The Professional Services Hourglass - The Changing PS Model
- Prepared by Thomas E. Lah, Executive Director, TPSA
OVERVIEW
The literature on professional services organizations focuses on the success and optimization of the PS
pyramid. This is the classic PS organizational structure in which veteran partners sit at the top of a pyramid
of junior resources. PS success is driven by the partners’ ability to keep junior resources billable. Focus is
placed on concepts such as leverage, bill rates, and staff utilization. Unfortunately, this classic approach to
building a professional services practice is not well-suited to the technology professional services (TPS)
organizations of the 21st century. This article reviews the deficiencies in the pyramid model and introduces a
new model to consider when building and scaling a TPS organization.
THE PS PYRAMID
The basic organizational structure that professional services organizations have been built on is the classic
PS Pyramid. In this model, senior partners sit at the top of the organizational pyramid. Below these
partners, senior managers and junior consultants work to deliver the service offerings of the firm. This basic
PS pyramid is documented in Figure 1: The Pyramid.
Figure 1: The Pyramid
Optimizing the Pyramid
Many experts on the topic have written on the techniques of optimizing this classic pyramid structure.
Common challenges and responses are as follows:
Matching skills with work type: For the PS pyramid to be profitable, there must be an effective match
between the skills that staff the pyramid and the type of work customers require. If the pyramid is topheavy with knowledge workers and the service organization delivers mostly procedural work, the firm
becomes unprofitable. The billing rates received don’t match the cost of these expensive knowledge
workers. However, the reverse can be just as painful. If customers are expecting deep industry experts, and
the pyramid is full of generalists, customers will become dissatisfied and revenues will drop.
Leverage and Margin: There are only so many billable hours in a day for partners at the top of the pyramid.
For the pyramid to be profitable there must be a healthy balance between expensive partners and junior
consultants. The more junior consultants a senior consultant or partner can keep billable, the more revenues
the service organization generates. If the firm can sustain a premium rate for these junior consultants, the
leverage drives maximum margins for the firm.
Productivity: Of course, the pyramid will never be profitable if staff are not billable a majority of the time.
Staff must meet acceptable utilization targets for the pyramid to be profitable. Otherwise, employee costs
exceed service revenues.
In 2004, Harvard Business School published an article titled “Profitability Drivers in Professional Service
Firms.” The article documented a clear correlation between increased leverage, increased productivity and
increased margins on the profitability of PS firms. In fact, the levers for optimizing a professional services
business seem straightforward in this modeling:
Keep your consultants billable
Charge the highest rates you can
Create leverage wherever you can
Technology companies have aggressively adopted this pyramid model when incubating their professional
services capabilities. The pyramid is instituted as a “practice.” Each technology practice area is assigned a
practice manager. This practice manager is responsible for growing the pyramid of resources in the practice.
Unfortunately, this pyramid approach is not well-suited to the professional services organizations of most
technology companies. There are concepts inherent in the pyramid model that do not transfer well to the
technology professional services environment.
CRACKS IN THE PYRAMID
The classic pyramid model has worked extremely well for traditional professional services organizations such
as law firms. However, the model has characteristics that are not well-suited to the business of technology
professional services.
First of all, the lifeblood of technology services is not partners but solution experts. These are subject matter
experts that can articulate the value of the solution being delivered. As talented and knowledgeable as these
individuals are, they are not necessarily suited to sit at the top of a services pyramid. Perhaps their
management skills lag behind their solution expertise. Perhaps they have absolutely no desire to manage
multiple consultants. Regardless of the reason, these solution experts do not fit the mold of a partner. Using
the pyramid approach, technology companies translate the role of partner into “practice manager.” Then,
outstanding solution experts are rewarded by being placed into the role of practice manager, where they
often fail at management aspects of the role.
In conjunction with this preoccupation with the top of the pyramid, the classic pyramid approach is
embedded in a culture of “up or out.” The implied objective of a consultant in the PS pyramid is to work his
or her way up to the top of the pyramid. In traditional professional services organizations, it is an
embarrassment to not make partner. If an employee is passed over for this promotion, it is a signal they
should consider “pursuing other opportunities.” This value system is economically destructive to technology
professional services organizations. Once again, senior solution experts are the lifeblood of success,
regardless of their ability to manage practices.
Next, the pyramid structure funnels both sales and operational responsibilities to a partner. Technology
companies attempt the same approach by endowing practice managers with the objective of making their
practices financially successful. The practice manager finds himself attempting to secure new services
opportunities while sourcing existing projects. A practice manager that excels in business development often
pays minimal attention to project implementation. Practice managers that focus on customer success often
have little passion or energy for sales. This common dichotomy between hunter and gatherer personalities is
a challenge traditional professional services firms constantly struggle with. How much of a partner’s time
should be spent selling? Can you be a partner without being a good salesperson? But, if all our partners only
excel at sales, who focuses on execution? This problem is exacerbated in the world of technology services,
where practice managers have technical solutions that serve large geographic territories. How does the
practice manager effectively scale sales and delivery capabilities across the globe? The answer to this
question depends on the overall sales structure of the company, which leads to the next challenge.
The pyramid model implies that pricing and scoping responsibilities are ultimately resolved at the top.
Partners are responsible for determining the price of their services and the overall scope of an engagement.
This makes good sense since ultimately these partners own the financial success of their business. Practice
managers in technology companies have much less autonomy. Pricing expectations are likely set by a
salesperson outside of the services practice. Project scoping and costs must come from technical experts. To
hold a practice manager to the same financial responsibilities as a partner makes little sense when the
practice manager must operate in a much more integrated environment.
Finally, the pyramid model does not focus on required investment. Technology solutions require investment.
The solutions must be architected, documented, and tested. If the solution is untested, initial reference
customers must be secured through discounting. This is not the world of lawyers where every hour is
billable. How much should the organization plan to invest in these types of solution completion activities?
Simply focusing on utilization, billable rates, and leverage will not provide an answer to this investment
question.
In summary, applying the traditional pyramid model to technology professional service organizations creates
the following challenges:
The up-and-out culture of the PS pyramid is economically destructive for technology practices.
Practice managers rarely have the same economic command and control available to partners
managing an enclosed pyramid.
Profitability drivers in the pyramid model do not address the investments required to incubate
technology services offerings.
To address these deficiencies, technology companies should look at their professional services organization
as an hourglass as opposed to a pyramid. The next section describes this new approach.
THE PS HOURGLASS
The professional service organizations firms we are addressing deliver complex technology-centered
services. In other words, complicated technology is at the center of their services offering. This creates a
difficult burden on these services providers. To scale this type of professional services organization, you
must possess a competent delivery staff that has the following profile:
Strong technical knowledge of the company’s core product offerings (hard skills)
Good understanding of the customer’s operational and business environment
Strong interpersonal, consultative skills (i.e., soft skills)
Typically, it is difficult to find delivery staff that truly possess all of these skills in adequate amounts. Such
employees are often dubbed “subject matter experts” (SMEs). These SMEs become the lifeblood of a
technology services business. SMEs are the consultants the customers love to see because they bring real
value add.
The problem with SMEs is that there aren’t enough of them. When you shake the recruiting tree, twenty
don’t fall out. Get used to this shortage—it will be getting worse in the next ten years. Technology
companies are approaching their current SME shortages by raiding competitors. But who is investing to
develop new SMEs? When existing SMEs in the market migrate away from professional services or retire,
who will be replacing them?
To help offset the SME shortage, a professional services organization must think about managing an
hourglass. Figure 2: The PS Hourglass introduces this model. At the top of the hourglass are front-end
sales resources that sniff out new deals and verify initial deal qualifications. Is the customer serious? Is a
budget established? At the bottom of the hourglass are junior-level delivery staff or subcontractors that are
qualified to deliver components of the complex technical solution. In the middle of the hourglass are the
subject matter experts. The trick is to shield these hard-to-find SMEs from involvement in every sales call
and every project status meeting. In other words, keep the SMEs away from the edges of the hourglass.
Figure 2: The PS Hourglass
Figure 3: Expanding the Hourglass shows how sales-channel partners and delivery subcontractors are
used to expand both the top and bottom of the hourglass. This expansion is all about creating leverage for
the expertise locked in the bodies of the SMEs.
Figure 3: The Expanding Hourglass
Consulting firm McKinsey, author Geoffrey Moore, and others have introduced the term “embedded
professional services organizations.” This is a great term for professional services organizations that exist
within a product company and are there to support product success. A common phenomenon in embedded
professional services organizations is that they often make no money on their subject matter experts in the
PS organization. These talented consultants are used to drive product adoption and account success. To
offset this investment, embedded professional services organizations must do an even better job of creating
leverage in the PS hourglass. Sound qualification must occur before the expensive SME is engaged and
invested. Margin must be generated by using partners and subcontractors on the bottom of the hourglass. If
this leverage does not occur, embedded PS organizations quickly become a cost center.
Finally, Figure 4: Roles and Responsibilities provides a detailed breakdown of how geography-based
sales staff partners with subject matter experts to manage services opportunities. In this version, SMEs are
represented as Practice Managers, Competency Managers, and Solution Engineers. This version of the
hourglass highlights the fact that SMEs work with product and services sales representatives to establish
technical feasibility and project costs. However, the sales staff ultimately owns the final pricing pitched to
the customer. Also, SMEs must work with resource managers and project managers to verify resource
availability. SMEs may know the solution, but they may not know who is available to implement this specific
customer project.
Figure 4: Roles and Responsibilities
Up and Over
Approaching your professional services organization as an hourglass as opposed to a pyramid is not without
challenges. The beauty of the pyramid model is its simplicity of responsibility. In a pyramid, there is no
doubt who is ultimately responsible for economic success. The visual of an hourglass lacks this crisp sense of
responsibility. Yet, does this picture not more accurately map the reality of your professional services
environment? Even if you have placed practice managers in charge, are they not relegated to executing
within an hourglass structure?
The hourglass creates a new focal point for a management team to apply its energy. Figure 5: Pyramid vs.
Hourglass shows this shift in focus.
Figure 5: Pyramid vs. Hourglass
The critical path in scaling a technology professional services organization centers on the subject matter
experts. The management team must constantly be strategizing how to secure competent SMEs, or how to
develop new ones. Are there natural sources of SMEs in other parts of the company? R&D? Support
Services? How can we reward talented employees to play this critical role for PS (and ultimately the
company)? These are the relevant questions for the professional services organizations of today. As a
perfect example, IBM just announced the release of some new software. As part of the product release, IBM
specifically announced its strategy to provide competent consultants that could actually design, implement,
and successfully integrate the new software. Without this qualified expertise, the software does not sell1.
This is the reality of technology adoption today. Without enough SMEs, products never become solutions.
Without the middle of the hourglass, the sand never flows.
1 - "IBM to seed software with $1 billion," Marketwatch.com, February 16, 2006.
Managing the Resource Pool for Just-in-Time Resourcing
- by Randy Mysliviec, President RTM Consulting
Introduction
In Part 1 of this article, Managing the Demand Forecast for Just-in-Time Resourcing, we discussed
new methods, processes and tools required to more effectively manage demand forecasting to enable Justin-Time Resourcing (JITR). Now, in Part 2, we will discuss how to manage the resource pool for JITR.
Objectives of Effective Resource Pool Management
The outcome of effective resource pool management affects many stakeholders throughout the enterprise.
Finance is expecting the business to deliver on forecasted revenue commitments to support pro-forma
estimates. Delivery teams need to hire, train, and deploy the right resources in the right places at the right
time. Sales teams want on-time quality implementations resulting in happy customers. And so on.
Therefore some key objectives for effective resource pool management include:
Financials
o Deliver on forecasted commitments
o Achieve target margins
Revenue
o Deliver on forecasted commitments
o Avoid missed or lost opportunities resulting from resource deployment issues
Skills Management
o Enable skills balancing (by region or geography)
o Development of needed experts in key technologies
Delivery
o
o
On-time and on-budget
Consistently high quality
Key Benefits of Effective Resource Pool Management
Resulting benefits from effective resource pool management include:
Effective project support and execution
Improved talent and skills management
Supports a JITR system
Lowers costs
More satisfied customers and employees
Leads to more revenue and profit!
The Fundamentals of Effective Resource Pool Management
We will discuss two fundamental aspects of resource pool management:
Foundational elements – the infrastructure needed to support the resource pool management
aspects of a JITR system (Note: demand forecasting is discussed as an essential element for a JITR
system in the February, 2008 Service Line Newsletter)
Process and methodology to execute effective resource pool management
Foundational Elements
Warm Pool Recruiting:
In Part 1 of this article we discussed the need to modernize the way we recruit and train new employees.
There are many ways we have traditionally accomplished acquisition of people such as recruiting firms,
hiring fairs, web-boards, etc. Today’s environment requires less expensive and more responsive approaches
to acquiring the right people to arrive at the right place at the right time. This timeline must also allow for
proper on-boarding and training of new personnel. A proven technique is the adoption of a “warm pool”
recruiting program, driven by a continuous recruiting process vs. the start/stop method deployed by most
firms today. The warm pool approach uses methods to create “warm” candidates in a pool that are later
recruited into permanent roles in a “just-in-time” hiring system to meet specific job or project needs.
Figure 1: Warm Pool Recruiting
Employee Training:
The subject of training and re-skilling could take up an entire paper on its own. Key points to consider are:
Define your skills roadmaps and have a plan as to how each key skill is developed
Build reasonable estimates into budgets/utilization estimates for training time
Leverage technology assisted training – it is a proven and cost effective way to build skills
Consider developing employee/technology certification programs which are growing as a way to
validate effectiveness of training, and improve the predictability of and quality of work
Use your PS Automation system to help keep track of available skills
Building a Bench:
Building a bench of resources is a critical element of a JITR system that enables the “right time” element of
JITR. For too long companies have viewed building a bench unnecessary, defaulting to hiring only when a
contract is in hand. Contemporary thinking on investment in a bench is changing, and must change. Reality
is that the lost opportunity cost of losing a deal because you could not serve it quickly enough, or the failure
to find needed resource in time to serve a committed project, can more than offset the cost of funding the
bench. The bench is also a source of often needed resource to support business capture needs which helps
avoid disruption of resources already committed to client funded projects.
Talent Management and Retention:
There are many aspects of talent management and retention e.g. training, career management, job
rotations, compensation, morale management. Some key elements to consider are:
Career management – high achievers are very marketable, looking for rapid career progression.
Your firm should provide appropriate career progression steps supporting this need in an affordable
manner. A good way to show career progression is through the creation and publication of a career
map or ladder which is used for ongoing employee development planning and discussions.
Job rotations – PS employees commonly like to learn new things, take on new challenges. Making
rotations a part of your culture will reinforce building a more responsive and adaptable workforce.
Training – as discussed earlier
Compensation – There are many sources of information to benchmark compensation levels and
methods. Compensation should be considered a very important element of JITR as it relates to
impacts on recruiting and retention.
Sources of labor – this highly complex topic could drive a book all on its own. For work that is
typically more static e.g. less travel required, common low cost sites today are India, S. America,
China and the Philippines. More and more, companies are finding that mobility of people from these
sites is more affordable and possible. This opens up the use of offshore/near shore resources to less
static work such as systems integration projects.
Peak-load Workforce Strategy and Planning:
The peaks and valleys of resource demands can make the process of maintaining a consistent level of fulltime resources difficult. Hiring and firing people with every change in your resource demand profile is not
workable, particularly from an employee morale point of view. Therefore establishment of a temporary pool
of resources will help smooth the peak-load demands of your business. Determination of the size of the
temporary pool should be made using historical and forecasted data. Typically modeling a particular level as
a starting point is helpful. A PSA system is particularly helpful in identifying opportunities for peak load
needs.
Packaged Services/Solutions:
The whole topic of packaged services and its potential impact on resource management is more than can be
covered adequately in this white paper. Key points to be made are that packaged services a) improve the
predictability of resource skill needs since a forecast exists/should exist for sale of these services, b)
improve the accuracy of resource forecasts since the base skills needs for a particular packaged service is
known in advance.
Centralized Resource Planning:
Certainly less of an issue for the smaller enterprise, centralized resource planning is essential for the
medium to large enterprise aiming for effective JITR. Particularly in situations where the resource pool is
shared across organizational boundaries, the establishment of a Resource Management Office (RMO) can
help play a neutral role and break down any fiefdoms that may exist in the enterprise. Typical functions for
centralized resource planning include resource planning, project staffing, and corporate JITR process
development and governance.
Professional Services Automation (PSA) Systems:
Surprisingly, some PS firms today manage their resource pool either without the help of automation, or with
simple tools generally not up to the task of today’s business needs. Considering the impact of just a few
points of utilization of a typical labor pool, justification of investment to automate this important task is
usually easy. Resource management software (also commonly part of or referred to as PSA software) exists
to create a data base of resource pool information, enter and track project needs and progress, and produce
reports/queries capable of reducing determination of project staffing needs by up to 90% (a human element
is still needed to finalize resource selections).
A summary of foundational elements is provided below:
Figure 2: Foundational Elements
Process and Methods for Management of the Resource Pool
With the foundational elements in place, executing to forecasted need is where the rubber really meets the
road. Key process and methods for effective JITR are:
Start by hiring and assigning only the very best project managers. Pick the right people for this job
and everything else gets easier.
Find the best balance of cost and skills to staff projects – Every customer wants the “A” players on
their project. The art to staffing a project is to find the right balance of cost, skills, and project
management. Sometimes resource availability will dictate use of labor from higher cost pools than
desired, or vice versa. Re-balancing the base of skills is a constant exercise requiring continuous
discipline and process improvement. Making these choices requires that the PS organization look at
its gross margin performance over a range of projects to accommodate these inevitable resource
imbalances. No two identical projects will produce the same profit, but on the average, achievement
of a target gross margin should and can be the desired outcome. Let your PSA system do the heavy
lifting for determining project staffing alternatives.
Don’t become hostage to expert shortages – Every company has them, but few are effective at
solving for these shortages in a systematic way. Your PSA system should be used to identify where
specific skills needs will be and when. If your resources are not centrally located, as few are any
more, providing the needed level of specialization in each region or geography becomes even more
challenging. A proven approach is to create Centers of Excellence in certain skills or service
offerings where depth of resource and thought leadership is needed. The centers should be
dispersed across your geographic regions. Ambassadors of each center are geographically located,
and act as a virtual member of their particular center of excellence to maintain proficiency and
provide regional input on marketplace activities and needs. Regional skills needs are calibrated to
forecasted needs and ongoing rebalancing of specific skills is performed to optimize resource
location and utilization. Where peak-load depth is needed, people travel or are temporarily relocated
as virtual teams form to service a particular project.
Replenish the bench – As you consume resources from the bench, begin to backfill them with
resources your forecasting system tells you are needed in the future. Avoid the temptation to 'save'
money by vacating the bench. If your forecasting is done correctly, managing the bench investment
as part of the overall cost of delivery can be easily manageable.
Require weekly (or daily is even better) reporting of time on projects. This builds the necessary data
to feed a JITR system. Your PSA system will be infinitely more valuable to your company if project
data is kept current. With near real time project start and stop information, higher utilization will
result.
Organizational considerations for the mid to large enterprise – establishing the "resource pool" –
breaking down the fiefdoms – this is probably the toughest issue most enterprises will tackle.
Failure to do this part well will mean the difference between success and failure. The need is to
adopt shared resource pools for services, much in the same way companies have done for other
more commonly shared services such as finance, human resources, and legal. There are three
important rules to establishment of a shared PS resource pool:
1.
No particular department "owns" the resource. The resources are recommended for a
particular project by the RMO. The team responsible for execution of the project makes the
final choices of the team, considering tradeoffs of other client and company needs.
2.
A suitable personnel management system must be put in place to make clear to each
employee who is managing their career, setting goals, doing evaluation, recommending
merit pay and promotions, etc.
3.
Senior management must proactively and visibly support the governance necessary for this
model to work.
Measuring Success
Measuring effective execution of your resource management processes will provide valuable feedback for
continuous improvement and monitoring. Some key measures include:
Utilization – There are three important elements to measuring utilization. 1) How will I measure
utilization to include giving proper consideration to training requirements, vacation/illness time,
internal meetings and staff work? 2) How will I record utilization? Time reporting will require some
form of simple and convenient method to capture project work, preferably daily, to drive accurate
utilization data and timely client billing. 3) What utilization targets will I set and will my targets vary
by job type and skill? Utilization targets should be set with an educated view of the marketplace,
and what will be competitive using some industry benchmark(s) for comparison.
Overtime – Measuring overtime is critical in two important ways. 1) It ensures a balance of
workload, critical to maintaining employee morale and preventing “burnout”, particularly for highest
performing employees who are typically most in demand. 2) Helps manage yield/gross margin on
projects. Planning for some level of overtime is common as a way to improve profitability where
exempt employees are doing the work.
Cost/time to hire/train – Tracking on-boarding time and costs, particularly for rapidly growing
enterprises is important. This critical measure helps drive resource planning (how far in advance do
I need to hire to ensure just in time project delivery?) and financial performance.
Cost per full time employee (fte) – Just as a manufacturer would strive each year to reduce unit
costs, well run PS firms will view labor cost management in the same way. With cost of living
driving wages higher each year, and benefits costs accelerating, a constant effort to find and build
lower cost labor pools is critical.
Training time – Key to maintaining high morale (and consequently lower employee turnover making
your JITR job easier) is an effective training program for employees. Training effectiveness is a
whole subject of its own, but important for JITR is for the enterprise to create a means to offer,
promote, and measure investments in training.
Managing the Demand Forecast for Just-in-Time Resourcing
- by Randy Mysliviec, President RTM Consulting
Introduction
Roughly thirty years ago the manufacturing industry embarked on a journey to transform itself from a
carryover of the industrial revolution to more efficient ways of creating products using modern technology.
This included the introduction of robotic gear to replace manual labor tasks with technology that could
perform the same work at a lower cost, and with higher and more predictable quality. The industry also
began to understand that it needed to find ways to eliminate the cost associated with idle inventory, and
lower lost opportunity costs due to short supply of parts when a peak in demand occurred. This was the
beginning of what became known as just-in-time manufacturing, whereby parts are predictably supplied at
precisely the time needed and timed to always changing demand forecasts.
The consulting and Professional Services industry remarkably finds itself in a similar state as the
manufacturing industry was in thirty years ago. Simply said, processes, methods and tools have failed to
keep pace with the large disruptions in traditional labor sourcing and management methods. Off-shoring,
near-shoring, globalization, price pressures, increasing competition – all things we read about and deal with
every day have changed the way we manage labor. Unfortunately too many companies have responded with
stop gap and tactical measures, in many cases compounding the problem or delaying the inevitable need for
real process change.
The Business Imperative for Just-in-Time Resourcing
Over the next decade growing competition and marketplace change will continue putting unprecedented
pressure on service providers to rapidly adapt and innovate in every facet of service delivery. Effectively and
efficiently sourcing and managing resources will be the new high water mark for the industry. Similar to how
manufacturers learned through advanced inventory planning techniques to have the right parts available at
just the right time, services providers are now challenged to provide the right resources at the right place at
the right time – Just-in-Time Resourcing.
Interestingly, most professional services providers today struggling with utilization problems and resulting
high labor cost, have reacted by pushing labor off-shore to lower average hourly labor costs. While offshoring is certainly a desirable and necessary part of the strategic labor equation, implementing better
demand forecasting techniques is necessary to address the strategic need for sustainable business
transformation.
Analogous to targeting near zero inventory for a manufacturer, professional services providers should target
constant full billable utilization of on-board resources. Table 1 illustrates the economic value of efficient
management of utilization.
Table 1
Since idle resources are a sunk cost, the revenue amounts in Table 1 drop straight to the bottom line as
profit.
Objectives of Effective Demand Forecasting
The outcome of demand resourcing for Professional Services affects many stakeholders throughout the
enterprise. Finance wants to forecast expected results to satisfy lenders, shareholders, and for public
companies SEC rules as appropriate. Delivery teams need the right information to ramp up or down in
anticipation of meeting delivery schedules. Sales teams want on-time quality implementations resulting in
happy customers. HR needs to know if they are expected to be recruiting and if so, what skills are needed
and when. And so on.
Therefore some key objectives for effective demand forecasting include:
Financials
o Enable accurate financial planning
o Achieve sustained high utilization
Revenue
o Identify sales trends
o Avoid missed or lost opportunities resulting from resource shortages
Capacity Management
o Alignment of the hiring plan (quantity)
o Enable skills planning (content and quality)
Delivery
o On-time and on-budget
o Consistently high quality
Key Benefits of Effective Demand Forecasting
Effective demand forecasting:
Enables a more predictive (vs. reactive) management system
Supports a Just-in-Time Resourcing system
Lowers costs
Creates more satisfied customers and employees and,
Leads to more revenue and profit!
The Fundamentals of Effective Demand Forecasting
There are essentially five steps to the demand forecasting lifecycle:
Figure A
Before reviewing each of the lifecycle steps, a solid understanding of key challenges you will likely
encounter, along with other key considerations will help prepare you for successful implementation. There
are five common reasons companies fail at executing the forecasting cycle effectively. They are:
1.
2.
3.
4.
5.
Lack of internal functional alignment (divergent expectations).
Lack of Professional Services Automation (PSA) tools – reality is that many companies still use
spreadsheets or outdated software to manage what is in many cases their most expensive asset.
Weak or no senior management commitment to the forecast process – without top level support it is
difficult to garner sufficient attention to a critical need.
Poor management accountability to the result – typical default is to blame the Delivery team when
there is a mismatch of need to supply of resources.
Lack of proper risk management techniques.
Therefore, as you prepare to transform your forecasting capabilities, it is prudent to ask some important
questions:
How good have we been at this historically? A comparison of past quality of forecasts should
provide a realistic basis for judging future performance.
What is the state of PS Automation in our company? A good PSA tool is absolutely essential
for effective resource forecasting and planning.
What is the current state of forecasting processes (including Senior Management
support) in our company? Building effective processes that uniquely fit your organizational
structure will take time, collaboration, and effort.
Gaining this critical understanding of your baseline in all respects will help you lay the foundation with a plan
to implement a forecasting system that will enable true Just-in-Time Resourcing.
The Demand Forecast Lifecycle
Step 1 – The Sales Forecast
The Sales team begins by providing a sales forecast typically in terms of revenue, with project or solution
descriptions and associated timing. The Delivery team helps translate sales revenues and project needs into
expected resource and skills necessary to accomplish the task. This translation is normally done as part of
the on-going business capture process. The preferred form of the forecast is from a sales force automation
(SFA) tool. If you don't have an SFA tool, get one. It will save time, money, and prove essential to making
this process work. There are many capable and affordable tools available today, some for installation on
your desktop or corporate IT systems, and some offered as a service (SaaS – Software as a Service). The
better Professional Services Automation (PSA) tools have pre-integrated the more popular SFA tools with
their other functions to alleviate redundant data entry and improve accuracy.
As discussed earlier, Senior Management should expect reasonable effort be made to produce an accurate
forecast (understanding that all forecasts are still only estimates). The Sales team should 'own' the forecast
and be accountable for its timely development and accuracy. Best practice in this area includes measuring
ongoing forecast accuracy with a forecast accuracy measure or index. When you add the element of a
measure, people pay attention to the input and the result inevitably improves.
A best practice for risk management in forecasting is to use weighted probabilities for each opportunity,
using some preset threshold for determining what deals get included in the forecast.
The overall form and fields of information collected and reported each forecasting period should be a
collaborative effort between the key stakeholders, normally Sales, Delivery, Finance and Human Resources.
Step 2 – The Functional Interlock
On some predetermined and agreed intervals, the key stakeholders should meet and review the forecast.
The primary purpose of these meetings is to get interlock on the go-forward forecast. Since hiring, firing,
recruiting, training, and other expenditures and investments are decided at these meetings, this is a critical
step where real financial and human resource decisions are made. Best practice is that key stakeholders will
have worked relevant issues prior to the standing meeting, using the forum to finalize and document
decisions upon which action will be taken.
An example of a functional interlock document might look as follows:
Table 2
The example used is somewhat oversimplified, but illustrates the aggregation of new and existing
opportunities, with probabilities applied to incorporate some risk management. The better PSA tools today
provide lots of functionality to support the functional interlock process with improved accuracy and
efficiency.
Once a decision is made, results and agreed actions are documented and disseminated to key stakeholders
and we move to the next step of the process.
Step 3 – Project Planning
There are many aspects of project planning necessary for effectively delivering projects on-time and onbudget. This article deals with elements of project planning specific to demand forecasting.
Project planning is a function screaming out for automation. Let your PSA tool or other project management
system do the heavy lifting for you. Just as a manufacturer uses a material requirements planning (MRP)
system to multiply forecasted demand by the required parts for each forecasted product to manufacture, PS
providers let their PSA tools take input on demand and skills requirements to produce an analysis indicating
resource requirements to meet a particular forecast or project.
A few important things you will want to do and watch out for. First, PSA tools do a great job of mundane and
tedious calculations, but the output still needs review by someone knowledgeable of the data to ensure
reasonableness of the output. Second, we all know in every business that Sales people have their favorite
delivery people. Sales people all want to have the 'experts' on their project. The 'my favorites' syndrome
and JITR do not mix. It is important that resourcing decisions be made primarily on skills needs, not on
personalities. We all know there may be times when personalities do come into play, however, it should not
dominate every resourcing decision. Last, even in the best run organizations, there will always be times that
you must decide between two different projects due to unplanned resource constraints. Every organization
should have a prioritization methodology to determine which project wins in a push, to remove emotion
from the equation (as best you can) and make better fact based decisions.
Always remember you will never be 100% right, but largely on track is a big win and an improvement for
most organizations. The goal is to have the right person in the right place at the right time – Just-in-Time
Resourcing.
Step 4 – Hiring and Training
This step could be a topic all on its own. Just as resource planning processes have failed to keep pace with
the times, traditional hiring and recruiting processes for many firms will not fully support a JITR system. The
bottom line is that your hiring and recruiting methods need to be able to deliver the right quantity of the
right skills at the right time. Recruiting firms and web-boards may continue to be helpful, but will not
provide for the near real-time recruiting capability needed to drive a JITR system. In a future article we will
deal with how to change hiring and training methods to support a JITR. There are some important
forecasting implications to keep in mind at this point:
Keep HR involved in all aspects of JITR process.
Track, analyze, and fully understand the levers necessary to minimize time required for on-boarding
and training, and build plans to improve them.
Be sure on-boarding and training time is factored into your resource planning calculations.
Know where you will source people that your internal recruitment efforts are unable to fulfill – e.g.
contractors or partners.
Step 5 – Project Start/Stop
This step is another topic that could be the subject of a separate article. From a forecasting perspective, it is
essential to know the precise status, in as close to real-time as possible, of all in-flight projects as you plan
for new ones. Your PSA tool will prove invaluable for this part of the resource planning process. A couple of
key points here will be helpful in the forecasting process:
The personnel working the in-flight projects must own the timeliness and accuracy of the data input,
and therefore measuring timeliness of billable time recording is a best practice.
The data should be input no less than every week, preferably daily to help you achieve near realtime information on project status.
The requirements outlined above seem like a big task for many firms, but in reality require only a few
minutes a day per employee, while providing information worth far more collectively for the organization.
Measuring Success
There are both quantitative and qualitative methods for measuring success of your resource forecasting
process. Quantitatively, start by establishing your baseline and measure improvements in the following:
Utilization – Look for results that meet or exceed industry norms, and equally important look for
consistency – does utilization go up and stay up? Effective process change will produce consistently
improved results.
On-time delivery performance – While there are many factors that influence timely delivery,
certainly having the right resources available at the right time and place makes a difference. Look
for improvements and consistency of schedule performance.
Cost performance – While there are many factors that influence project costs, certainly having the
right resources available at the right time and place makes a difference. Look for improvements and
consistency of cost performance.
Client and Sales team satisfaction – If you measure client and sales satisfaction, these
measures can be important barometers of the positive impact of effective JITR systems.
Qualitatively, there are many ways to measure success. Each organization will find methods suitable to their
needs. Some common ones include looking for a decline in fire drill inquiries from the CFO or finance team,
resulting from improved forecasting accuracy; or a change in the role of a typical PS manager morphing
from a reactionary role to a more predictive (and enjoyable) one. Your clients will notice the difference, and
comments internally or externally will become more positive and supportive.
Closing Comments
JITR is a major shift in the way Professional Services companies will manage in the future. The benefits of
effective JITR execution can be substantial, and as more and more technology companies expand their
solutions portfolios, the need for effective resource planning will continue to grow. This article deals with
how to plan for how much of the right resource and skills you need to support an ever changing forecast of
demand. In the next article, we will deal with how to manage the resource pool to support a JITR system.
The Professional Services Business Model - Fighting the 40/20 Myth
- by Thomas E. Lah, author of Mastering Professional Services
Many Professional Services Organizations focus on increasing bill rates, increasing utilization, and reducing
load costs to meet profitability targets. While it's important to track such metrics, oftentimes, the senior
management team has not yet defined a target business model for their Professional Services team. The
lack of a clearly defined business model can lead to poor decisions.
Business Model Definition
In a previous article, The Professional Services Charter - Beyond Financial Targets, I argued that a clear and
prioritized charter is critical for the long-term success of the Professional Services organization. However, a
clear charter is only half of the battle when it comes to setting revenue objectives for the services function.
The executive management team must also discuss and document the financial business model for services.
Of course, this financial model should be 100% aligned with the charter.
When people think of the term “business model”, several items come to mind:
Target Markets
Target Customers
Product Offerings
Distribution Channels
Margins
Profits
A sound business model considers all of these items. In essence, a business model demonstrates how a
company will manage all of these parameters to grow and make money on a sustainable basis. If you don’t
have a business model that eventually makes money, you don’t have a sustainable business model.
A financial business model reflects the realities of your overall business model. Ideally, a financial business
model accurately defines the costs, investments, and profits required for the business to succeed long term.
The financial business model should be realistic and sustainable. A successful model allocates the
appropriate amount of investment in sales, research, and administration to achieve market success and hit
target profitability.
A financial business model is not simply a financial report. A financial report summarizes anticipated
revenues and expenses to show profitability. You could have extremely accurate financial reporting but have
no idea what your target financial business model should be.
A sample financial business model is shown in Table 1.
Table 1: Sample Financial Business Model
Category
Common
Abbreviation
Revenue
Description
Total revenues expected to the company from
services.
Target
100%
Cost of
COS
Services Sold
Cost of materials and human resources required
to deliver the services to customers.
70%
Gross Margin GM
The difference between what customers paid for
the services and what it cost the company to
deliver those services.
30%
The total cost of all selling efforts. Includes
salaries, expense accounts, and commissions for
sales management, sales people and sales
support.
5%
The general expenses not captured in COS, sales,
marketing or R&D.
8%
Sales Costs
General &
G&A
Administration
Costs
Research &
Development R&D
Costs
Marketing
Investments mad to improve service
methodologies and delivery tools.
2%
Investments made to market the service
portfolio.
2%
The profit generated by services. Also known as
the operating margin. Operation Profit= Revenue
- COS - Sales Cost - G&A - R&D - Marketing
Operating
Profit
13%
The example financial business model in Table 1 shows that the management team of this business believes
at least 4% of revenues needs to be invested into marketing and R&D to sustain the business. If these
investments are not made, future revenues and margins could be compromised.
Business Model Examples
Before you attempt to document a viable financial business model for your services business, it is helpful to
understand what models already exist in the marketplace. Let us begin this review by looking at Accenture
Consulting. Accenture is a global consulting firm with over 75,000 employees in 47 countries. They perform
the type of high-end technology and business consulting that many companies wish they could deliver.
Table 2 shows the financial results for Accenture in 1998 and 20021.
Table 2: Accenture Financial Results
Accenture 1998
Revenue
$9,511
100%
COGs
$5,996
63%
GM
Sales & Marketing
Accenture 2002
$13,105
$8,428
37%
$696
Sample Business
Model
100%
100%
64%
63%
36%
37%
7%
$1,566
12%
8%
R&D
2%
G&A
$1,036
11%
$1,616
12%
8%
Operating Income
$1,783
19%
$1,385
11%
19%
In the far right hand column, I have reverse engineered a financial business model Accenture could be
using. Accenture targets services that will bring in decent gross margins. However, they need to invest
heavily in sales and marketing to maintain their brand and land large engagements. I make the assumption
that some of Accenture’s G&A expenditures are actually R&D dollars invested in delivery methodologies.
A second sample model to review is that of IBM, a stellar example of PS within a product company. Table 3
shows IBM Global Services results for 19982 and 2003. In 2003, IBM Global services represented 48% of
total company revenues. What is amazing is how significantly different the IBM services business model
appears to be from Accenture’s. IBM only brings in an average gross margin of 26% on the service business.
After the COS, I had to allocate G&A and Sales costs to the services business based on the percentage of
total revenues services represented.
Table 3: IBM Service Revenues
IBM 1998
IBM 2003
Sample Business
Model
Service Revenue
$28,916
100%
$42,635
100%
100%
COGs
$21,125
73%
$31,803
75%
73%
GM
Selling, G&A
27%
$3,470
12%
$5,116
25%
26%
12%
12%
R&D
2%
Marketing
4%
Operating Income
$1,959
7%
$4,263
10%
8%
Even with the gross assumptions I am making, the sample business model I have reverse engineered in the
far right column of Table 3 is significantly different than the one Accenture is possibly operating under.
Finally, let’s consider the point where most product companies are starting from: a Support Services
financial model. A traditional support services business often commands fat margins with minimal
investment in sales and marketing. This is due to the fact that support services are a natural attachment to
the product sales cycle. Table 4 summarizes a sample financial business model for a traditional support
services business.
Table 4: Support Services Financial Business Model
Support Services at a Product
Company
Service Revenues
100%
COS
50%
GM
50%
G&A
8%
Selling
5%
R&D
2%
Marketing
2%
Operating Income
33%
The 40/20 Myth
So there are three sample financial business models for services organizations. It is important to notice how
wide the variations are, with gross margins ranging from 50% to 26% and operating profits ranging from
8% to 33%.
When I first work with organizations on their PS strategy, the senior management team has a common
assumption 80% of the time: PS is a fat business. How fat? Executives consistently tell me they are looking
for gross margins around 40% and operating profits around 20%. What are these expectations based on? It
is unclear. Do you currently get 40/20 from your PS business? No. Have you historically achieved 40/20
from your PS business? No. Do you have hard data that other companies are sustaining 40/20? No. Then
where do these expectations come from?
Industry Results
I believe this 40/20 myth is a function of how companies currently report their service revenues. Recently, I
reviewed the 10-Q’s of 30 publicly traded companies. Ninety-seven percent of them blend support services
revenues with professional service revenues. Figure 1 documents the gross margin these companies report
for “services”. Oracle is the one company on the list that explicitly reports the gross margin for their
consulting services. As you can see, this gross margin is significantly lower than the blended numbers.
Interestingly enough, the average gross margin reported on services for these thirty companies is 41.2%.
This represents the forty of the 40/20 myth. Unfortunately, 97% of these companies are not reporting the
operating profit achieved by their PS business. So it is very unclear where the twenty portion of the myth is
coming from. My assumption is that executives look at the results of independent consulting firms like
Accenture, see the high operating profit as shown in Table 2, and assume that should be the target for their
PS business.
Mix Matters
Another insight provided by Figure 1 is the impact of service revenue mix. Six of the listed companies do
break out how much top line revenue is coming from support services vs. professional services. This data
supports my premise that a mature service revenue mix with lots of PS drives down the blended gross
margin.
Figure 1: Service Gross Margin %
To prove the point, Figure 2 documents the revenue mix for Novell services. As shown, the mix is heavily
weighted in support services. This helps Novell report an overall service gross margin of a healthy 52%!
Figure 2: Novell Service Mix
Unisys, however, has a very mature service revenue mix which includes professional, outsourced, and
managed services as shown in Figure 3. Revenue from support services represents less than 15% of total
service revenues. This reality drives the blended service gross margins for Unisys down to 21%. In
summary, Professional Services activities appear to drag down total service gross margins. This
substantiates the premise that PS is not a 40/20 business. But what does the business model look like?
Figure 3: Unisys Revenue Mix
Setting the Boundaries
We have reviewed example business models for service organizations. I have made the argument that
Professional Services is not likely the 40/20 business many executives feel it should be. Now, for the million
dollar question - what does a sustainable business model look like for professional services?
First, we should discuss the individual line items of the financial business model. Table 5 provides target
boundaries for each line item. The table also provides rationale for the boundaries.
Table 5: PS Line Items
Line Item
Gross Margin
Recommended
Boundaries
15% < Target < 40%
Rationale
If less than 15%, PS can not sustain itself. No
money left to invest.
Difficult to consistently exceed 40% when
asked to pull products or invest in critical
company accounts.
If less than 5%, required infrastructure for PS
is not created and maintained.
G&A
5% < Target < 8%
Sales
5% < Target < 8%
If less than 5%, service capabilities are not
aggressively being sold to customers and
channels.
R&D
2% < Target < 5%
If less than 2%, intellectual property is not
being documented and leveraged to improve
profitability.
2% < Target < 5%
If less than 2%, service portfolio is not being
positioned to the marketplace. Sales
representatives are forced to do general
awareness and initial demand generation.
Marketing
Operating Profit
Greater than 8% is a sign critical operational
processes are not defined or are not being
followed.
Within this range, PS is being asked to carry its
own water. However, the organization is not
being tasked to sustain unachievable profits.
5% < Target < 12%
With these boundaries in mind, what overall financial model is realistic for the professional services
organization at your company? Table 6 provides a range of possible values for the key financial variables
that need to be set.
If you create a business model with values from the left side of the table, you risk setting financial
objectives that cannot be sustained by PS. For example, having a gross margin target of 50% will be difficult
for the professional services organization to maintain. On the other hand, setting the financial business
model with values from the right side of the table will make it difficult to keep the services organization
alive. If Services continually brings in low gross margins, no investment is made in sales, marketing, or
R&D, and operating profits are non-existent, then senior management may have little patience for the
business. Even if services are considered a strategic investment, a business model weighted toward the right
will be difficult to maintain. There is not enough investment in the business to help it grow. The anemic
return will eventually make it unpalatable.
Table 6: PS Business Models
Can Not
Maintain
Can Not Sustain
GM
55%
50%
45%
40%
35%
30%
25%
20%
15%
10%
G&A
13%
12%
11%
10%
9%
8%
7%
6%
6%
6%
Selling
10%
9%
8%
7%
6%
5%
4%
3%
3%
3%
R&D
8%
7%
6%
5%
4%
3%
2%
2%
0%
0%
Marketing
8%
7%
6%
5%
4%
3%
2%
2%
0%
0%
Operating
Income
16%
15%
14%
13%
12%
11%
10%
7%
6%
1%
Using the range table for guidance, the management team should be able to draft a viable target financial
model for the services organization. The key point here is alignment. The target financial business model
should be aligned with the charter thatwas created for the professional services organization. Looking at
Table 6 again, we can see that financial targets from the middle to the left supports a service charter that is
focused on revenue, margins, and profits. However, if a services organization has a charter of product sales
enablement, the financial targets from the center to the right will make much more sense.
Stake Your Ground
Defining a sustainable business model is a critical step for any business. This reality applies to the
professional service business. However, senior managers often focus on bill rates and utilization targets,
without ever stepping back to identify what financial business model makes sense for PS. This lack of
abstraction is denying PS required investment and crippling the function long term. If the management team
does want to create a business model, they often start with the incorrect assumptions that PS will maintain
significant margins (40% or higher) and require minimal investment. This behavior must stop if PS is to
flourish as a function.
To move the conversation in the right direction, I believe a management team can take these four important
steps:
1.
2.
3.
4.
Acknowledge that operating a business function with no defined business model handicaps the
function.
Based on actual financial data, reverse engineer the financial business model PS is currently
operating under.
Understand what the PS business model truly looks like in your industry today.
Determine how PS will move the current business model to a sustainable one that makes sense for
your industry.
If a senior management team takes these four steps, they will dramatically improve the ability of PS to
succeed long term. If the business model remains undefined, PS management will continue to focus all their
energies on pushing staff to bill more hours at higher rates-until those employees bail in frustration.
The Positioning Pentagon
- by Thomas E. Lah, author of Mastering Professional Services
Service positioning is a component of effective demand generation. Over the past four years, I have had the
opportunity to review the service positioning of many companies. Regardless of company size or target
industry, technical professional services organizations position their services pretty consistently: “We have
really smart people, that are a joy to work with, and, if you engage us, we will save you money.”
This “me-too”, generic positioning is extremely ineffective in motivating potential customers to engage your
professional services organization over the host of others knocking on the door. When I point this deficiency
out, managers agree their service positioning has always been an afterthought. However, they are not sure
how to fix their approach. Positioning and differentiating services is a mushy, grey experience. This article
introduces a clear framework a management team can use to create effective service positioning that
motivates clients to purchase the company’s services.
Why You Win
The objective of service positioning is very simple: motivate potential customers to become actual
customers. How does this happen?
Seasoned service professionals will tell you the following items ultimately determine if you win a service
engagement:
1.
2.
3.
Superior relationships;
Solid references;
Great consultants.
Apparently marketing and positioning have very little to do with the final choice! I agree, positioning carries
little influence during the endgame. However, effective positioning is critical to starting the game. The
reasons you lose service business are not the exact opposite of why you win that business.
How many times has your company pitched a perfect potential customer—only to see that customer refuse
to act? You know the potential customer would benefit from your service, but they do not bring you in. Why?
Pretium Partners 1 is a firm that focuses on training product sales representatives to sell services. During
training, Pretium emphasizes how critical it is to overcome three hurdles if you expect to close a service
deal: risk, indifference, and price. Pretium instructs their trainees that if they do not address these areas,
their potential service deal will die.
Risk
The most common reason a potential service customer does not become an actual service customer centers
on risk. Why is a senior manager looking for relationship, references, and quality consultants before signing
on the dotted line? Because all of these help minimize the risk of selecting your firm. If this is a new solution
with a new customer, you must get creative. If you do not reduce the perceived risk to an acceptable level,
the customer will remain indifferent.
Reward
The second most common reason a customer does not try a service centers on how tangible the potential
rewards are. Yes, it seems so obvious to you how the customer would benefit from your services. If you
cannot articulate and substantiate the potential value of your services, however, the customer will remain
indifferent.
Figure 1: Proposal Strike Zone summarizes this concept of risk and reward overcoming indifference.
When motivating a customer to engage your company, your service positioning must move the customer
into the proposal strike zone. Positioning that minimizes perceived risks and maximizes perceived rewards
helps accomplish this.
Figure 1: Proposal Strike Zone
Overview of the Positioning PentagonTM
Based on what we now understand about the service-selection process, I believe there are at least five
elements that influence service positioning:
1.
Service Attributes: Every product or service is positioned around something. That something could
be anything from cost savings to how cool the customer will be if it uses your cutting-edge firm. The
something you choose to position around is called the service attribute. I will define service
attributes in more detail, but for now, let’s simply acknowledge that to effectively position your
service offering, you must understand what you want to position around.
2.
Competitor’s Positioning: To differentiate your positioning, you should understand how your
competitor’s is positioned. If you do not understand what your competition is focusing on, it is very
difficult to claim your positioning is differentiated.
3.
Current Positioning: Very few of us are starting this positioning exercise with a brand new startup
and a blank canvas. Your company and its products already stand for something. What is that
something?
4.
Benefits: What are the benefits of the service offering you want to position? Benefits can be much
more than simply cost savings. Service benefits can include reduced risk, higher customer
satisfaction, or reduced time to market.
5.
Customer Validation: Even though you have defined a set of benefits your service can deliver, can
you demonstrate that the benefits are actually delivered? Do your customers actually receive the
benefits you promote?
These five elements are summarized in Figure 2: The Positioning Pentagon. Each point in the pentagon
influences the positioning of your service offerings. The clearer your understanding of each variable, the
more effective your service positioning.
Figure 2: The Positioning PentagonTM
Service Attributes
Before we use the positioning pentagon, I need to better define the concept of service attributes. In
Marketing Professional Services, Philip Kotler inventories a list of items a service firm can choose to
differentiate around. Example items include location, price, and industry knowledge. Each one of Kotler’s
items is a potential attribute of your service positioning. Kotler emphasizes how subtle service attributes can
be. Because services are a personal experience in which product delivered and the deliveree cannot be
separated, simple items like the dress code of your consultants become potential service attributes. Table
1: Example Service Attributes provides a list of items that could be used to differentiate and position a
service offering.
Table 1: Example Service Attributes
Attribute Categories
The challenge with service attributes is to choose which ones to focus on. To facilitate this selection process,
I strongly recommend you group all of the potential service attributes into three main categories identified in
Table 2: Main Attribute Categories.
Table 2: Main Attribute Categories
Table 3: Specific Attributes - Categorized plots several potential service attributes into these three main
categories.
Table 3: Specific Attributes - Categorized
Qualifying Attributes
Even by simplifying potential service attributes into three main categories, there is still the challenge of
determining what category (or categories) you should position around. This is not an easy decision.
However, when reviewing potential service attributes you might focus on, consider the characteristics of a
strong attribute as defined by Kotler:
Important: The attribute that is important to your target customers. If your customers do not care
that all of your project managers are PMI certified, then don’t make that a positioning point.
Distinctive: The attribute that is unique to your company. For service organizations within product
companies, this often centers on their unique access to internal technical information.
Superior: The attribute that your company delivers better than your competitors.
Tangible: The attribute that can be quantified in some way. How does this attribute of yours result
in real dollar savings or faster delivery for the client?
Affordable: Your target audience can afford your services.
Profitable: This attribute is not cost prohibitive for the customer. In other words, the benefit to your
customer of taking advantage of this differentiator does not exceed its cost to maintain it.
Believable: The attribute is aligned with the product brand positioning. If your product is positioned
as the low-cost choice, why would you try to build an elite and expensive consulting staff?
With a working understanding of what service attributes are and what makes them useful, we can move
onto the actual process of creating effective service positioning.
The Positioning Process
The Starting Point
The starting point of any positioning process is to have something to position around. This is where most
service marketing managers hit the wall. You have a brand new service offering that the PS team wants to
take out the door. At this point, you have the following items:
1.
2.
3.
Service Name: A working title for the service. Not necessarily very sexy at this point, but you have
to give it a name so people can refer to it without reaching for a descriptive title.
Service Description: A paragraph or two that describes what the service is.
Service Benefits: The benefits that a customer will get from the service. At this point these benefits
can be located on a spectrum going from documented and validated across to hopeful speculation.
It is likely that they are educated speculation at this point.
Note: These three items do not constitute service positioning. If you can enunciate these three items, it
means you have a service that now needs to be positioned into the marketplace. This is where the real fun
begins.
Important Service Attributes
The first step in effective service positioning is to understand what is important to your customers! This
understanding comes from determining which service attributes are actually important to your potential
customers.
Let’s work through an example. Say you want to offer a new service to consolidate computer storage
infrastructure. Storage consolidation saves money—the obvious benefit of such a service. There are several
ways you might position and differentiate your consolidation offering. Referring back to Table 3, you could
chose to position around a multitude of attributes. Table 4 provides an example of all the ways you could
position your storage consolidation service.
Table 4: Positioning Storage Consolidation
Here is the puzzle at hand: Which attributes should you position the storage consolidation service around?
Expertise-based attributes? Experience? Expense? The answer should be driven by which attributes are
important to potential service customers. If you sell high-end storage products to Fortune 500 companies
with mission-critical data needs, expense might not be the overriding concern. Yes, these customers want to
save money by consolidating their storage environment, but not at the expense of data availability. Perhaps
“expertise” or “experience” are more critical attributes to these customers.
The point is simple: Find out which attributes matter to your potential customers. Once you understand this,
you can continue the positioning process.
Shotgun Positioning
I must address the most common error I see in service positioning: shotgun positioning. This occurs when
the service marketing manager really has no idea which service attributes are most important to target
customers. To compensate for this lack of knowledge, the marketing manager “covers all the bases” by
positioning around multiple attributes. There are a number of problems caused by this approach.
First of all, you confuse your customers. What are you really good at? Secondly, it is difficult to differentiate
yourself from competitors if you are promising to provide everything they do—only more of it. Finally, and
most important, every service attribute you add to your positioning adds effort. Why? Because it takes effort
to convince customers that your claim to that attribute is warranted. Because you must validate your service
attributes with customer testimonials, project data, etc., the more things you say you can do, the more
things you have to prove you can do.
Mike Moser has a great picture of this reality. In his book, United We Brand 2, he presents a “positioning
bull’s-eye diagram.” Basically, Mr. Moser argues that the more a company drifts from its core positioning,
the more marketing effort is required to make that positioning stick. In our terms, for every service attribute
you add to your positioning, the further you move away from the positioning bull’s-eye. The further you
move from the bull’s-eye, the more your message gets diluted. Think laser, not shotgun.
Not a Linear Process
The reason I created a model titled “the positioning pentagon” and not “the five steps of positioning” is to
recognize that a linear positioning process—going step by step—is not always possible. You may go to
market having only knowing two or three of the positioning variables. Perhaps you know what attributes
customers care about and you have a list of theoretical service benefits. However, you need to complete
some actual engagements to validate service benefits. That is why the picture is a pentagon. All five points
influence the center. The more you know about the five points, the stronger the positioning will be. The less
you know, the weaker. The objective of a service marketing manager should be to continue to mature the
positioning pentagon for all key service offerings. It is a never-ending exercise in continuing improvement. If
you thought you simply launched and were done, you were wrong.
Positioning, Branding and Marketing
When managers start talking marketing, the world quickly turns grey. Right before your eyes, concepts and
issues that seemed crisp and clear fade and grow fuzzy.
“We need to differentiate our positioning!”
“How is our brand positioned?”
“Brand is everything!”
“What type of brand equity do we have?”
“Our marketing has got to be on target.”
“Is our brand differentiated in our target markets?”
Welcome to marketing speak—where a simple word like “positioning” can have multiple meanings based on
context. To keep things simple, I want to clearly define the concepts of “positioning,” “branding,” and
“marketing.”
Positioning describes how you differentiate your service offerings from the service offerings of providers your
company is competing against. Positioning involves trying to answer these key questions:
1.
2.
3.
4.
Which service attributes are most important to our customers?
How are competitors perceived on those attributes?
How are we perceived on those attributes?
What specific attributes will we position on?
Branding supports and aligns with your company positioning. A brand is your company logo, your company
tagline, and much more. I don’t want to define branding in great detail. However, your brand should become
an icon that communicates your positioning.
Marketing comprises all the activities you pursue to communicate your positioning. Marketing includes
partner training, advertising, customer presentations, etc. Marketing is effective if customers and partners
understand and believe your positioning.
Perhaps one of the most strategic activities a services marketing team can engage in is a review of the
company’s positioning, branding, and marketing. Does our branding align with the service attributes we are
positioning around? Do our marketing messages align with our brand and target attributes?
Positioning Evaluation
To close this article on positioning, I want to give you a simple tool you can use to evaluate how mature
your service positioning currently is. Go to your company’s Web site. Click on the button that says “Our
Services” or “Professional Services.” Now, I want you to start reading the text. As you read, I want you to
start filling in Table 5. Every time you recognize a service attribute, place it into one of the three rows of
Expertise, Experience, or Expense in the Attribute column. Then complete the other columns in the table if
you can.
Benefits: Does the copy on the Web site state any clear benefits for this attribute? For example, if your site
states, “We have the most creative web designers in the world,” is there an explanation of why this is a
good thing? Even if the Web site does not state the benefits, do you know them? If so, pencil them in.
Validation: Are proposed benefits validated on the Web site? Are real customer quotes provided that
reinforce the proposed benefits? Are example dollar savings listed? Even if the Web site does not provide
validation, do you know of supportive data? If so, pencil it in.
Brand Aligned: This is subjective. Do you feel the service attribute listed aligns with how your company
brand is perceived in the marketplace? If yes, write yes. If no, write no.
Table 5: Positioning Evaluation Table
So, what are we looking for?
If your completed table lists multiple service attributes scattered throughout all three categories, or if you
could not pencil in hard benefits or hard validation for positioned attributes, or if none of the attributes are
aligned with your company brand, you have a service positioning problem.
Positioning Data
As with any management endeavor, relevant data is critical to success. This management law applies to
positioning as well. Your service positioning will be more effective, on target, and motivating if it based on
actual data. What type of data? Unfortunately, the type of data service companies often do not spend time
or energy to collect:
Project Data: Formal project review summaries that identify what customers valued and did not value. Hard
data that quantifies how much money you saved a client. Itemized inventories of specific customer
deliverables.
Customer Value Surveys: Formal surveys to identify where customers feel you deliver value.
Prospect Surveys: Formal surveys into the marketplace to determine what service attributes are most
important to the marketplace.
Competitive Analysis: Review of competitor’s web sites to understand how they are positioning themselves.
Once again, I believe service positioning is an iterative process. The positioning pentagon does not mature
overnight. However, when a service organization makes a conscious effort to capture and document relevant
positioning data, service positioning does improve!
Closing Comments
This concludes our walk on the wild side of service positioning. This is an area begging for more discussion.
Effective service positioning is rare in today’s services-based economy. Why is that? Service positioning,
unlike product positioning, is in its infancy. My goal is that the positioning pentagon can be used to help
quantify the current deficiencies in service positioning. I leave the rest of the positioning effort to the true
marketing gurus.
For more information on the work of Pretium Partners, please visit their website at
www.pretiumpartners.com.
1
2
United We Brand, Mike Moser, Page 59, Figure 3-2. Harvard Business Press, 2003.
Metrics that Matter: Measuring Professional Services Business
- by Thomas E. Lah, author of Mastering Professional Services
There are easily over fifty meaningful metrics a management team could use to assess their professional
services business. The issue is determining what specific metrics provide the greatest insight. Unfortunately,
revenue and profitability are not the beginning and ending of your measurement process. These two metrics
provide very limited insight into the strengths and weaknesses of your PS business. In this article, we will
introduce a practical framework managers can use when selecting the appropriate metrics for their PS
organization. Future articles will discuss types of metrics in more detail and discuss the process of defining
and deploying a metric strategy.
What Metrics?
When it comes to the professional services business, managers will quickly agree on a short list of metrics
that are “must haves”. Yes, you need to understand the utilization rate of your consultants. Revenue and
bookings are obviously critical to track. Then what? Load costs? Project Margins? Employee turnover rate?
The debate begins. Table 1: Ten Professional Services Metrics provides ten metrics for a professional
service organization that I have pulled from the appendix of my book, “Building Professional Services: The
Sirens’ Song. I can articulate the specific value of each one of these metrics. I can explain how each metric
provides specific business insight. Despite this, I have yet to meet with a Professional Services organization
that has all ten of these metrics at their finger tips. I am learning that metrics are a “premium” activity for
most service organizations. “Yes, it would be nice to have all this data and insight, but we don’t have the
staff, time, or systems to generate lots of metrics.” Resources are tight. You do not want to add metrics for
the sake of having one more number to review. You want to carefully add metrics that bring true strategic
insight and help you improve the state of your business. You want to add metrics that matter. How do you
do this?
In the well-received book “The Balanced Scorecard”, David P. and Norton and Robert S. Kaplan introduce
the concept that “existing performance measurement approaches, primarily relying on financial accounting
measures, are becoming obsolete”. Norton and Kaplan are convinced that metrics that focus simply on
financial performance “hinder an organization’s ability to create future economic value.” Furthermore, they
state “the success of organizations cannot be motivated or measured by financial metrics alone.” I believe
their warning is particularly relevant for human capital intensive businesses. In a Professional Services
business, future quarterly revenues and profits are a direct reflection of how your employees and
consultants will execute their jobs over the next three months. Do they have the right skills? Are they
motivated? Are they building deep relationships with your customers? Last quarters revenue and profit
numbers will provide little insight into answering these telling questions.
To help companies accept the reality that there is more to a healthy business than profit and loss numbers,
Kaplan and Norton engineered a balanced scorecard that has four distinct categories companies where
companies should track data:
1.
2.
3.
4.
Financial: ROI, revenue growth, revenue, mix
Customer: Customer satisfaction, account share
Internal: Quality control, time-to-market, operational efficiency
Learning and Growth: Employee satisfaction, training, skills development
Broadening the areas companies should track with discipline is a significant step in the right direction.
However, creating additional categories does not help a management team determine what specific metrics
they should focus on. There is still this issue of priority. “Remember, I don’t have a lot of extra staff cycles.
Which metrics will tell me the most?” To begin addressing this challenge, I want to define the concept of
metric perspectives.
Table 1: Ten
Professional
Services
Metrics
Definition
Metric
The total value of contract commitments yet to be executed.
Backlog (Total Backlog = Previous Fiscal Years Commitments +
Latest Fiscal Years Sales - Latest Fiscal Years Revenue.)
Bill Rate Average billable rate achieved by class of consultant.
Gross Margin (%)
The gross profit generated per dollar of service delivered.
(Gross Margin = Total Services Revenue - Cost of Services
Delivered (COS)), traditionally called “cost of goods sold”
(COGS).
The competitive success rate of the company in the markets
Hit Ratio it chooses to compete in. Does not include single-sourced
bids.
Load Costs
Total business costs that are not directly related to the cost
of delivering services.
Profit per Project
The profit generated by a specific project. (Project Profits =
Total Project Revenue - COS - Sales Costs).
Rate Realization
The amount of revenue actually earned as a percentage of
potential revenue represented by the list prices.
The total costs for the selling efforts of each line of
business. Total Sales Costs includes salaries, expense
Sales Costs
accounts, and commissions for sales management, sales
people and sales support.
Measurement of the different types of revenue; should be
Total Services
listed separately by Consulting, Solutions and 3rd Party
Revenue
Pass-through.
Utilization Rate
Measures the organization's ability to maximize its billable
resources.
Metric Perspectives
Every metric provides a certain perspective on your business. In other words, different metrics tell you
different things about your business. Some metrics tell you there is a problem today. Some metrics give you
a heads up that there will be a problem down the road. Also, metrics naturally have different scopes. Total
services revenue indicates how the overall business is doing, but provides little insight on how individual
consultants are doing. Individual utilization metrics provides insight on individual performance and the
overall health of the business. Continuing this logic, there are at least five unique metric perspectives you
can consider:
1.
2.
3.
4.
5.
Functional Perspective: What business function does this metric help evaluate? Your sales
organization? Your delivery teams? Service Marketing?
Economic Perspective: Almost every internal company initiative has one of two objectives: improve
operational efficiency or create future revenue (economic value). Does the metric track
improvements in operational efficiency or assess the economic value of the business?
Timeframe Perspective: Just like economic data, is the metric a leading or lagging indicator of how
the business is performing? Does the metric indicate you currently have a real problem, or does the
metric warn that soon you will have a problem if the current trend continues?
Scope Perspective: Does the metric measure the performance of specific individuals, specific
projects, or the entire business unit?
Stakeholder Perspective: Does this metric provide insight on how your external stakeholders view
you? External stakeholders would include customers and partners.
In Table 2: Metric Perspectives, these five distinct perspectives are applied to the ten metrics defined in
Table 1. The table shows what perspectives are satisfied by each metric. For example, Backlog is a leading
indicator. If Backlog drops below a certain threshold, the business could be moving in the wrong direction.
Yes, revenue targets may be met for this quarter. However, two or three quarters out may be a problem if
backlog is not improved. Backlog can be used to evaluate the service delivery and operations functions.
Backlog is not an appropriate metric to effectively evaluate the Services Engineering (Development)
function.
Now that these five distinct perspectives have been defined, they can be applied to help create an effective
metrics portfolio.
Table 2:
Metric
Perspectiv
es
Functional Perspective
Metric
Deli
Servic
Lag
Servic
Servic
Lead
Effie
Servic
Valu Staf Proje Busines Intern
e
e
cienc
ver
Engrn e Ops
gin
e
f
ct
s
al
Sales
Mktg
ing
y
y
g
g
Backlog
Timefram
e
Perspecti
ve
Y
Bill Rate
Y
Y
Gross
Margin (%)
Y
Y
Hit Ratio
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Rate
Realization
Y
Sales Cost
Y
Total
Services
Revenue
Y
Y
Y
Utilization
Rate
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Stakeholder
Perspective
Y
Y
Y
Y
Scope Perspective
Y
Y
Load Costs
Profit per
Project
Economic
Perspectiv
e
Y
Extern
al
Metric Perspectives Graph
We are still working to answer the question: What tight set of metrics should I be using to evaluate my
professional services business? Remember, the smaller the list the better. By using the concept of metric
perspectives, we can create a truly balanced metrics portfolio. The objective is to identify a set of metrics
that minimizes any perspective blind spots. For example, you would not want to pick ten metrics to manage
your service business — only to realize that not one of them is a leading indicator of how your business is
doing.
Figure 1: Metrics Perspective Graph Introduction shows the metrics perspective graph. This graph
allows you to map metrics to determine if there are any obvious perspective blind spots. Figure 1 shows
there are four distinct zones that metrics can be mapped into:
ZONE 0: Lagging, Economic Value. Metrics in Zone 0 represent how the business has actually
performed. Metrics in this zone are the ones ultimately used to evaluate a management team and
include Total Service Revenues, and Profitability.
ZONE 1: Lagging, Efficiency. Metrics in Zone 1 indicate you have a serious and immediate problem
in the way you are running the PS business. If operational efficiencies are not improved, Revenues
and Profits will suffer.
ZONE 2: Leading, Efficiency. Metrics in Zone 2 provide early warning that you may have efficiency
issues. Poor performance on these metrics does not mean revenue and profits (Zone 0) will be
immediately impacted. However, these metrics are a pointer to areas that, if not addressed, could
impact future financial performance.
ZONE 3: Leading, Economic Value. Metrics in Zone 3 provide insight on how the business will be
doing in the future. Are you creating economic value that will generate future revenues and profits?
Or, are you whittling down your intellectual and human capital in order to pay today’s bills?
Figure 1: Metrics Perspective Graph Introduction
Finally, we need to map scope and stakeholder perspective onto the picture. Figure 2: Completed Metrics
Perspective Graph adds these two perspectives. We have added three rings that represent the scope of
the metric. Metrics that only measure the overall business are placed in the outer ring. Metrics that assess
the health of projects are placed in them middle ring. Metrics that can evaluate down to the staff level are
placed close to the center of the graph.
Stakeholder perspective will be shown by the color used when placing the metric on the graph. Metrics
colored in RED have an internal perspective — the metric is important to you and your superiors. Metrics
colored in GREEN have an external perspective — your customers or partners care about your performance
in this area.
Great, we now have this pretty graph. We need to put it into action.
Figure 2: Completed Metrics Perspective Graph
Using the Metrics Perspective Graph
Let us start using the graph by mapping an industry standard metric that almost every service business
uses: utilization. As a metric, consultant utilization provides the following perspectives into your service
business:
Functional Perspective: Utilization is used to evaluate the service delivery function.
Economic Perspective: Utilization evaluates the efficiency of your service organization.
Time Frame Perspective: Utilization is a lagging metric. When utilization goes down, you have a
problem now. After the low utilization report comes in, you can’t recapture those lost billable hours.
Like airplane seats and hotel rooms, you cannot inventory consulting capacity.
Scope Perspective: Utilization is used to evaluate the performance of individual employees. This
data can then be used to evaluate the health of projects and eventually the overall business. In
other words, utilization is a metric that can provide insight on all levels of your PS business.
Stakeholder Perspective: Utilization is an internal viewpoint. Your customers and partners are not
concerned about your utilization rates.
With this perspective information, Figure 3: Mapping Utilization maps utilization onto the metrics
perspective graph.
The good news about utilization is that it covers the lower quadrant of the graph nicely. It is a metric that
hits the center bull’s-eye of “staff”. This means the metric can provide insight on individual employees,
specific projects, or the overall business. However, if you only used utilization to measure your services
business, you would have several blind spots:
Functional Blind Spots: Not specifically evaluating sales, marketing, or services engineering.
Economic Blind Spots: Not evaluating the return on investments you are making into the business.
Not understanding the economic potential of your service portfolio. Yes, you may be utilized today,
but what about six months from now?
Time Frame Blind Spots: You have no leading indicators that will warn the business may be heading
south.
Stakeholder Blind Spots: You have no indication how customers and partners feel about the services
you are delivering.
Figure 3: Mapping Utilization
Only using one metric is a simplified example to demonstrate how blind spots can exist. Now, lets map the
top ten metrics we called out in Table 1. Table 3: Metrics Reference Codes provides a two letter code for
each metric.
Table 3:
Metric
Reference
Codes
Code
Metric
Backlog
BL
Bill Rate
BR
Gross Margin
(%)
GM
Hit Ratio
HR
Load Costs
LC
Profit per
Project
PP
Rate
Realization
RR
Sales Cost
SC
Total Services
Revenue
TR
Utilization
Rate
UR
Figure 4: Ten Service Metrics maps these metrics onto the perspective graph. Remember, the closer to
the center the metric lands, the greater potential scope it has. Being close to the bull’s-eye is a good thing.
Figure 4: Ten Service Metrics
A majority of the PS organizations I have worked with do not have all ten of these metrics at their finger
tips. Even if they did have these ten traditional metrics in place, there are still weak spots:
1.
2.
3.
There is not one metric that provides an external perspective. How do customers view the business?
How do critical partners feel about your skills and ability to deliver? None of these metrics provide
insight on how the external world views your business.
70% of these metrics are lagging. They provide little insight on what direction the service business
is moving: positive or negative. Yes, you may have made money this quarter, but are you headed in
the right direction? Hit rates, sales costs, and backlog do provide leading information — so you are
not totally blind. However, you have no leading indicators on the health of the service portfolio or
the skills of your staff.
No leading metrics to evaluate the health of projects. Project profitability tells you after the fact how
it went. Are your projects on track now? Are you getting better at managing your projects?
Hopefully the power of this graph is becoming apparent. By considering the concept of metric perspectives,
you have much greater insight into what metrics provide what insight. Mapping these perspectives onto a
picture makes the assessment more visual and intuitive. If you mapped the metrics you currently use to
manage your PS business onto this graph, what would the picture look like? I am guessing you see the
following reality:
Very few (if any) leading metrics.
Limited insight on the cost and effectiveness of your service sales activities. You may track
revenues and bookings, but not hit rates, sales costs per rep or sales cost per project type.
Very little insight into overall operational efficiency. Are you getting faster, better, cheaper in the
way you deliver your service portfolio?
No hard metrics to evaluate the specific activities of service development and service marketing.
These blind spot should be addressed. Once again, I am not advocating you track thirty PS metrics. I am
advocating you track at least ten to twelve metrics that minimize the types of blind spots I have listed
above.
Key Messages
You can’t manage what you don’t measure—every senior manager will agree to this truism. Even
though we all agree to it, we have a tough time living it.
Metrics are a premium activity. It takes money and staff to generate data. PS organizations want to
apply finite resources to the right activities.
Management teams must make a conscious decision to focus on a tight set of metrics that will
provide the most strategic insight into the business.
To accomplish this objective, managers can use the concept of metric perspectives to assess and
prioritize what metrics they will use.
At a bare minimum, a balanced metrics portfolio contains leading indicators on the health of the
business.
Zone 0 Metrics
Now that we have reviewed the framework, let’s take a deeper dive into Zone 0. As previously defined, Zone
0 metrics provide lagging information about the economic health of the professional service business. In
other words, metrics in this zone tell you how you how much money you just made--not how much you will
make. Also, this zone does not provide specific insight into the operational efficiency of your organization.
Are we doing things faster, better, cheaper? Zone 0 is not very helpful answering these questions. Having
said all this, the metrics that live in Zone 0 are critical to the continued employment of the management
team.
If targets in this Zone 0 are consistently missed, the management team will eventually be replaced. That
why this Zone is always a focal point.
Example Metrics
Specifically, which metrics in this critical zone impact employment longevity? There are ten metrics that live
in Zone 0. Table 1: Zone 0 Metrics, lists these ten metrics and defines them.
Priorities
In the first column of Table 1, I have documented the three natural priority levels that exist within these
ten metrics.
Priority 1: Total Service Revenues, Operating Profit, Gross Margin. These are the metrics that EVERY
service organization tracks. When these three go soft, executives need answers.
Priority 2: Bill Rate, Rate Realization, Labor Multiplier. These metrics are the next wave most likely
to be tracked by management. They provide immediate insight into how profitable you will be for
the quarter.
Priority 3: Revenue per Practice, Profit per Practice, Solution Revenue Solution Margin. These are
Zone 0 metrics that many service organizations do not take the time to calculate. Nevertheless,
they provide immediate insight into the profitability of specific service lines and provide greater
insight into where profitability problems may exist.
Table 1:
Zone 0
Metrics
1
1
1
Metric
Description
Measurement of the different types of revenue;
Total Services
should be listed separately by Consulting,
Revenue
Solutions, and 3rd party pass-through.
The profit generated by operations, also known as
Operating Operating Margin. (Operating Profits = total
Profit services revenue - cost of services (COS) delivered
- total operating expenses)
The gross profit generated per dollar of service
Gross Margin delivered. (Gross Margin = total services revenue
(%) - COS) , traditionally called cost of goods sold
(COGS)
Code
TR
OP
GM
2
2
2
3
Bill Rate
Average billable rate achieved by class of
consultant.
BR
The amount of revenue actually earned as a
Rate
percentage of potential revenue represented by
Realization
list prices.
RR
The average factor by which billable personnel can
be charged over and above their fully loaded
Labor costs. A Labor Multiplier of 1.0 indicates a
Multiplier breakeven point. (Fully Loaded Costs = direct
salary + direct fringe benefits + overhead + G&A
+ margin)
LM
Revenue per Total services revenues incurred by specific
Practice consulting practice.
RPP
3
The profit generated by practice operation, also
Profit per known as Operating Margin. (Operating Profits =
Practice total services revenue - COS - total operating
expenses)
PPP
3
Solution Total services revenues incurred from a specific
Revenue solution.
SR
3
Solution Average margin experienced when delivering a
Margin specific solution.
SM
Table 2: Zone Metrics Perspectives provides additional data on what these ten metrics can be used to
manage. Figure 3: Zone 0 Metrics Graph maps these ten metrics onto the metrics perspective graph.
Table 2:
Metric
Perspectives
Metric
1
Total
Services
Revenue
1
Operating
Profit
1
Sales
DeliBusi- Inter- ExterMktg Dev Ops Staff Project
very
ness
nal
nal
Y
Y
Y
Y
Y
Y
Gross
Margin
(%)
Y
Y
Y
Y
Y
Y
Y
2
Bill Rate
Y
Y
Y
Y
Y
Y
2
Rate
Realization
Y
Y
Y
Y
Y
Y
2
Labor
Multiplier
Y
Y
3
Revenue
per
Practice
Y
Y
Y
Y
Y
Y
3
Profit per
Practice
Y
Y
Y
Y
Y
Y
3
Solution
Revenue
Y
Y
Y
Y
3
Solution
Margin
Y
Y
Y
Y
Y
Y
Y
Y
Figure 3: Zone 0 Metrics Perspective Graph
Deficiencies
Hopefully, by looking at Figure 3, the deficiencies of Zone 0 metrics becomes apparent. There is a natural
tendency for the PS management team to fixate itself on Zone 0 metrics. This is understandable. If
revenues and profits are falling, jobs are at stake. But if a management team only tracks metrics in Zone 0,
they have a seriously flawed metric strategy. These ten metrics will not provide insights in the following
areas:
Future Economic Value: Yes, we just had a good quarter! But what will future profits look like? Zone
0 metrics don't help me here.
Operational Efficiencies: Revenues and profits do indicate if we are managing the business well or
not. However, they do not provide much insight where operational challenges may exist. Margins
were off. Why? Were sales costs too high? Did we simply scope the projects poorly? Zone 0 comes
up empty when asking these questions.
External Perspective: Last but not least, the ten metrics in Zone 0 are all important to managers.
They are not important to customers. Does a customer really care if margins and profits were
down? No. If you are trying to determine how customers feel about you, Zone 0 does not help.
Targets
The most frequent request I receive from management teams is to provide guidance for the following Zone
0 metrics:
Gross Margin: How much margin should are professional service business be throwing off?
Operating Profit: What operating profit is reasonable and sustainable for a PS business?
Bill Rate: Hey, are our bill rates too high (like our sales people keep telling us)?
Rate Realization: What rate should we be expecting from our consultants? 65%, 75%, 100%?
Over the past three years, I have found the specific targets for these four metrics vary widely from
organization to organization, practice to practice, and industry to industry. Gross margins in PS are ranging
from 10% to 45%. Operating profits are ranging from -20% to 20%. Realization rates are typically ranging
from 50% to 90%. The spectrums are WIDE. Having said this, I do see some pattern recognition.
First of all, actual gross margins are consistently lower than target gross margins. The most common target
I see for gross margin is 40%. The actual gross margins in PS are much closer to 25%. Operating profit
targets are typically set between 12% - 15%. Actuals are hovering around 10%. I base these observations
on the few companies that will publicly report the gross margins and profits of their professional service
business and the various companies I have had the privilege to work with directly.
My experiences lead me to the following conclusion: There are no universal targets that make sense for
Zone 0 metrics. Target margins and profits should be driven by the specific business model for your
professional service organization, NOT some mythical standard that in reality does not exist. For more
information on target business models for professional service organizations, please refer to the previously
published article The Professional Services Business Model - Fighting the 40/20 Myth.
Key Messages
When creating a metrics portfolio, is important to consider what the metrics are telling you. The
objective is to identify a set of metrics that minimizes any perspective blind spots.
Zone 0 metrics provide lagging information about the economic health of the professional service
business.
If targets in Zone 0 are consistently missed, the management team will eventually be replaced.
Zone 0 metrics do not provide insights into critical areas such as future economic performance,
operational inefficiencies, or customer satisfaction.
In the industry, Zone zero metrics are all over the map. There is a wide spectrum of results for
these metrics. Industry dynamics, organizational maturity, and service type all impact what a
professional service organization can achieve in Zone 0. Universal targets for these metrics does not
make sense.
Zone 1 Metrics
Per the earlier definition, Zone 1 metrics provide important insights on the operational efficiencies of your PS
business. However, these insights are lagging in nature—not predictive.
If targets in Zone 1 are consistently below industry expectations, PS revenues and profits will continue to
disappoint.
Example Metrics
There are at least eight metrics that can logically be placed in Zone 1. Table 1: Zone 1 Metrics, lists these
eight metrics and defines them.
Priorities
In the first column of Table 1, I have documented the three priority levels for these eight metrics. These
assigned priorities are most likely the opposite priorities most PS managers would assign to these metrics.
Let me defend my prioritization:
Priority 1: Profit per Project, Project Overrun Costs, Cost of Services Delivered, Delivery Labor
Costs. All of these metrics inform the management team how much cost is actually involved in
delivering their services. When project profitability decreases and project overruns increase, overall
PS profitability (Zone 0 metric) will soon be impacted. If delivery labor costs are increasing,
profitability will be impacted. In other words, the management team must understand the true and
total costs required to deliver the service portfolio. These costs need to be monitored and
aggressively managed. If not, the natural tendency is for project costs to become bloated and
margins to erode.
Priority 2: Load Costs, Delivery Overhead Costs. These metrics are the next area management can
track to identify potential efficiency improvements. These metrics provide insight into how much
overhead the PS organization is carrying to support project delivery. The healthiest project margins
will have difficulty covering unnecessary and inflated overhead costs.
Priority 3: Utilization and Cash Flow. The fact Utilization is placed as a third priority is no doubt
controversial. Every PS leader demands that consultant utilization be tracked and accounted for. I
agree utilization is a very insightful metric. If consultants are only being utilized 50% - 60% of the
time, the business is inefficient and over resourced. However, utilization is one of the most abused
metrics available to the management staff. If you tell PS staff you will be tracking utilization, they
will be utilized—trust me. The question remains, how beneficial the utilization was. Tracking real
project costs and overruns will provide more immediate and potentially more accurate insights into
the efficiencies of your business.
Even if deals are being won and top line revenue is growing, you may not be delivering your services
portfolio at an optimized level. Zone 1 metrics help answer a very pertinent business question: “How
efficient are we as a Professional Services Organization?”
Table 1:
Zone 1
Metrics
1
1
Metric
Profit per
Project
Definition
Calculation
Code
The profit generated by a
specific project.
PP
Project Profits = Total Project
Revenue - COS - Sales Costs
The fully loaded direct and
indirect costs of billable
services. Includes the expenses
Cost of of any managers that are more
Services than 50% billable.
Delivered
Cost of Services
Delivered / Total
Services Revenue
COS
Delivery Labor
Costs / Total
Services Revenue
DLC
Costs of Services Delivered =
Delivery Labor Costs + Deliver
Overhead Costs
1
1
The direct costs of billable
Delivery services. Includes the labor
Labor Costs costs of any managers that are
more than 50% billable.
Total project costs
Project The accuracy with which project incurred / total
Overruns costs are forecasted.
estimated project
costs
POR
The fully loaded indirect costs of
billable services. Includes the
related expenses of any
managers that are more than
50% billable.
2
2
Delivery
Overhead Delivery Overhead Costs =
Costs fringe benefits + travel +
delivery - unit management
costs + all other related costs
with full-time consultants,
hourly employees, or
independents.
Load Costs Total business costs that are not
Delivery Overhead
Costs / Total
Services Revenue
DOC
LC
directly related to the cost of
delivering services.
Total # of hours
billed / # of
working hours in a
year (varies by
geography) x # of
billable ours
3
Measures the organization's
Utilization
ability to maximize its billable
Rate
resources.
3
The amount of cash generated
Cash Flow from
Cash Flow (or absorbed, if negative) by the operations / Total
organization.
Services Revenue
UR
CF
Table 2: Zone 1 Metrics Perspectives provides additional data on what these eight metrics can be used
to manage. Figure 3: Zone 1 Metrics Graph maps these eight metrics onto the metrics perspective graph.
Table 2: Zone 1
Metric
Perspectives
Sales
DeliInvestBusi- Inter- ExterMktg Dev
Staff Project
very
ment
ness
nal
nal
Metric
Profit per Project
Y
Y
Y
Y
Y
Cost of Services
Delivered
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Delivery Labor
Costs
Y
Y
Project Overrun
Y
Y
Delivery Overhead
Costs
Y
Y
Load Costs
Utilization Rate
Y
Y
Y
Y
Cash Flow
Figure 3: Zone 1 Metrics Perspective Graph
Deficiencies
Zone 1 metrics have two significant deficiencies. First of all, the metrics are indeed lagging in nature.
Soaring delivery costs or project overruns tell you there is a problem after it has occurred. Secondly, these
metrics are very internally focused. As a PS manager, YOU care about utilization rates and delivery load
costs. Your clients do not.
Targets
In the previous article on Zone 0 metrics, I discussed the fact that best practice targets for many of these
metrics are a slippery slope to stand on. However, there are some reasonable guidelines for two of the Zone
1 metrics:
Utilization: PS organizations have a tendency to target very high utilization rates. I believe this bias
comes from the heritage of traditional professional service organizations such as law firms and
accounting firms. In these environments, employees are often expected to bill over forty hours a
week to client accounts. I believe PS activity within a product company is a very different
environment. I have yet to review a PS organization that was sustaining 100% billable utilization. I
do see PS organizations that report 100%+ utilization rates. However, these rates track non-billable
activity such as pre-sales calls. For billable utilization activity, I believe there is a natural strike zone
that sits between 60% and 85% billable utilization. Less than 60%, and the PS organization cannot
financially support itself. Greater than 85%, and no time is left for ongoing staff development.
Project Overruns: Project overruns occur. It is a fact of life when you are delivering complex
technology centered solutions. The question is the order of magnitude. On an ongoing basis, project
overruns should average 10% - 25%. If your project costs consistently exceed 25% of the initial
estimation, your ability to estimate effort is seriously in question. If you are bidding projects at a
fixed price, your ability to be profitable is clearly in jeopardy!
Key Messages
When creating a metrics portfolio, is important to consider what the metrics are telling you. The
objective is to identify a set of metrics that minimizes any perspective blind spots.
Zone 1 metrics provide lagging information concerning the operational efficiency of the professional
service business.
If targets in Zone 1 are below industry expectations, the PS business will find it difficult to
effectively compete in the marketplace. Revenues and profits will eventually be compromised.
Zone 1 metrics such as utilization and project overruns costs can and should be benchmarked
against industry standards.
Zone 2 Metrics
Let's begin the transition to leading metrics by visiting Zone 2. Per the earlier definition, Zone 2 metrics
provide leading insights into the operational efficiency of your PS business.
If Zone 2 metrics begin declining, operational efficiency will begin suffering. If operational efficiency drops,
reduced margins and profits are sure to follow.
Example Metrics
There are at least ten metrics that can logically be placed in Zone 2. Table 1: Zone 2 Metrics lists these
ten metrics and defines them.
Priorities
In the first column of Table 1, each Zone 2 metric is rated by priority level.
Priority 1:
Bid and Proposal Costs – This metric is a little tricky. Even though it is a cost metric, and
fundamentally speaks to efficiency, it can speak to so much more. We are winning more business!
However, if bid costs are going up, something is changing. Are we simply getting sloppy in our bid
approach? Are new competitors entering our space? Or, are we chasing business we simply should
not be chasing? Review those bid costs now, before your revenues reflect the fact the sales
folks were chasing the wrong business.
Channel Mix – How efficiently are we using all of our sales channel options? Are the old partners
getting any better at selling the new services? Does everything still get sold through the most
expensive channel option we have – direct sales staff? Act to improve the channel mix now,
before you are forced to reduce direct sales staff later.
G & A – Are G&A costs creeping up? This often happens in service businesses. If G&A continues to
climb as a percentage of total revenues, you are probably spending money to mask other
fundamental issues in the business. Take a look at creeping G&A costs now, before the CFO
hands you required budget cuts.
Project Completion Ratio – Yes, you track project profitability after the fact. But how about the large
projects in play right now? Are the teams meeting commitments on time? Also, this is the first
metric we have spoken of that has an external perspective as well. In other words, your customers
care how you do here. Are you delivering on your commitments to them? Track project
milestones now, before you realize chunks of revenue will be delayed next quarter.
Priority 2:
Research and Development Costs – How much money does PS spend to manage intellectual
property and improve delivery methodologies? If this number is becoming too large, profits suffer.
If this number becomes too small, you struggle to increase the value you bring to customers. Track
how much money is invested in solution development and improvement now, before your
solution portfolio becomes stale and unmarketable.
Total Operating Expenses – Many PS organizations are not disciplined in their tracking of Sales
Costs vs. Marketing Costs, G&A, etc. To offset this common deficiency, it is recommended that the
management team tracks the total amount of money spent to support the business. If PS margins
are flat and total operating expenses are growing, there is a problem. Understand total operating
expenses now, before there are not enough margin dollars to support them.
Training Costs and Training Days – Like R&D Costs, the concern on Training is centered more
around under-investment. Catch severe declines in training investments now, before
consultants embarrass your brand six months from now.
Priority 3:
Alliance and Partner Costs – Partners are a critical component to the delivery of most “solutions”.
How much money are you investing in identifying, qualifying, and enabling these critical partners?
Are you wasteful or under-investing. Spend money certifying your delivery partners today,
before they tank a critical engagement tomorrow.
Collateral Costs – How much does PS spend on marketing materials? If it is the largest portion of
your service marketing budget, you have a problem—trust me. Reduce marketing material costs
now, before you wish you did.
These Zone 2 metrics provide wonderful perspectives into your business. Once again, no executive will be
fired because R&D costs were too low, or Project Completion ratios have slipped by 10%. However, that
same executive could be subjected to a very unpleasant business review four quarters down the road, when
a poorly differentiated service portfolio and poor project execution has created significant slips in revenues
and profits.
Table 1:
Zone 2
Metrics
Metric
Definition
Calculation
Code
1
1
Total dollars spent on
submitting a bid, including
dollars spent on bid
qualification, financial
Bid & Proposal
analysis, alliance/partner
Cost
selection, feasibility
analysis, proposal submittal
and best and final offer
(BAFO).
Channel Mix
Total dollars spent for
submitting bids /divided
by total contract value of
bids submitted
Percentage of sales
revenues that occur through
each potential sales
channel.
BPC
CM
The general expenses not
captured in COS, Sales,
Marketing or R&amp;D.
1
1
2
General and
G&amp;A Expenses
Administrative
/divided by Total Services
Expenses (G&A) G&amp;A Expenses = Total Revenue
Expenses - Training Costs +
Management Costs + other
administrative costs.
Measures the degree of
Project
completion against project
Completion Ratio
milestones.
Number of milestones
accomplished on schedule
/divided by total
milestones targeted.
Degree of investment made
to enhance the firm's tools,
products, and
Research & methodologies.
R&D Costs /divided by
Development
Total Services Revenue
Costs
Total R&D Costs =
Infrastructure + Sales Tools
+ Delivery Tools
G&A
PCR
R&D
The sum of all non-delivery
operating expenses.
2
2
2
Total Operating Expenses
Total Operating
/divided by Total Services
Expenses Total Operating Expenses =
G&A Costs + Sales Costs + Revenue
Marketing Costs + R&D
Costs
The total cost of training.
Training expenses include
Training Costs curriculum design and
development, instruction
costs, and facilities costs.
Training Expenses
/divided by Total Services
Revenue
Number of employee
working days spent
Average number of working
Training Days
training /divided by total
days spent in training.
number of employee
working days
TOE
TC
TD
3
The amount of dollars spent
Alliance & Partnering
Alliances & on alliance and partner
costs /divided by Total
Partnering Costs programs by line of
Services Revenue
business.
APC
3
The amount of dollars spent
Seminars &
Seminars & Collateral
on prospect and/or client
Collateral
Costs /divided by Total
seminars and marketing
Material Costs
Services Revenue
collateral.
COL
Table 2: Zone 2 Metrics Perspectives provides additional data on what these ten metrics can be used to
manage. Figure 3: Zone 2 Metrics Graph maps these metrics onto the metrics perspective graph.
Table 2: Zone 2
Metric
Perspectives
Sales Leading Lagging Efficiency Investment Staff Project Business Internal External
Metric
Bid & Proposal Cost
Y
Y
Y
Channel Mix
Y
Y
Y
Y
Y
Y
Y
Y
G&A Expenses
Y
Y
Y
Y
Project Completion
Ratio
Y
Y
Y
Y
R & D Costs
Y
Y
Y
Y
Total Operating
Expenses
Y
Y
Y
Y
Training Costs
Y
Y
Y
Y
Training Days
Y
Y
Y
Y
Alliance/Partnering
Costs
Y
Y
Y
Seminar &
Collateral Material
Costs
Y
Y
Y
Y
Y
Y
Y
Y
Figure 3: Zone 2 Metrics Perspective Graph
Zone 3 Metrics
Finally, our long journey through Professional Services business metrics comes to a close as we enter Zone
3. The metrics in this zone provide the greatest insight into the future economic health of a PS business.
Revenues and profits normally determine whether managers are paid bonuses for the quarter. The metrics
in Zone 3 are early indicators on how bonuses will be paid four quarters from now.
If Zone 3 metrics begin declining, your PS business is in decline. It is only a matter of time before revenues
and profits will suffer.
Example Metrics
Table 3: Zone 3 Metrics lists ten metrics that provide a leading economic assessment of the PS business.
Priorities
In the first column of Table 3, each Zone 3 metric is rated by priority level
Priority 1:
Account Expansion – This metric tracks how much follow-on business a Professional Services team
gets after the first engagement. If this dollar value is increasing per account, PS is doing a better
job of delivering, establishing credibility, and identifying new opportunities. If this metric is
declining, customers are not impressed with your services or staff. Account expansion in existing
customers is typically an easier task than securing new accounts.
Backlog – First backlog slips. A decline in recognized revenues is not far behind. Ideally, your
quarter starts with at least 75% of the service work identified and booked. For most project-based
services, a backlog below 50% of the target revenue for the quarter is a difficult hole to climb out
of.
Hit Ratio – This metric tells you how successful your sales proposals are. If your hit ratio is
improving, your positioning and value proposition are most likely improving. Also, your employees
are becoming more effective at selling the solution. A declining hit ratio is an early indicator that a
solution is growing stale of competitors have created a more compelling value proposition.
New Client Ratio – How much business is coming from new customers? This metric provides the
mirror insight that “account expansion” does. If ALL of your revenue is coming from the existing
client base, you are not effectively selling or marketing the portfolio to new prospects.
Priority 2:
Customer Value – Customer Value, Customer Loyalty, Customer Satisfaction. All related metrics.
The bottom line: How do customers feel about the services you are delivering? A downward trend
here provides an early warning signal that all is not well.
Delivery Tools – This metric is closely related to R&D spend. The difference is that here you want to
measure how much as been invested in tangible infrastructure that facilitates the delivery of service
offerings. If this percentage is flat or declining, you may be under investing in the tools that
differentiate your services. This scrimping will not show up this quarter, but can bite you later in the
year.
Sales Yield – How effective is your selling process? If sales yields are increasing, your solution
selling skills are improving or your solution positioning is more compelling. Either way, the economic
value of your PS business is increasing.
Solution Portfolio Maturity – This is the concept of measuring your ability to deliver a particular
service consistently. If service maturity is increasing, your ability to improve margins increases.
Your ability to improve margins is a great indicator of the economic health of the business.
Priority 3:
Skills Gaps – Do you have the skills you need to deliver your services? When you first start a PS
business, this gap may be significant. The goal is to shrink it. If the gap is not improving or
widening, you will eventually pay a very real price in margins and revenues.
Turnover Rate – Last but not least. What is your overall turnover rate in the PS business? A key
consultant can leave today and the quarter is not lost. Your top ten consultants leave over the next
six months, and revenues may be impacted. A spike in turnover rates can be an early warning sign
that the business is not on track.
Zone 3 metrics provide the greatest insight into the true health of your Professional Service organization.
Ironically, these are the metrics that are least likely to show up on a monthly PS dashboard.
Table 3:
Metric
Definition
Calculation
Code
Zone 3
Metrics
1
1
1
The ability of a vendor to
expand its account
Account
penetration and its volume
Expansion
of business within existing
accounts.
The total value of contract
commitments yet to be
Backlog executed.
The competitive success
rate of the company in the
Hit Ratio markets it chooses to
compete in. Does not
include single-sourced bids.
Measures a vendor's ability
to win new accounts and
develop new business.
1 New Client Ratio
New Client Ratio = new
clients /divided by total
clients
2
Measures how satisfied the
customer is with the
services delivered.
Customer Value
Identifies how customers
receive value from the
service offering.
Add on revenue /divided
by dollar value of original
proposal
AE
Total Backlog = Previous
Fiscal Years Commitments
+ Latest Fiscal Years
Sales - Latest Fiscal Years
Revenue
BL
Revenue from proposals
won /divided by possible
revenue from proposals
submitted
HR
Total dollar value of new
client accounts /divided
by total dollar value of all
client accounts
NCR
Perceived Business
Benefit of Service
Offerings - Cost of Service
Offering.
Benefit ultimately
represents the sum total
of expected cost savings
and/or increased
revenues.
CV
The amount of R&D
investment in Delivery
Tools.
2
2
2
3
Delivery Tools = automated
methodology tools + project Delivery Tools /divided by
Delivery Tools management + online skills
Total Services Revenue
inventory/resource + time
scheduler + automated
labor voucher + real-time
conferencing + workgroup
sharing + knowledge
database
The sales productivity of the
company. (Target values or
Sales Yield
sales quota versus actuals
are encouraged.)
Sales dollar value /divided
by number of direct or
full-time equivalent sales
people
Average of: number of
completed sales and
Solution
delivery tools for a
The average maturity rating
Portfolio
solution /divided by total
for target solutions.
Maturity
number of sales and
delivery tools to be
created
Measures the gap between
the skills required to deliver
Skills Gaps target services and the
skills available within the
delivery staff.
DT
SY
SPM
SG
3
A measure of attrition. An
example of a Former
Employee is a person who
was on the personnel roster
Turnover Rate at the start of the previous
fiscal year and was no
longer on the personnel
roster at the start of the
current year.
Number of Former
Employees (annualized)
/divided by total number
of employees
(annualized)
TR
Table 4: Zone 3 Metrics Perspectives provides additional data on what these ten metrics can be used to
manage. Figure 4: Zone 3 Metrics Graph maps these metrics onto the metrics perspective graph.
Table 4:
Zone 3
Metric
Perspectiv
es
Deliver Mkt
y
g
De Op Leadin Laggin Efficienc Economi Staf Projec Busines Intern
v
s
g
g
y
c Value
f
t
s
al
Extern
al
Metric
Account
Expansion
Y
Backlog
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Hit Ratio
Y
Y
Y
Y
Y
New Client
Ratio
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Customer
Value
Y
Delivery
Tools
Y
Y
Y
Sales Yield
Y
Solution
Portfolio
Maturity
Y
Skills Gaps
Y
Turnover
Rate
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Figure 4: Zone 3 Metrics Perspective Graph
Summary
We hope you have found this article on Professional Services business metrics to be valuable to your
business. Remember, Professional Services is a human capital intensive business. Scaling or contracting a
human capital intensive business can be much more challenging than scaling or contracting manufacturing
capacity. On-boarding people takes time. Off-boarding takes even longer. Improving skills and human
efficiency takes patience and understanding. Services that are centered on complex technologies have the
added challenge of scaling human resources that are competent in both hard (technical) and soft
(consultative) skills. In all this complexity, I don’t see how a modern professional service business improves
without insightful data. I hope this metrics framework provides you an approach to acquire that insightful
data.
Key Messages
When creating a metrics portfolio, it is important to consider what the metrics are telling you. The
objective is to identify a set of metrics that minimizes any perspective blind spots.
Professional Services Management teams have a tendency to focus on metrics that provide lagging
information concerning the health of the Professional Services function.
Zone 2 metrics provide leading information concerning the operational efficiency of the Professional
Services business.
Zone 3 metrics are leading indicators of the future economic health of the Professional Services
business.
If Zone 2 and 3 metrics are in decline, future financial targets are at risk.