Over the years we’ve noticed that the top performing professional services firms are always tinkering with their processes. Their growth strategy is a combination of selling more on the front end, and adjusting delivery operations on the back end. Seasoned managers are constantly evaluating incremental costs and benefits, and making a chorus of small changes that effect dramatic improvements in bottom line results.
For professional services organizations (PSOs) that have limited visibility into their staffing and delivery operations, focusing on incremental improvements may seem trivial. Who has time to focus on leveling resource demand to increase utilization rates by 0.5% when it might take a whole week just to understand current performance? Sure improvements in resource utilization translates into profitability, but doesn’t winning a new project do the same thing? Well…only sort of.
Small changes drive results
We saw the power of marginal optimization in this year’s Professional Services Benchmark Study performed by Service Performance Insight (SPI). Each year this study surveys more than 200 professional services firms across a multitude of different sizes, industries, and geographies to paint a picture of how they are performing. Because the survey methodology is consistent year after year, trends in PSOs can be identified and results can be attributed to specific actions. This year was all about small productivity improvements across the board adding up to significant profitability gains.
Bid-to-win ratios decreased slightly along with the time it takes to staff a project. On-time project delivery notched up 1% while project cancelation decreased by 5%. And PSOs are reporting small gains in the effectiveness of their resource management processes. Each one of these improvements taken in isolation would have a very marginal effect on a business. But when aggregated together, they are the drivers of increased profitability. In fact, this year’s survey indicated average profitability, measured as EBITDA, is up nearly 15% across the professional services industry, while revenue growth remained in-line with the previous year.
What’s more telling is that all of the top-performing PSOs in this year’s benchmark are using professional services automation (PSA) software to make incremental changes to the performance of their firm. PSA software manages the entire delivery operations of a PSO to help them operate more efficiently and, more importantly, gain organizational visibility.
PSA software amplifies those results
When comparing organizations who are using commercial PSA software to those who are trying to run their business on spreadsheets or homegrown solutions, the differences are stark. Firms using PSA software saw more than a 6% increase in their billable resource utilization. Often classified as the most important key performance indicator (KPI) for professional services firms, billable utilization measures the amount of time employees are working on productive work. Because PSA software helps find the right person for a project, balances backlog against scheduled work, and drives accountability, it’s no surprise that it helps improve billable utilization.
Along with higher utilization comes more revenue. On average, firms using professional services automation earned an extra $11,000 of revenue per consultant than those that have yet to adopt a PSA solution. In this year’s survey, the average bill rate for a delivery resource was about $175. This translates into nearly a week and half of extra billable work, per consultant. Simply put, working more efficiently means more work gets done.
Project margins, on the other hand, are not influenced by utilization rates. They are, in effect, a measure of how well a project manager planned, estimated, and delivered their project. Firms using professional service software saw a 20% advantage in their project margins. This is largely because project managers have the tools they need to deliver a successful engagement. They have a detailed record of previous projects to help the planning and estimation process. They have the ability to find the right people with the right skills to confidently deliver the work. And most importantly, they have real-time and forward looking budgets to help understand the health of their project. This gives project managers more time to make corrections if needed and gives them access to mid-project profitability without needing to run time consuming simulations.
The bottom line
Any one individual KPI would be easy to influence if focused on in isolation. The art of running a professional services firm is being able to influence all of the important KPIs simultaneously. Using professional services automation software to gain real-time visibility allows services managers to know which lever to pull at just the right time. Each small change adds up to significant results. In this year’s professional services benchmark, SPI Research found that service firms running on a PSA solution enjoy nearly 75% stronger profit margins as measured by EBITDA.
Organizational visibility is one of the greatest enablers PSA software provides. Having visibility into the supply and demand of your resources enables you to staff projects quickly and manage utilization effectively. Having visibility into mid-project profitability allows you to understand project health, and when to take corrective actions. Having visibility into both historicals and projections means you know exactly where your business has been, and where it is headed.
This is the platform that successful professional services firms use to get to the top. There isn’t a special “increase profit” or “sell more work” button built into PSA software—at least we haven’t figured out how build one yet. Instead, it’s the combination of each area of influence that delivers such a dramatic results. Successful professional services firms know this, and it isn’t a myopic focus on winning new projects that makes them so successful. It is their focus on running efficient delivery operations that sets them apart from their peers. That is why they spend the time to select and implement a PSA that can model their business, provide real-time visibility, and help them make those small improvements that payoff so well.
Because at the end of the day, each new project is worth more with a PSA.