain them. For instance, most PSOs have utilization targets. The calculation of utilization is usually clear to the employees, and therefore, they understand how they are performing. Employees will meet with greater success if they come into the job with a clear understanding of these requirements and a skill profile that helps them become more visible and billable.

Employees must come into the job with a clear understanding of what their career path could potentially be if they successfully remain with the organization over several years. To keep these employees motivated and challenged, the PSO must offer various education and training programs to keep employees up-to-date on the latest skills required for them to succeed.

“World class” relies on human capital

Many factors go into creating a world-class professional services organization. Fluctuating economic cycles and changing client needs can cause stress and poor performance on the workforce, resulting in turnover and reduced profitability. These external factors can make life difficult in the highly charged and competitive professional services sector.

Greater clarity of expectations for the workforce provides for a work environment that helps reduce many of the issues related to external factors. PS executives must ensure the organizational strategy and directives are clear to the workforce and that their workers understand management’s expectations.

With this type of clarity, workers will feel a greater empowerment to operate in a manner consistent with the needs of their organization. In professional services, it always starts with the workforce. It ends there, too.