Service Performance Insight, LLC. February Winter Hazel Drive 25 Boroughwood Place

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1 February 2013 Service Performance Insight, LLC 6260 Winter Hazel Drive 25 Boroughwood Place Liberty Township, OH USA Hillsborough, CA USA Telephone: Telephone:

2 Service Performance Insight Service Performance Insight (SPI) is a global research, consulting and training organization dedicated to helping professional service organizations (PSOs) make quantum improvements in productivity and profit. In 2007, SPI developed the PS Maturity Model as a strategic planning and management framework. It is now the industry-leading performance improvement tool used by over 6,000 service and project-oriented organizations to chart their course to service excellence. The core tenet of the PS Maturity Model is PSOs achieve success through the optimization of five Service Performance Pillars : Leadership Vision, Strategy and Culture Client Relationships Human Capital Alignment Service Execution Finance and Operations The SPI Advantage Research Service Performance Insight provides an informed and actionable third-party perspective for clients and industry audiences. Our market research and reporting forms the context in which both buyers and sellers of information technology-based solutions maximize the effectiveness of solution development, selection, deployment and use. The SPI Advantage Consulting Service Performance Insight brings years of technology service leadership and experience to every consulting project. SPI helps clients ignite performance by objectively assessing strengths and weaknesses to develop a full-engagement improvement plan with measurable, time-bound objectives. SPI offers configurable programs proven to accelerate behavioral change and improve bottom line results for our clients. To provide us with your feedback on this research, please send your comments to: david.hofferberth@spiresearch.com or jeanne.urich@spiresearch.com For more information on Service Performance Insight, please visit: The information contained in this publication has been obtained from sources Service Performance Insight believes to be reliable, but is not guaranteed by SPI Research. All forecasts, analyses, recommendations, etc. whether delivered orally or in writing, are the opinions of SPI Research consultants, and while made in good faith and on the basis of information before us at the time, should be considered and relied on as such. Client agrees to indemnify and hold harmless SPI Research, its consultants, affiliates, employees and contractors for any claims or losses, monetary or otherwise, resulting from the use of strategies, programs, counsel, or information provided to client by SPI Research or its affiliates. The trademarks and registered trademarks of the corporations mentioned in this publication are the property of their respective holders Service Performance Insight, Liberty Township, Ohio

3 Copyright Notice Service Performance Insight trademarks Professional Services Maturity Model, Professional Services Maturity Benchmark Report, Service Performance Pillars, Service Lifecycle Management Maturity Model, and SLM3. The information contained in this publication has been obtained from sources Service Performance Insight believes to be reliable, but is not guaranteed by SPI Research. The trademarks and registered trademarks of the corporations mentioned in this publication are the property of their respective holders. This document is the result of primary research performed by SPI Research. SPI Research s methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by SPI Research and may not be reproduced, distributed, archived or transmitted in any form or by any means without prior written consent by SPI Research. You may download this report and print a copy for your personal use, but you may not distribute it, reproduce it, or alter it in any way or store it in a retrieval system without prior written consent. Service Performance Insight (SPI Research) is a global research, consulting and training organization dedicated to helping professional service organizations (PSOs) make quantum improvements in productivity and profit. In 2007, SPI developed the PS Maturity Model as a strategic planning and management framework. It is now the industry-leading performance improvement tool used by over 6,000 service and project-oriented organizations to chart their course to service excellence. SPI provides a unique depth of operating experience combined with unsurpassed analytic capability. We not only diagnose areas for improvement but also provide the business value of change. We then work collaboratively with our clients to create new management processes to transform and ignite performance. Visit for more information on Service Performance Insight, LLC Service Performance Insight

4 Table of Contents Introduction Report Sponsored by NetSuite Executive Summary The Professional Services Maturity Model Service Performance Pillars Professional Services Maturity Model Benchmark Levels Building the Professional Services Maturity Model Why Maturity Matters Pillar Importance and Organizational Maturity Report Demographics PS Business Applications Primary PS Business Applications Solution Satisfaction The Professional Service IT Maturity Model Leadership (Vision, Strategy & Culture) Pillar Symptoms of Leadership Issues Business Plan Essentials Survey Results Client Relationship Pillar Client Relationships Trends Survey Results Human Capital Alignment Pillar Human Capital Alignment Trends Survey Results Service Execution Pillar Service Execution Trends Survey Results Finance & Operations Pillar Survey Results Income Statements Service Performance Insight Sponsored by NetSuite i

5 11. The Best-of-the-Best Performing PSOs Demographics Pillar Performance Best-of-the-Best Conclusions The PS Maturity Model Development Maturity Levels Model Improvements Model Inputs Model Results The Financial Benefits of Moving Up Levels Model Conclusions Recommendations & Conclusions Professional Services Lead the Way Now is the Time to Act! SPI Research Will Be There Appendices Appendix A: Acronyms Used in This Report Appendix B: Financial Terminology Professional Services Performance Acceleration Program About Service Performance Insight Figures Figure 1: Bid-to-Win Ratio Figure 2: Sales Cycle Length... 3 Figure 3: Annual Employee Attrition Figure 4: Billable Utilization Figure 5: Year-over-year Change in PS Revenue... 6 Figure 6: Percentage of Billable Employees... 7 Figure 7: Annual Revenue per Billable Consultant... 9 Figure 8: Service Performance Pillars Figure 9: Services Maturity Model Levels Figure 10: Service Performance Pillar Maturity Figure 11: Maturity Progression Figure 12: PS Performance Pillars Core KPIs Service Performance Insight Sponsored by NetSuite ii

6 Figure 13: 2013 Benchmark Vertical Market Distribution Figure 14: Independent vs. Embedded Survey Organizations Surveyed ( ) Figure 15: Organization Size Figure 16: Headquarters Location Region Figure 17: Annual Company Revenue Figure 18: Total Professional Services Revenue Figure 19: Year-over-Year Change in PS Revenue Figure 20: Year-over-Year Change in PS Headcount Figure 21: Percentage of Employees Billable/Chargeable Figure 22: Percentage of PS Revenue Delivered by 3rd-parties Figure 23: Core PS Business Solutions Figure 24: Commercial Solution Adoption Figure 25: Financial Management Solution Used Figure 26: Client Relationship Management (CRM) Solution Used Figure 27: Professional Services Automation (PSA) Solution Used Figure 28: Human Capital Management (HCM) Solution Used Figure 29: Business Intelligence (BI) Solution Used Figure 30: Knowledge Management (KM) Solution Used Figure 31: Remote Service Delivery and Collaboration Tool Used Figure 32: Social Media (SM) Solution Used Figure 33: Is CRM Integrated with PSA? Figure 34: Professional Service IT Maturity Level Figure 35: SPI Research Business Plan Structure Figure 36: Service Planning Pyramid Figure 37: Confronting Reality Figure 38: Use Tools to Organize, Strategize and Prioritize Figure 39: PS Goals Figure 40: SPI Research s Service Lifecycle-Management Framework SLM Figure 41: Service Lifecycle Management Maturity Model Figure 42: Service Lifecycle Management Maturity Matters! Figure 43: Service Productization Creates Value Figure 44: Type of Work Sold Figure 45: Primary Service Sales Measurement Service Performance Insight Sponsored by NetSuite iii

7 Figure 46: Primary Service Target Buyer Figure 47: Bid-To-Win Ratio Figure 48: Deal Pipeline Relative to Quarterly Bookings Forecast Figure 49: Primary Responsibility for New Solution Dev Figure 50: The Traditional Consulting Pyramid Figure 51: The Professional Services Pyramid All PS Markets (30+ consultants) Figure 52: Management Consulting PS Pyramid (30+ consultants) Figure 53: IT Consulting PS Pyramid (30+ consultants) Figure 54: PS within Software Company PS Pyramid (30+ consultants) Figure 55: The SaaS PS Pyramid Figure 56: Why Employees Leave Figure 57: Employee Satisfaction Survey Frequency Figure 58: Resource Management Process Figure 59: Revenue per Project (k) Figure 60: Project Margin Figure 61: Services Maturity Model Levels Figure 62: Key Performance Indicators (KPIs) are Correlated Tables Table 1: 2013 Key Performance Indicator (KPI) comparison... 6 Table 2: Hourly Bill Rate by Organization Type (k)... 8 Table 3: Maturity Matters! Table 4: Performance Pillars Mapped Against Service Maturity Table 5: Service Pillar Importance by Organizational Maturity Level Table 6: The Service Market is Huge, and Growing Table 7: Top 100 Software Company Ratios Table 8: Vertical PS Markets the North American Industry Classification System Table 9: Number of Participating Firms by Vertical Market (2007 through 2012) Table 10: Demographics by Organization Type Table 11: Demographics by Vertical Market Table 12: Average Organization Size (employees) Table 13: Annual Company Revenue (mm) Table 14: Total Professional Services Revenue (mm) Service Performance Insight Sponsored by NetSuite iv

8 Table 15: Year-over-Year Change in PS Revenue Table 16: Year-over-Year Change in PS Headcount Table 17: Percentage of Employees Billable/ Chargeable Table 18: Percentage of PS Revenue Delivered by 3rd-parties Table 19: Commercial Solution Adoption Table 20: PSO Departments and Information Needs Table 21: Solution Satisfaction Table 22: Impact Client Relationship Management (CRM) Use Table 23: Impact Commercial CRM Integration Table 24: Impact Professional Services Automation (PSA) Use Table 25: Impact Human Capital Management (HCM) Use Table 26: Impact Business Intelligence (BI) Use Table 27: Impact Knowledge Management (KM) Use Table 28: Integration with Core Financials Table 29: The Leadership Maturity Model Table 30: Leadership Rating Compared to Core KPIs Table 31: PS Goals by Organization Type and Geographic Region Table 32: PS Goals by Organization Size Table 33: PS Goals by Service Market Vertical Table 34: Leadership Impact by Organization Type and Geographic Region Table 35: Impact Well-understood Vision, Mission and Strategy Table 36: Impact Confidence in Leadership Table 37: Impact Goals and Measurements are in Alignment Table 38: Impact Confidence in the PSO s Future Table 39: Impact Effective Employee Communication Table 40: Organizational Challenges by Organization Type and Geographic Region Table 41: Organizational Challenges by Organization Size Table 42: Organizational Challenges by Embedded Service Market Table 43: Organizational Challenges by Independent Service Market Table 44: Client Relationship Business Process Maturity Table 45: Type of Work Sold by Organization Type and Geographic Region Table 46: Type of Work Sold by Organization Size Table 47: Type of Work Sold by Embedded Service Market Service Performance Insight Sponsored by NetSuite v

9 Table 48: Type of Work Sold by Independent Service Market Table 49: New Client Penetration Table 50: Impact - The Effect of Sales Measurements on Performance Table 51: Impact - The Effect of Primary Buyer Type on Performance Table 52: Primary Service Target Buyer by Organization Type and Geographic Region Table 53: Impact of Solution Importance to Client s Business on Performance Table 54: Solution Importance to Client's Business Table 55: EBITDA by Solution Importance and Organization Type and Geographic Region Table 56: Impact - Solution Uniqueness Effect on Performance Table 57: Solution Uniqueness Table 58: Bid-To-Win Ratio Table 59: Deal Pipeline Relative to Quarterly Bookings Forecast Table 60: Sales Cycle (days) Table 61: Impact - Sales Effectiveness Impact on Performance Table 62: Service Sales Effectiveness Table 63: Service Marketing Effectiveness Table 64: Impact - Client References Table 65: Percentage of Referenceable Clients Table 66: Impact - The Impact of Solution Development Effectiveness on Performance Table 67: Solution Development Effectiveness Table 68: Fee Structure by Organization Type and Geographic Region Table 69: Fee Structure by Organization Size Table 70: Fee Structure by Service Market Vertical Table 71: Professional Services Sales Quotas, Base and Variable by Job Title Sales Representatives Table 72: Professional Services Sales Quotas, Base and Variable by Job Title - Management Table 73: Professional Services Sales KPI s by Organization Type and Geography Table 74: Professional Services Sales KPI s by Organization Size Table 75: Professional Services Sales KPI s by Position by PS Market Table 76: Performance Pillars Mapped Against Service Maturity Table 77: An Aging Workforce Marginalized Youth Table 78: Most Effective Retention Strategies by Generation Table 79: Year-over-year Change in Talent Management Challenges Table 80: The Impact of Attrition Service Performance Insight Sponsored by NetSuite vi

10 Table 81: Impact of Recommend to Family and Friends (1-No, 5-Yes) Table 82: Recommend Company to Friends and Family Table 83: Impact Annual Employee Attrition Table 84: Annual Employee Attrition Table 85: Impact Management-to-Employee Ratio Table 86: Management-to-Employee Ratio Table 87: Impact Time to recruit and hire for standard positions Table 88: Time to Recruit and Hire for Standard Positions (days) Table 89: Time for a New Hire to Become Productive (days) Table 90: Guaranteed Training Days per Employee per Year Table 91: Impact Well-understood Career Path Table 92: Well-Understood Career Path for all Employees Table 93: Frequency of Conducting an Employee Satisfaction Survey (years) Table 94: Impact Billable Utilization Table 95: Consultant Billable Utilization Table 96: Annual Hour Comparison by Organization Type Table 97: Annual Hour Comparison by Region Table 98: Annual Hour Comparison by Organization Size (< 100 employees) Table 99: Annual Hour Comparison by Organization Size (> 100 employees) Table 100: Annual Hour Comparison by Embedded Service Organization Type Table 101: Annual Hour Comparison by IT & Management Consultancy Table 102: Annual Hour Comparison by PS Market (Advertising, Arch./Engr., Other PS) Table 103: Workforce Location by Organization Type and Geographic Region Table 104: Workforce Location by Organization Size Table 105: Workforce Location by Service Market Vertical Table 106: Five Year Total Average Compensation by Job Title (k) Table 107: Annual Base Salary by Organization Type (k) Table 108: Annual Base Salary by Region (k) Table 109: Annual Base Salary by Organization Size (< 100 employees) (k) Table 110: Annual Base Salary by Organization Size (> 100 employees) (k) Table 111: Annual Base Salary by Embedded Service Organization Type (k) Table 112: Annual Base Salary by IT & Management Consultancy (k) Table 113: Annual Base Salary by PS Market (Advertising, Arch/Engineering Other PS) (k) Service Performance Insight Sponsored by NetSuite vii

11 Table 114: Variable Compensation by Organization Type Table 115: Variable Compensation by Region (k) Table 116: Variable Compensation by Organization Size (< 100 employees) Table 117: Variable Compensation by Organization Size (> 100 employees) Table 118: Variable Compensation by Embedded Service Organization Type Table 119: Variable Compensation by IT & Management Consultancy Table 120: Variable Compensation by PS Market (Advertising, Arch./Engr., Other PS) Table 121: Target Utilization by Organization Type and Geographic Region Table 122: Target Utilization by Organization Size Table 123: Target Utilization by Vertical Service Market Table 124: Service Execution Performance Pillar Mapped Against Service Maturity Table 125: Impact of Resource Management Strategies Table 126: Project Staffing Time (days) Table 127: Impact Project Team Size (people) Table 128: Project Staff Size (people) Table 129: Impact No. of Concurrent Projects Managed by Project Mgr Table 130: Concurrent Projects Managed by Project Manager Table 131: Project Duration (months) Table 132: Impact On-time Project Delivery Table 133: Projects Delivered On-time Table 134: Project Cancellation Rate Table 135: Impact Average Project Overrun Table 136: Project Overrun Rate Table 137: Impact Standardized Delivery Methodology Use Table 138: Standardized Delivery Methodology Use Table 139: Impact Resource Management Effectiveness Table 140: Effectiveness of Resource Management Process Table 141: Impact Effectiveness of estimating processes and reviews Table 142: Effectiveness of Estimating Processes and Reviews Table 143: Impact Effectiveness of change control processes Table 144: Effectiveness of Change Control Processes Table 145: Effectiveness of Project Quality Processes Table 146: Effectiveness of Knowledge Management Processes Service Performance Insight Sponsored by NetSuite viii

12 Table 147: Finance and Operations Performance Pillar Maturity Table 148: Hourly Bill Rates by Organization Type Table 149: Hourly Bill Rates by Region Table 150: Hourly Bill Rates by Organization Size Table 151: Hourly Bill Rates by Embedded Service Organization Type (k) Table 152: Hourly Bill Rates by IT & Management Consultancy (k) Table 153: Hourly Bill Rates by PS Market (Advertising, Arch/Engineering Other PS) (k) Table 154: Americas Targets by Role Table 155: EMEA Targets by Role Table 156: APAC Targets by Role Table 157: Steps Taken to Improve Profitability Comparison: Table 158: Steps Taken to Improve Profitability Organization Type and HQ Region Table 159: Steps Taken to Improve Profitability Organization Size Table 160: Steps Taken to Improve Profitability PS Vertical Markets Table 161: Impact Revenue per Billable Employee Table 162: Annual Revenue per Billable Consultant (k) Table 163: Impact Annual Revenue per Employee Table 164: Annual Revenue per Employee (k) Table 165: Impact Revenue per Project Comparison Table 166: Revenue per Project (k) Table 167: Impact Project Margin Fixed Price Projects Table 168: Project Margin Fixed Price Projects Table 169: Impact Project Margin Time & Expense Projects Table 170: Project Margin Time & Expense Projects Table 171: Project Margin Subcontractors / Offshore Table 172: Impact Quarterly Revenue Target in Backlog Table 173: Quarterly Revenue Target in Backlog Table 174: Impact Percentage of annual target revenue achieved Table 175: Annual Revenue Target Achieved Table 176: Impact Percentage of Annual Target Margin Achieved Table 177: Annual Revenue Margin Target Achieved Table 178: Revenue Leakage Table 179: Invoices Redone Due to Errors or Client Rejections Service Performance Insight Sponsored by NetSuite ix

13 Table 180: Days Sales Outstanding (DSO) Table 181: Quarterly Non-Billable Expense per Employee Table 182: Percentage of Billable Work Written-Off Table 183: Executive Real-Time Visibility Table 184: Income Statement by Organization Type and Embedded Service Type Table 185: Income Statement by Organization Size Table 186: Income Statement by Position by PS Market Table 187: Best-of-the-Best Comparison Demographics Table 188: Best-of-the-Best Comparison PS Goals Table 189: Best-of-the-Best Comparison Leadership Pillar Table 190: Best-of-the-Best Comparison Client Relationships Pillar Table 191: Best-of-the-Best Comparison Human Capital Alignment Pillar Table 192: Best-of-the-Best Comparison Service Execution Pillar Table 193: Best-of-the-Best Comparison Finance & Operations Pillar Table 194: Best-of-the-Best Income Statement Comparison Table 195: Minimum Normalized Performance Pillar Scores Table 196: Leadership Model Inputs Table 197: Client Relationships Model Inputs Table 198: Human Capital Alignment Model Inputs Table 199: Service Execution Model Inputs Table 200: Finance and Operations Model Inputs Table 201: Average Service Maturity by PSO Size (People) Table 202: Average Service Maturity by PSO Type Table 203: Average Service Maturity by Vertical Market Table 204: Key Performance Indicators (KPIs) by Maturity Levels Table 205: Lexicon of Acronyms and Abbreviations Table 206: Standard Key Performance Indicator (KPI) Definitions Service Performance Insight Sponsored by NetSuite x

14 Introduction The Professional Services Maturity Model is designed to help service and project-driven organizations understand their relative performance compared to an expansive benchmark of peers. It provides visibility into critical business processes and key performance measurements so organizations can compare, diagnose and improve their own execution. It also provides prescriptive advice so organizations can pinpoint current levels of maturity and visualize the steps required to advance to the next level. Service Performance Insight (SPI Research) first introduced the New Professional Services Maturity Model benchmark report in January, Since that time more than 6,000 organizations representing 1.5 million consultants have adopted the PS Maturity Model as a strategic planning and management framework. Cumulatively, 1,059 organizations have completed the maturity survey from 2007 through The 2013 benchmark report is based on completed surveys from 234 participants and provides comparative year-over-year trend analysis to the 216 participants in 2011, 214 in 2010, 225 in 2009, 118 in 2008, as well as the initial 52 in independent providers (management consultancies, IT consultancies, architects, engineers and marketing) outnumbered the 80 captive service providers (PS within hardware and networking, software and software-as-a-service) who completed the 2013 PS Maturity benchmark survey. Thus, the results lean toward independent service providers, who are primarily focused on service growth and profitability, as opposed to embedded PSOs who must also focus on driving product revenue. The benchmark covers nine professional service segments: Software; SaaS; Hardware and Networking; IT consulting; Management Consulting; Accounting; Marketing and Advertising; Architects and Engineers and other PS. Additionally the report categorizes key performance measurements into six organizational size segments based on the number of PS employees. Originally North American-dominated, the survey has gained significant international participation with this year s respondents representing leading service organizations around the world. In the 2013 report, 79% of the participating organizations were North American-based, compared to the first two years when over 95% were. This year s benchmark reflects data from nearly 50,000 consultants worldwide. Highlights from the 2013 Benchmark 2012 was a pivotal year in the professional services market. While the world was consumed with the future direction of the economy, presidential elections, and the changing geo-political landscape, the professional services sector grew at a fairly impressive rate and achieved pre-recession profit levels will be a transitional year, as markets driven by people (such as professional services) will face increased healthcare costs, higher taxes and a looming talent cliff. Organizational profitability will become increasingly difficult; meaning PS executives must place increased emphasis on talent management and streamlining business processes, to improve their use of capital. SPI Research does 2013 Service Performance Insight Sponsored by NetSuite 1

15 not expect profit levels to significantly rise from the 2012 highs but there is still plenty of room for market expansion. In this year's survey SPI Research began to ask questions around the incorporation of social media by PSOs. LinkedIn, Facebook, Twitter and other social media sites have been around for several years, but in 2012 they became an important component of PS brand-building, lead generation and recruiting. Now, social media has become a brand builder, as well as a collaboration tool to find resources, share best practices, and communicate more effectively across a diverse and dispersed workforce. Software solution providers have stayed ahead of this curve, and many have incorporated social media into their application suites. The goal is to keep everyone working on the same platform, sharing the same information and best practices, in order to be, more efficient and profitable. Earlier in 2012 SPI Research introduced the first comprehensive report on service lifecycle management (SLM). This analysis and report was several years in the making, as SPI Research consulted, presented, trained and surveyed organizations around the world regarding the move toward service packaging. This topic has gained increased attention as PSOs have worked to further refine their sales and marketing strategies around services as products, which offer greater structure and standardization, and ultimately deliver greater client value and consistency. For the past three years SPI Research has discussed the movement to the cloud. Providers such as FinancialForce.com, Intacct, Projector and NetSuite built their solutions from the ground up on the cloud. Other market leaders, such as SAP, Deltek, and Microsoft, have begun to introduce new cloudbased solutions, which have been met with marketplace acclaim. There is no going back, and therefore, application developers not considering the cloud will be left behind. The Past Five Years Have Seen Change The 2012 survey was the sixth annual survey conducted. Rather than look back to the initial year of the survey, SPI Research prefers a fiveyear trend analysis which gives Figure 1: Bid-to-Win Ratio readers a birds-eye view of the trends that will shape the next five years. Figure 1 shows the average bid-towin ratio over the past three years has remained fairly constant. This figure indicates on average PSOs win slightly over half the bids they submit (5 out of 10). As global competition intensifies, this key performance indicator could be negatively impacted, meaning more 2013 Service Performance Insight Sponsored by NetSuite 2

16 money must be spent on sales and marketing initiatives. Almost all of the professional services organizations interviewed for this year's benchmark stated sales and marketing remains one of their highest priorities. And like last year, service productization is becoming increasingly important to help organizations better package, market, sell and deliver consistent high quality services. Figure 2: Sales Cycle Length Interestingly, the average length of the sales cycle (Figure 2) from qualified lead to signed contract declined in 2012 from 100 days in 2011 to a little over 95 days in This key performance measurement means there is pent-up demand for professional services; consulting buyers are opening up their wallets with shorter approval times. In conjunction with yearover-year revenue growth (11.5%); a strong sales pipeline (193% of forecast) and starting backlog of 43%, 2013 should be another strong year for PS. Figure 3 shows annual employee attrition is slightly lower than last year's benchmark, but overall still on the rise. SPI Research expects it to increase further as the economy continues to recover. SPI Research interviews, especially with those who earned best-of-the-best status, indicates they have serious concerns about finding, hiring and retaining qualified employees. The market is at the beginning of the retirement of the baby boomer generation, which will hit its peak by Figure 3: Annual Employee Attrition A new talent cliff of qualified resources with critical skills in science, technology, engineering and math (STEM) portends a deficit of over 230,000 workers with these skills in the US by The problem is exacerbated by underfunding advanced STEM education, baby boomer retirement and restrictive immigrant visa policies. The Talent Cliff topic is one PS executives should closely monitor as it will increasingly become the number one growth inhibitor Service Performance Insight Sponsored by NetSuite 3

17 Figure 4 shows employee billable utilization has continued to rise over Figure 4: Billable Utilization the past five years. SPI Research has always considered 70% to be an achievable target, and this year's results came in right at that percentage. Billable utilization, coupled with the percentage of billable employees, have both risen over the past year, which enabled organizations in this year's benchmark to achieve their highest profitability in the past five years. The results of this study continue to show increases in staff to be slightly below increases in revenue, meaning PSOs are consistently becoming more efficient, as well as doing a better job of resource scheduling. The market appears to have finally recovered from the downturn which started four years ago was an exceptional year for the 234 participating organizations as average profit for the entire benchmark increased from 6.9% in 2010 to 13.5% in 2011 and now 18.3% in 2012! Both ESOs and PSOS significantly increased their profits - ESOs [13.3% (2010) to 17.0% (2011) to 23% (2012)] outperformed independents [6.0% (2010) to 10.6% (2011) to 15.6% (2012)]. The bottom-line is that the PS market is very much alive, well and growing with no let-up in sight. The greatest challenge going forward for PS providers will be finding the skilled talent they need for growth which means both large and small firms will have to develop innovative new talent management techniques to stay ahead of the curve Service Performance Insight Sponsored by NetSuite 4

18 1. REPORT SPONSORED BY NETSUITE Professional Services Industry Recovering Nicely but Increasingly Competitive Benchmarking the Evolution of Services Businesses The services industry has come out of the recessions nicely with stronger performance across key metrics such as annual revenue growth, headcount and salaries, pipeline size, bill rates, and utilization rates. Given this strong performance, I wasn t too surprised to see the study s results citing a continued surge in PSA technology adoption over the past several years. It s great for NetSuite, the PSA market leader, but it s also good for the adopters. The combination of economic improvements, proven benefits of PSA solutions, and the improved ease of use and lower total cost of ownership of cloud-based offerings all contributed to that growth. With over 70% of respondents to this year s SPI Benchmark Survey now using a commercial PSA solution, it s more apparent than ever that professional services organizations realize the need for tools to help maximize their potential in an increasingly global, mobile, and competitive environment. Client pressure to adopt more fixed fee contracts and keep their costs contained means that staying on top of your expenses and avoiding over-servicing accounts is critical. Despite unique expertise and offerings many service companies offer, competition is intense whether from a local firm, one overseas, or a prospective client choosing to do more in-house. While we all try our best to stay on top of our own business metrics and performance, we don t always have time or the information required to look outside. Annual benchmarks like this allow us to look beyond ourselves to see how the metrics we thought were good or bad in isolation stack up against our peers. This comparison can be incredibly useful to identify ways we can expand business and identify areas where more attention can yield tremendous payoffs. I am particularly proud to report that NetSuite SRP and PSA customers performed superbly. 25% of the study s Best-of-the-Best winners use our leading cloud PS solutions; far more than any other vendor in the study. The survey also reveals that, while there s still a big opportunity for services firms to integrate their PSA solutions with their financial and CRM systems, those that have done this have far better performance than others. With an integrated cloud services business management suite that streamlines the quote to bill process, we re thrilled to see the improved business and financial results that a complete services platform provides our customers. We re proud to once again sponsor SPI s Benchmark Survey. We thank all services organizations who contributed to it and hope this year s findings will give you insights to help grow and improve your services organizations in the year ahead. Regards, Ed Marshall, GM, Services Vertical NetSuite Service Performance Insight Sponsored by NetSuite 5

19 2. EXECUTIVE SUMMARY Service Performance Insight is proud to introduce the sixth annual Table 1: 2013 Key Performance Indicator (KPI) comparison Professional Services Maturity Key Performance Indicator (KPI) benchmark with cumulative results Annual PS revenue growth 7.6% 13.7% 11.5% from 1,059 PS organizations. 234 PS Percentage of billable personnel 70.8% 74.2% 75.2% organizations representing 50,000 consultants worldwide completed the 2013 PS Maturity benchmark survey in the 4 th quarter of The benchmark shows the professional service market is in good shape, with high levels of growth across all market Attrition Annual revenue per consultant Profit (EBITDA) Quarterly Non-billable expense 6.8% $ % $3, % $ % $1, % $ % $1,266 segments. PS includes research, management and IT consulting, architecture/engineering, accounting and advertising. PS constituents are at the forefront of developing new strategies for improving productivity by helping their clients apply the right blend of people, process and technology to solve business issues. Thus, they pave the way to a brighter and more dynamic 21st century business model. Strong growth but not as strong as in 2011 The professional services market is accustomed to high levels of growth. Back in the early 2000 s annual revenue growth rates of 15% to 20% were the norm. As the global economy dipped into a protracted recession the professional services market also retrenched but never to the point of flat or negative growth. In SPI Research's six years of benchmarking the average annual growth rate has never been negative represented the low point of year over year revenue growth at 3.6% while 2007 growth of 17.2% was the most recent high point. Figure 5: Year-over-year Change in PS Revenue The 2012 survey showed an average growth rate of 11.5%, which was nearly 20% lower (on a relative basis) than 2011 growth of 13.7%. This decline from 2011 could be seen as a reaction to the European sovereign debt crisis and worry over the US fiscal cliff and increased regulatory costs. Regardless, 2013 Service Performance Insight Sponsored by NetSuite 6

20 double digit growth rates still signify the strength of the global professional service market, making it a dependable source of revenue and profit, particularly around technology and management consulting services. The low end of the market staff augmentation is experiencing contraction and significant rate pressure but the upper end of the market for unique, specialized expertise is growing along with higher bill rates. Growth rates over 10% generally portend increased hiring. Growth below 10% can be managed through efficiency gains, increased utilization and use of third-party contractors. According to the survey, the number one challenge for PSOs is talent management. Skilled talent shortages have forced firms to revitalize college recruiting and necessitated significant investments in employee development. Since 2009, with economic improvement, SPI Research has seen a steady increase in attrition to 7.24% in 2012 which is on-par with pre-recession levels. A distributed global consulting workforce allows PSOs to explore hybrid on-site and off-site delivery models, which reduce travel time and cost while increasing workforce flexibility. Talent management is and always will be a primary focus for service providers, as skilled consultants are at the heart of their brand value and differentiation. Globalization and growth of the service sector have intensified the war for talent with increasing shortages of qualified resources. The developed world is set to experience a massive Talent Cliff as baby boomers exit the workforce without enough skilled workers; particularly in Science, Technology, Engineering and Math (STEM); to replace them. In the second decade of the 21 st century, top performing service organizations will accentuate college and offshore hiring, while investing in on-boarding, mentoring and skill development programs. The ability to rapidly attract, hire and ramp high-quality staff will be a significant source of differentiation. Effective talent management strategies will support and propel growth, while ineffective human capital management will undercut all other areas of performance. The percentage of billable personnel continues to increase One key performance indicator that Figure 6: Percentage of Billable Employees has continued to improve every year is the percentage of employees who are billable as compared to nonbillable management, sales and administrative personnel. In 2009 this metric was less than 70%, but it has risen every year since. The percentage of billable staff is now over 75% of total staff. While this change might not sound significant, it bodes well for profitability, as now there are three billable consultants to every non-billable employee. This ratio also reduces the pressure for excessive billable utilization because the chargeable workforce has to carry fewer non-billable staff. Certainly increased reliance on powerful integrated accounting, sales and professional service automation solutions has resulted in 2013 Service Performance Insight Sponsored by NetSuite 7

21 significant productivity improvements and fewer administrative roles. However, as the percentage of senior management personnel continues to decline it could cause operational and sales concerns for PSOs. With fewer sales and administrative personnel, sales and marketing efforts could suffer. Reductions in other supporting organizations such as human resources, finance, accounting and service quality or engineering may compromise recruiting, employee development, financial management and quality. PS executives should closely monitor this key performance indicator to ensure that short-term profitability improvements don t inhibit long-term growth and quality. Bill Rates Climb Increases in bill rates of almost 3% across the board fueled profit. Both independents and embedded organizations saw an increase in rates with embedded organizations commanding a significant premium over independent consultancies. This tremendous surge in bill rates combined with higher consultant productivity and higher billable utilization explains the dramatic jump in net profit shown in this year s survey. All in all 2012 was a banner year for PS across all verticals and geographies with the Americas leading the surge. Table 2: Hourly Bill Rate by Organization Type (k) Role Survey ESOs PSOs Change Change Change Vice President $265 $ % $203 $ % $298 $ % Director % % % Delivery Manager % % % Project/Program Mgr % % % Business Consultant % % % Sr. Tech. Consult./Engr % % % Tech. Consultant/Engr % % % Solution Architect % % % Profits continue to rise SPI Research was particularly impressed with the average organizational profitability in this year's survey, nearly tripling that of just two years ago. The 2013 benchmark revealed average EBITDA (earnings before income tax, depreciation and amortization) to be 18%. Considering the 2012 benchmark showed average profit at 13.5%, this year s survey shows the market is growing and profits are there for the taking. The steep increase in profit was fueled by higher consultant productivity, lower discretionary and overhead spending combined with higher bill rates Service Performance Insight Sponsored by NetSuite 8

22 Many PSOs have taken the necessary steps to improve profitability. For instance, quarterly non-billable expense went down from $1,600 per Figure 7: Annual Revenue per Billable Consultant employee to less than $1,300. Annual non-billable administrative time per employee declined from 232 to 150 hours resulting in more than two weeks of additional time per employee. Unfortunately most of this improvement was squandered on non-billable project hours as this time increased from 196 to 225 hours. Bill rates also continued to rise resulting in significantly higher revenue yield per consultant. Average revenue per consultant soared to $206k as compared to $197k in And as stated in the prior section, a higher percentage of employees are now billable, which means administrative costs are lower, all leading to improved profitability. Although client delight is almost always the number one PS priority, high levels of profitability are an excellent indicator of firm health. Many profitability levers, like the reduction of administrative, facility and discretionary travel expense are sound business practices for the long term; other profit levers like staff, salary and bonus reductions or curtailing training may improve short-term profitability but damage long-term morale and growth. Sound management practices should favor long-term growth investments over short-term tactics to juice profit. For instance, employee incentives help drive performance improvements, revenue growth and profitability. Employee, quality and infrastructure investments will ultimately result in greater financial performance. Maturity Matters! SPI Research has spent the past six years benchmarking varying levels of operational control or process Maturity to determine the characteristics and appropriate behaviors for PSOs based on their organizational lifecycle stage. The primary questions SPI Research was seeking to answer when the PS Maturity Model Benchmark was first conceived remain our primary focus today: What are the most important focus areas for professional service organizations (PSOs) as their businesses mature? What is the optimum level of maturity or control at each phase of an organization s lifecycle? Can diagnostic tools be built for assessing and determining the health of key business processes? Are there key business characteristics and behaviors that spell the difference between success and failure? 2013 Service Performance Insight Sponsored by NetSuite 9

23 The original concept behind the SPI Research s PS Maturity Model was to investigate whether increasing levels of standardization in operating processes and management controls improve financial performance. SPI Research s 2013 PS Maturity Benchmark demonstrates that increasing levels of business process maturity do indeed result in significant performance improvements. In fact, SPI Research found that high levels of performance have far more to do with leadership focus, organizational alignment, effective business processes and disciplined execution than "time in grade." Relatively young and fast-growing organizations can and do demonstrate surprisingly high levels of maturity and performance excellence if their charters are clear. Further improvements accrue when their goals and measurements are aligned with their mission, and they make the investments they need in talent and systems to provide visibility and appropriate levels of business control. Of course, it certainly helps if they are also well-positioned within a fast-growing market. As Table 3 shows, the payoff from investing in a program to assess current maturity and prioritize maturity improvements can be substantial. Based on the 2013 benchmark of 234 service organizations, 55% performed at maturity levels 1 and 2, 25% at level 3 and 20% performed at maturity levels 4 and 5. The 48 level 4 and 5 organizations significantly outperformed their peers by generating significantly higher revenue per billable consultant combined with higher project and operating margins. Table 3: Maturity Matters! Key Performance Measurement Maturity Level 1-2 Maturity Level 3 Maturity Level 4-5 PS EBITDA 6.7% 13.2% 29.9% Annual revenue growth 10.9% 11.8% 12.9% Billable utilization (2,000 hours) 69.2% 73.9% 74.5% Project gross margin 31.9% 37.4% 41.4% Revenue per billable consultant (k) $175 $223 $252 Every year SPI Research recognizes the top 5% of benchmark participants with the annual Best-of-the-Best award based on superlative overall maturity scores. Perennial winners share many common characteristics, chief among them being constant management operational vigilance and respect for metrics. The leaders of the Best-of-the-Best firms all have real-time visibility and control over all aspects of the business. They intimately understand the impact of key metrics like attrition, project overruns and excess overhead on bottom-line profitability. The most mature organizations are more likely to have implemented integrated accounting, Client Relationship Management (CRM) and Professional Services Automation (PSA) backbones to give them the real-time visibility they need to catch problems and spot negative trends before they spiral out-of-control. Their key focus and investment is in finding, hiring and retaining top-quality staff but they are very frugal in other areas like expensive facilities and perks that don t impact client and employee satisfaction Service Performance Insight Sponsored by NetSuite 10

24 Looking ahead to 2013 The professional services market has experienced high levels of growth the past two years. A focus on greater efficiency and productivity were major reasons for success in will require greater creativity, as increased burdens, such as healthcare costs and taxes, could not only limit profitability for PSOs, but could also inhibit growth as their clients face similar challenges. The professional services marketplace has grown and succeeded because a majority of the organizations offer innovative services to help their clients manage change and improve performance. As market dynamics change, leading PSOs have been able to adapt to take advantage of new technologies to create innovative solutions to help their clients will be no different in terms of the need for continuous improvement. But, the headwinds will be slightly stronger and the need for repeatable service offers and organizational efficiency and effectiveness will become increasingly critical to remain competitive and profitable Service Performance Insight Sponsored by NetSuite 11

25 3. THE PROFESSIONAL SERVICES MATURITY MODEL The core tenet of the PS Maturity Model is service and project-oriented organizations achieve success through the optimization of five Service Performance Pillars : 1. Leadership Vision, Strategy and Culture 2. Client Relationships 3. Human Capital Alignment 4. Service Execution 5. Finance and Operations Within each of the Service Performance Pillars, SPI Research developed guidelines and key performance maturity measurements. These guidelines cut across the five service dimensions (pillars) to illustrate examples of business process maturity. This study measures the correlation between process maturity, key performance measurements and service performance excellence. Service Performance Pillars SPI Research developed a model that segments and analyzes a PSO into five distinct areas of performance that are both logical and functional. We call the five underpinning elements Service Performance Pillars because they form the foundation for all professional services organizations (Figure 8): Figure 8: Service Performance Pillars 1. Leadership - Vision, Strategy and Culture: (CEO) a unique view of the future and the role the service organization will play in shaping it. A clear and compelling strategy provides a focus for the organization and galvanizes action. Effective strategies bring together target customers, their business problems, and how a solution solves those problems differently, uniquely, or better than its competitors. For a service strategy to be effective, the role and charter of the service organization must be defined, embraced, communicated and supported throughout the company. Depending on whether the service strategy is to primarily support the sale of products, or to drive service revenue and profit; service organization goals and measurements will vary. Leadership skills and competencies must mature as the organization matures. Culture is the unwritten customs, 2013 Service Performance Insight Sponsored by NetSuite 12

26 behaviors and beliefs that determine the rules of the game for decision making, structure and power. 2. Client Relationships: (Marketing and Sales) the ability to communicate effectively with employees, partners and customers to generate and close business and win deals. Effective client management involves improving relationships to better understand client needs, while ensuring clients will continue to buy and provide references and testimonials. 3. Human Capital Alignment: (Human Resources) the ability to attract, hire, retain and motivate a high quality consulting staff. With changing workforce demographics, talent management has increased in importance. High-caliber employees represent the essence, brand and reputation of the firm. PSOs are starting to adopt hybrid on and off-site staffing models which put increased pressure on customer-facing staff to develop client relationships and more carefully define client requirements. Demands for career planning, skill development and flexible work options have intensified. 4. Service Execution: (Engagement/Delivery) the methodologies, processes and tools to effectively schedule, deploy and measure the quality of the service delivery process. Service execution involves a number of factors: from resource management, to delivering projects in a predictable and acceptable time frame, to reducing cost while improving project quality and harvesting knowledge. Processes include resource management, project planning and quality control, knowledge management and methodology and tool development. 5. Finance and Operations: (CFO) the ability to manage services profit and loss to generate revenue and profit while developing repeatable operating processes. The finance and operations pillar focuses on revenue, margin and cost and the financial, contractual and IT operating processes and controls required to run a profitable and predictable business. Professional Services Maturity Model Benchmark Levels The model is built on the same foundation as the Capability Maturity Model (CMM), which has been adopted for software development; but is specifically targeted toward billable PSOs, that either exclusively sell and execute professional services or complement the sale of products with services. Figure 9 depicts maturity level progression and outlines primary characteristics for each maturity level: Figure 9: Services Maturity Model Levels 2013 Service Performance Insight Sponsored by NetSuite 13

27 Level 1 Initiated Heroic : (approximately 30% of PSOs) at maturity Level 1, processes are ad hoc and fluid. The business environment is chaotic and opportunistic, and the focus for a PSO is primarily on new client acquisition and reference building. Often professional service employees at this level are chameleons able to provide presales support one day and develop interfaces and product workarounds the next. Success depends on the competence and heroics of people in the organization, and not on the use of proven processes, methods or tools. Practices and procedures are informal and quality is based on individual experience and aptitude. Level 1 organizations are often characterized as informal and heroic. Level 2 Piloted Functional Excellence : (approximately 25% of PSOs) at maturity level 2, processes have started to become repeatable. Best practices may be demonstrated in discrete functional areas or geographies but they are not yet documented and codified for the entire organization. Basic processes have been established for the five Professional Services Performance Pillars, but they are not yet universally embraced. Operational excellence and best practices may be discerned within functions but not across functions. By Level 2 individual Functional Excellence should have emerged in key areas. Level 3 Deployed Project Excellence : (approximately 25% of PSOs) at maturity level 3, the PSO has created a set of standard processes and operating principles for all major service performance pillars but renegades and hold-outs may still exist. Management has established and started to enforce financial and quality objectives on a global basis. Processes have been established to focus on effective execution and there is spotlight on alignment between and across functions. By level 3 project delivery methodologies and quality measurements are in place and enforced across the organization. Level 3 organizations should exhibit Project Excellence with a consistent, repeatable project delivery methodology. Level 4 Institutionalized Portfolio Excellence : (approximately 15% of PSOs) at maturity level 4, management uses precise measurements, metrics and controls, to effectively manage the PSO. Each service performance pillar contains a detailed set of operating principles, tools and measurements. Organizations at this level set quantitative and qualitative goals for customer acquisition, retention and penetration, in addition to a complete set of financial and quality operating controls and measurements. Processes are aligned to achieve leverage. The portfolio is balanced with a focus on project selection and execution. Level 4 organizations should exhibit Portfolio Excellence. Level 5 Optimized Collaborative : (approximately 5% of PSOs) at maturity level 5 executives focus on continual improvement of all elements of the five performance pillars. A disciplined, controlled process is in place to measure and optimize performance through both incremental and innovative technological improvements. Quantitative process-improvement objectives for the organization are established. They are continually revised to reflect changing business objectives, and used as criteria in managing process improvement. Initiatives are in place to ensure quality, cost control and client acquisition. The rough edges between disciplines, functions, and specialties have been smoothed to ensure unique problems can be addressed 2013 Service Performance Insight Sponsored by NetSuite 14

28 quickly without excessive bureaucracy or functional silos. Level 5 organizations are visionary and collaborative both internally and with clients and external business partners. Over the past six years, over 6,000 PSOs have studied the PS Maturity Model and are using the concepts and key performance measurements to pinpoint their organization s current maturity and develop improvement plans to advance lagging areas. SPI Research summarizes individual PSO performance in a SPIder chart (Figure 10). The maturity scorecard provides a measurement for each organization in comparison to the benchmark maturity definitions. It provides an invaluable tool to analyze current performance and prioritize future improvement initiatives. Figure 10: Service Performance Pillar Maturity This graphical depiction of the Service Performance Pillars by maturity level enables PS executives to quickly scorecard their organization s performance, and diagnose areas of relative strength and weakness. Building the Professional Services Maturity Model With core benchmark information gleaned on all primary business functions, SPI Research was able to construct a Professional Services Maturity Model that determines organizational maturity by pillar and provides guidance to advance to the next level (Table 4). Table 4: Performance Pillars Mapped Against Service Maturity Level 1 Initiated Level 2 Piloted Level 3 Deployed Level 4 Institutionalized Level 5 Optimized Leadership Initial strategy is to support product sales and provide reference customers while providing workarounds to complete immature products. Leaders are doers. PS has become a profit center but is subordinate to product sales. Strategy is to drive customer adoption and references profitably. Leaders focus on P&L and client relationships. PS is important revenue and margin source but channel conflict still exists. Services differentiate products. Leadership development plans are in place. Leaders have strong background & skills in all pillars. Service leads products. PS is a vital part of the company. Solution selling is a way of life. PS is included in all strategy decisions. Succession plans are in place for critical leadership roles PS is critical to the company. Service strategy is clear. Complimentary goals and measurements are in place for all functions. Leaders have global vision and continually focus on renewal & expansion Service Performance Insight Sponsored by NetSuite 15

29 Level 1 Initiated Level 2 Piloted Level 3 Deployed Level 4 Institutionalized Level 5 Optimized Client Relationships Opportunistic. No defined solution sets or Go to Market plan. Focus is on new customers and reference building. Individual heroics, no consistent sales, marketing or partnering plan or methodology. Ad hoc, one-off projects. Start to use marketing to drive leads. Multiple sales models. Start investing in sales training, CRM & sales methodology. Start measuring sale effectiveness & customer satisfaction. Start developing partners and partner programs. Some level of proposal reviews and pricing control. Marketing, inside sales, solution sales with defined solution sets. CRM integrated with financials and PSA. Deal, pricing and contract reviews. Partner plan and scorecard. Tight pricing and contract mgmt. controls. High levels of customer satisfaction. CRM, PSA, ERP integration provides 360 degree view of client relationships. Business process, vertical and horizontal solutions. Vertical client centers of excellence. Top client and partner programs. Global contract and pricing management. Key partner relationships. Strong customer reference programs. Executive relationships. Thought leadership. Brand building and awareness. High customer satisfaction. Integrated sales, marketing and partnering programs. High quality references. Human Capital Alignment Hire as needed. Generalist skills. Chameleons, Jack of all Trades. Individual heroics. May perform presales as well as consulting delivery. Begin forecasting workload. Start developing job and skill descriptions & compensation plans. Rudimentary career paths. Start measuring employee Satisfaction Resource, skill and career management. Employee satisfaction surveys. Training plans. Goals and measurements aligned with compensation. Attrition <15% Business process and vertical skills in addition to technical and project skills. Career ladder and mentoring programs. Training investments to support career. Low attrition, high satisfaction Continually staff and train to meet future needs. Highly skilled, motivated workforce. Outsource commodity skills or peak demand. Sophisticated variable on and off-shore workforce model. Service Execution No scheduling. Reactive. Ad hoc. Heroic. Scheduling by spreadsheet. No consistent project delivery methods. No project quality controls or knowledge management. Skeleton methodology in place. Centralized resource mgmt. Initiating project mgmt. and technical skills. Starting to measure project satisfaction and harvest knowledge. PSA deployed for resource and project management. Collaborative portal. Earned Value Analysis. Project dashboard. Global Project Management Office, project quality reviews and measurements. Effective change management. Integrated project and resource management. Effective scheduling. Using portfolio management. Global PMO. Global project dashboard. Global Knowledge Management. Global resource management. Integrated solutions. Continual checks and balances to assure superior utilization and bill rates. Complete visibility to global project quality. Multi-disciplinary resource management. Finance and Operations The PSO has been created but is not yet profitable. Rudimentary time & expense capture. Limited financial visibility and control. Unpredictable financial performance. Rudimentary contract management. 5 to 20% margin. PS becoming a profit center but still immature finance and operating processes. Investment in ERP and PSA to provide financial visibility. May not have real-time visibility or BI. Standard Library of Contracts and Statements of Work. 20 to 30% margin. PS operates as a tightly managed P&L. Standard methods for resource mgmt., time & expense mgmt., cost control & billing. In depth knowledge of all costs at the employee, sub-contractor & project level. Processes in place for contract management, legal and pricing decisions. PS generates > 20% of overall company revenue & contributes > 30% margin. Well-developed finance and operations processes and controls. Systems have been implemented for CRM, PSA, ERP and BI. IT integration and real-time visibility. Systems have been implemented for contract management, legal and pricing decisions. > 40% margin. Continuous improvement and enhancement. High profit. Integrated systems. Global with disciplined process controls and optimization. Completely integrated financial, CRM, resource management, contracts and pricing systems, processes and controls. Why Maturity Matters SPI Research believes wide support for the PS Maturity model is due to its holistic approach to measuring performance. Maturity is determined through alignment and focus both within and across functions. For example, although financial measurements are of primary importance they are equally weighted and correlated with leadership and sales and quality measurements to ensure organizations improve across all dimensions, not just in terms of financial performance. However, if the organization is profit-motivated (which most are), increasing maturity levels do show up in significant bottom-line 2013 Service Performance Insight Sponsored by NetSuite 16

30 profit. Figure 11 highlights major key performance measurements by maturity level, and should alone be an important reason why PS executives should look deeper into using it to increase profits. Figure 11: Maturity Progression Pillar Importance and Organizational Maturity The results and insights gained in the past six years have confirmed SPI Research s original hypothesis that service organizations must develop a balanced and holistic approach to improving all aspects of their business as they mature. SPI Research has discovered that the emphasis on individual service pillar performance shifts as organizations mature. Excellence in only one particular service performance pillar does not create overall organizational success rather it is the appropriate balance and alignment within and across performance pillars which ultimately leads to sustainable success. Table 5 depicts the relative service performance pillar importance by organizational maturity level. Many professional service organizations are established without a particular initial focus toward optimizing performance. They begin with the goal of establishing a client and reference base. They may be operated as a cost center or as an adjunct to the product function to establish alpha and beta customers and to provide early product feedback. Initially they often perform presales, training, quality assurance and service delivery tasks. They hope to deliver services that are both profitable to them as well as valued by their clients, but in reality, they take the position that just about any deal is a good deal. The emphasis at Level 1 maturity is on building client references and recruiting highly skilled generalist consultants who are experienced enough and flexible enough to perform heroic feats to ensure early customer success Service Performance Insight Sponsored by NetSuite 17

31 By Level 2, although primary focus is still on creating Table 5: Service Pillar Importance by Organizational Maturity Level reference customers, more Pillar Initiated Piloted Deploy. Inst. Opt. emphasis is placed on human Leadership capital alignment for recruiting and ramping skilled employees, partners and contractors. Service execution focus is on developing repeatable Client Relationships Human Capital Align. Service Execution Finance & Operations project delivery methods and quality processes. At these early stages, many embedded professional service organizations have a strong product-driven focus and the role of the service organization is subordinate to products. Conflicts between service profit, client success and driving product revenue are often characteristic of Level 2 embedded service organizations. By Level 3 the organization must move toward a more balanced focus on all elements of the business by investing in systems, operating processes and repeatable methods to sustain growth and ensure quality. At Level 4 the organization has implemented structured business processes and utilizes integrated information systems to assure there is one view of the business. Finally, at Level 5 the organization is running very efficiently and the focus is on continual improvement and innovation. Very few firms achieve sustained Level 5 performance. Figure 12: PS Performance Pillars Core KPIs 2013 Service Performance Insight Sponsored by NetSuite 18

32 4. REPORT DEMOGRAPHICS SPI Research surveyed 234 billable Professional Services Organizations (PSOs) from October through December, The following sections breakdown the 2012 survey demographics in a number of key areas (market, size, and geographic region) to help PS firms compare their individual results to the benchmark. The Service Market is Huge and Growing According to Gartner s July 2012 IT Spending report, IT and Telecom services represent almost 70 percent of all IT spending with vast global revenues in excess of $2.6 trillion. Although the pace of service revenue growth has slowed, unlike most other industries, year-over-year IT service revenue has only declined once in the past ten years ( ). Table 6: The Service Market is Huge, and Growing 2011 Spending 2010/11 Growth 2012 Spending 2011/12 Growth 2013 Spending 2012/13 Growth Computing Hardware % % % Software % % % IT Services % % % Telecom Equipment % % % Telecom Services % % % All IT % % % Source: Gartner, 2012 Top 100 Software Company Product to Service Mix Ratios Table 7: Top 100 Software Company Ratios Company Size (Revenue) Combined Support and PS Gross Margin Services % of Total Revenue Service Median Statistics $1bn Rev. 68.3% 53.9% Maintenance represents 38.7% of total revenue $250mm - $999mm 59.1% 54.9% Maintenance produces 83.2% median margin $100mm - $249mm 55.9% 50.6% PS represents 20.8% of total revenue $50mm - $99mm 47.5% 37.3% PS produces 22.5% median margin Under $50mm 68.0% 53.6% Maintenance Attach Rate is 90% Source: Service Performance Insight Sponsored by NetSuite 19

33 Vertical PS Markets the North American Industry Classification System SPI Research uses the North American Industry Classification System (NAICS) to analyze the PS market. The following sections define the Professional Services markets (Code 54). The NAICS defines these industries as those in this subsector engage in business processes where human capital is the major input. These establishments provide the knowledge and skills of their employees, often on an assignment basis, where an individual or team is responsible for the delivery of high value services to the client. The individual industries of this subsector are defined on the basis of the particular expertise and training of the services provider (Table 8). According to the US Census in 2010 estimated US revenue for Professional, Scientific and Technical Services reached $1.304 trillion with 3.4% year over year sector growth from 2009 to Revenues from the US PS industry have grown 22% in the past five years. Table 8: Vertical PS Markets the North American Industry Classification System Code Market Description US Census 2010 Revenue 5411 Legal This industry is comprised of legal practitioners known as lawyers or attorneys (i.e., counselors-at-law) primarily engaged in the practice of law. Firms in this industry may provide a range of expertise or specialize in specific areas of law, such as criminal law, corporate law, family and estate planning, patent law, real estate law, or tax law. $240bn 5412 Accounting/ Tax Prep. / Bookkeeping / Payroll This industry comprises establishments primarily engaged in providing services, such as auditing and accounting, designing accounting systems, preparing financial statements, developing budgets, preparing tax returns, processing payrolls, bookkeeping, and billing. Accountants are certified to ensure they have and maintain competency in their field. $116bn 5413 Architectural, Engineering and Related Services This industry comprises establishments primarily engaged in planning and designing residential, institutional, leisure, commercial, and industrial buildings and structures by applying knowledge of design, construction procedures, zoning regulations, building codes, and building materials. $226bn 5414 Specialized Design Services This industry group comprises establishments providing specialized design services (except architectural, engineering, and computer systems design). $16bn 5415 Computer Systems Design Services Related Services (IT Consulting) This industry comprises establishments primarily engaged in providing expertise in the field of information technologies through one or more of the following activities: (1) writing, modifying, testing, and supporting software to meet the needs of a particular customer; (2) planning and designing computer systems that integrate computer hardware, software, and communication technologies; (3) on-site management and operation of clients' computer systems and/or data processing facilities; and (4) other professional and technical computer-related advice and services. $284bn 2013 Service Performance Insight Sponsored by NetSuite 20

34 Code Market Description US Census 2010 Revenue 5416 Management, Science and Technical Consulting Services (Management Consulting) This industry comprises establishments primarily engaged in providing advice and assistance to businesses and other organizations on management issues, such as strategy and organizational planning; financial planning and budgeting; marketing objectives and policies; human resource policies, practices, and planning; production scheduling; and control planning. $153bn 5417 Scientific Research and Development Services This industry group comprises establishments engaged in conducting original investigation on a systematic basis to gain new knowledge (research) and/or the application of research findings or other scientific knowledge for the creation of new or significantly improved products or processes (experimental development). The industries within this industry group are defined on the basis of the domain of research; that is, on the scientific expertise of the establishment. $117bn 5418 Advertising and Related Services (Marketing and Communications) This industry comprises establishments primarily engaged in creating advertising or public relations campaigns and placing advertising in periodicals, newspapers, radio and television, or other media. These firms are organized to provide a full range of services (i.e., through in-house capabilities or subcontracting), including advice, creative services, account management, production of advertising material, media planning, and buying (i.e., placing advertising). $89bn 5419 Other Professional, Scientific, and Technical Services (Other PS) This industry group comprises establishments engaged in professional, scientific, and technical services (except legal services; accounting, tax preparation, bookkeeping, and related services; architectural, engineering, and related services; specialized design services; computer systems design and related services; management, scientific, and technical consulting services; scientific research and development services; and advertising and related services). $63bn 54XX 2010 Total US Estimated Professional, Scientific and Technical Services Revenue $1,305bn Source: US Census and Service Performance Insight, February 2013 Many of the concepts and uses of technology described in this report also exist within product-driven organizations. As a result, Service Performance Insight uses the term services-driven organization, or embedded service organization (ESO) to describe this rapidly expanding market. PS Maturity Benchmark Vertical Market Demographics The following sections breakdown the 2012 survey demographics of the 234 participating organizations in a number of key areas that will help PS firms compare their individual organizations to the benchmark. The nine vertical segments represented in the benchmark are: IT Consulting: Systems Integrators and developers 29.5%; Software PS: Service divisions within software suppliers 19.2%; Mgmt. Consulting: Management consultancies 14.5%; SaaS PS: Service divisions within software as a service providers 9.8%; 2013 Service Performance Insight Sponsored by NetSuite 21

35 Advertising: Advertising, marketing, communication firms 4.7%; Hardware (and Networking) PS: Service divisions within hardware and networking, manufacturers 3.9%; Arch./Engr.: Architects and engineers 3.4% ; Accounting: Accountancies 1.7%; and, Other PS: Research and Development; business optimization, training 13.3%. Other PS includes other types of PSOs such as legal, research, managed services and those organizations that did not squarely fit into other specific professional services verticals. The two markets with the greatest number of observations are IT consulting and software professional services organizations. Figure 13 highlights the vertical markets included in this year s report. Figure 13: 2013 Benchmark Vertical Market Distribution Table 9 shows participant demographics for the past six years. For the past three years IT consultancies have been the largest market participating, closely followed by PS within software firms Service Performance Insight Sponsored by NetSuite 22

36 Table 9: Number of Participating Firms by Vertical Market (2007 through 2012) Market Type Total PS within Software company ESO IT Consulting PSO Management Consulting PSO Other PS PSO PS within SaaS company ESO PS within Hardware/Networking ESO Architecture / Engineering PSO Advertising (Marcom) PSO Accounting PSO Total ,059 PSO Type While SPI Research analyzes billable PSOs in a number of ways, all of the organizations in the benchmark are grouped into one of two macro segments: 1. Independent Professional Services Organizations (PSOs): Independent PSOs sell, deliver, and invoice for professional services to external clients. Clients hire systems integrators, IT consultancies (SIs) and Value-Added Resellers (VARs) to implement or integrate technology based on their strategic competence or specialized industry or product knowledge. Clients hire management consultancies to provide strategic insight, guidance, facilitation and coaching. Independent PSOs typically provide expertise, knowledge, skills and business practices that are more specialized than those found within internal organizations. In this study a majority of the independent PSOs were IT consultancies, Systems Integrators (SIs) or VARs, with the remainder representing Management Consultancies (MCs) and Accountants, Marketing and Advertising and Architects and Engineers. The participating PSOs represented a spectrum from some of the largest independent service providers in the world to extremely small, independent regional and specialty service providers. The majority of responding independent PSO s were privately held. 2. Embedded Services Organizations (ESOs): ESOs operate much like PSOs; however, they are part of a product-driven organization. The majority of ESO participants focus exclusively on their company s own technology but many of the largest ESOs like IBM and HP services provide global IT consulting, managed services and outsourcing not associated with their company s products. For the small to mid-size ESOs, their primary charter is to successfully implement their company s products. While they are focused on professional service revenue and profit, they often are asked to perform non-billable presales, proof of concept and customer satisfaction services at little to no charge. They enable external clients but must also support internal sales, support and engineering constituencies. At maturity levels 1 and 2, their primary focus is on project delivery and building a reference base. For ESOs, lead generation, marketing and sales are primarily provided by the product sales organization. In this survey a majority of 2013 Service Performance Insight Sponsored by NetSuite 23

37 the ESOs were part of independent software vendors (ISVs) who provide on-premise software however the percentage of respondents representing SaaS (cloud) providers is rapidly growing. SPI Research shows both on-premise and SaaS results. Figure 14: Independent vs. Embedded Survey Organizations Surveyed ( ) SPI Research uses this segmentation because independent consultancies must fund sales and marketing and back-office operations for Finance, Operations, Facilities, IT, etc., in a way that embedded organizations generally do not. Therefore, independents incur a higher cost of operation than captive (embedded) organizations do. However, the following chapters will demonstrate independent PSOs generally outperform their embedded counterparts because their sole focus is delivering high-quality services at a profit. Independents generally are focused on service revenue and profit growth, versus embedded, that might be more focused on delivering services to increase product revenues. Table 10: Demographics by Organization Type KPI Survey Avg. ESOs PSOs Size of PS organization (employees) Annual company revenue (mm) $132.0 $261.4 $63.0 Table 10 shows the average size of organization in this year's survey has 209 employees, which is slightly under last year's survey average of 222. What is interesting about this year's survey is that the Total professional services revenue (mm) $42.6 $63.3 $31.6 Year-over-year change in PS revenue 11.5% 12.6% 11.0% Year-over-year change in PS headcount 8.9% 8.9% 8.9% % of employees billable or chargeable 75.2% 70.6% 77.7% % of PS revenue delivered by 3rd-parties 11.1% 10.8% 11.3% 2013 Service Performance Insight Sponsored by NetSuite 24

38 average number of employees in both embedded and independent service organizations is much different from last year's benchmark. In 2012 embedded service organizations averaged 194 employees compared to 252 this year. Likewise, independents averaged 244 employees in the 2012 benchmark and now only average 186. Not too much should be read into these changes, and their impact in terms of financial key performance measurements will be detailed in other sections. Despite the changes in the average number of employees in this year's survey when compared to last year's, SPI Research found professional services revenue went up significantly for both independents and embedded PSOs. For instance, the average employee headcount of the embedded service organizations increased approximately 30% from 2011 to But the PS revenue increased over 86% for embedded, from 34.5 million to 63.3 million in this year's survey. Likewise, even though independents decreased in employee size by almost 25% from 2011 to 2012, annual PS revenue actually increased by 17.52%. These changes show that whether or not professional service organizations are growing or contracting headcount, revenue per employee is growing significantly. Table 11 further analyzes the survey demographics by vertical market, highlighting the seven largest markets surveyed. Perhaps the most interesting aspect of this table is the high levels of growth within embedded service organizations, as well as independent providers in IT consulting and marketing communications was a year of significant growth in these industries. Also, the embedded service organizations added significant headcount, but not as much as their revenue growth, meaning efficiency gains were attained and employees worked more hours. The table also shows in most markets over 70% of the employees were billable, meaning reduced administrative headcount across the board. Table 11: Demographics by Vertical Market Demographic Software PS SaaS PS Hardware PS IT Consult. Mgmt. Consult. Marcom Arch./ Engr. Number of firms reporting Average Size of PS organization (employees) Annual company revenue ($mm) $287.2 $103.2 $451.7 $59.3 $46.3 $99.0 $74.2 Professional service revenue ($mm) $59.7 $13.2 $59.4 $40.2 $23.5 $31.0 $23.8 Year-over-year change in PS revenue Year-over-year change in PS headcount % of employees billable or chargeable % of PS revenue delivered by 3rdparties 13.0% 11.6% 13.3% 13.9% 6.6% 15.8% 8.2% 10.0% 8.5% 5.6% 10.5% 8.2% 10.6% 3.9% 70.8% 67.6% 80.6% 76.2% 79.7% 81.0% 73.1% 11.2% 10.2% 12.8% 12.1% 13.8% 9.5% 10.7% 2013 Service Performance Insight Sponsored by NetSuite 25

39 Organization Size Figure 15 shows the distribution of survey participants by organization size. Similar to the past five years SPI Research has conducted this benchmark, the highest percentage of firms have between 30 and 100 employees. Even though there are slightly fewer employees on average in this year's survey versus last year's, these results reflect the metrics from nearly 50,000 consultants around the world. Figure 15: Organization Size SPI Research works to encourage larger organizations to participate, which generally skews the average organization size to somewhat larger than is found industry-wide, but it is critical that larger organizations are represented to ensure professional services organizations of all sizes can compare and contrast attributes by organization size, with sufficient statistical accuracy. Table 12 summarizes the past five years of benchmarks, and breaks the survey down by organization type, size, geographic region and Table 12: Average Organization Size (employees) market. The average number of employees per organization has gone down slightly over the past four ESO PSO Year Avg Software PS SaaS PS years, but still is fairly large compared to the industry Americas EMEA APac Hardware PS IT Consulting norm. As one might expect, embedded software firms and hardware firms are larger than SaaS PS 204 Under Mgmt. Cons Advertising 259 organizations. Also, Over 700 Arch./Engr. Other PS marketing communication , /advertising organizations have fairly high numbers of employees Service Performance Insight Sponsored by NetSuite 26

40 Headquarters Location Service Performance Insight encourages professional service organizations from around the world to participate in the benchmark survey. Survey participation from firms headquartered outside of the Americas [Europe, Middle East, Africa (EMEA) and Asia Pacific (APac)] is over 20% and growing. Figure 16: Headquarters Location Region Regardless of the headquarters location, many employees are located outside of North America. This year s survey is based on firms who employee more than 50,000 consultants worldwide making it the most comprehensive study of the Professional Service industry. Interest in the Professional Services Maturity benchmark comes from around the world, and SPI Research has begun partnering with organizations globally to increase its reach and use. Annual Company Revenue Figure 17 breaks down the survey respondents by annual company revenue, which in the case of embedded service organization consists of product and service revenue. However, services are becoming increasingly important to these organizations as they are drivers of additional product sales, innovation and client satisfaction. Figure 17: Annual Company Revenue Table 13 shows the annual company revenue ($132mm) is 6% higher than in last year's survey ($125mm), and 8% lower than the past fiveyear's survey average ($143mm). The table shows independent service providers had values 76% lower than embedded services organizations ($63mm vs. $261mm). Organizations from North America had the highest ($143mm) annual company revenue in the survey, while those from APac had the lowest ($83mm) Service Performance Insight Sponsored by NetSuite 27

41 The table shows embedded hardware and software PSOs have the highest annual company revenue, which should be expected. For independents, advertising, architects and engineers and IT consultancies are the largest. Virtually every one of these annual revenue numbers is higher than just a year ago, reflecting the rapid growth in the professional services market. Table 13: Annual Company Revenue (mm) $235 $143 $107 $125 $132 ESO PSO 6-Year Avg. Software PS SaaS PS $261 $63 $143 $287 $103 Americas EMEA APac Hardware PS IT Consulting $143 $91 $83 $452 $59 Under Mgmt. Cons. Advertising $7 $28 $61 $46 $ Over 700 Arch./Engr. Other PS $145 $463 $1,028 $74 $132 Total Professional Services Revenue Figure 18 shows the majority of firms surveyed have less than $50 million in annual revenue. The majority of the organizations have less than 100 employees. Figure 18: Total Professional Services Revenue Table 14 shows the total professional services revenue ($42.6mm) is 41% higher than in last year's survey ($30.2mm), and 10% lower than the past five-year's survey average ($47.2mm). The table showed independent service providers had values 50% lower than embedded services organizations ($31.6mm vs. $63.3mm). Organizations from EMEA had the highest ($59.7mm) total professional services revenue in the survey, while those from APac had the lowest ($13.0mm). By market, SPI Research found the other PS market reported the highest total professional services revenue ($75.9mm), while those in the SaaS PS market had the lowest ($13.2mm) 2013 Service Performance Insight Sponsored by NetSuite 28

42 Table 14: Total Professional Services Revenue (mm) $74 $68 $30 $30 $43 ESO PSO 6-Year Avg. Software PS SaaS PS $63 $32 $47 $60 $13 Americas EMEA APac Hardware PS IT Consulting $41 $60.0 $13 $59 $40 Under Mgmt. Cons. Advertising $3 $5 $17 $23 $ Over 700 Arch./Engr. Other PS $32 $87 $541 $24 $76 Year-over-Year change in PS Revenue 2012 was another year of significant growth in the professional services market. Almost 25% of the organizations surveyed reported growth rates of over 25%. Figure 19 shows almost 90% of the organizations surveyed experienced growth last year, making 2012 a good year for almost all Figure 19: Year-over-Year Change in PS Revenue service providers. Despite turbulence and uncertainty in the global market, professional services continued to expand as all other industries increasingly rely on the skills and expertise that PS firms provide. Table 15 shows that while the growth rate in 2012 was nearly 20% lower than 2011 (on a relative basis), it was still much higher than 2009 and The professional services market can absorb growth rates of 5 to 10% through efficiency gains and better management of external subcontractors without significant increases in hiring. However, when growth rates rise above 10%, professional services organizations must add full-time employees. The table shows the year-over-year change in PS revenue (11.5%) is 16% lower than in last year's survey (13.7%), and 14% higher than the 2013 Service Performance Insight Sponsored by NetSuite 29

43 past five-year's survey average (10.1%). Table 15: Year-over-Year Change in PS Revenue The table shows independent service providers had values 13% lower than embedded services organizations (11.0% vs. 12.6%). Organizations from North America had the highest (11.9%) year-overyear growth in PS revenue, while those from APac had the lowest (6.8%). Organizations with employees had the highest (14.7%) year-over-year 14.6% 14.7% 10.0% 8.2% 8.4% change in PS revenue, while those with less than 10 employees had the lowest (8.1%). SPI Research found the Advertising/ Marcom market shows the greatest year-over-year change in PS revenue (15.8%), while those in the Management Consulting market had the least (6.6%). Year-over-Year change in PS Headcount % 3.6% 7.6% 13.7% 11.5% ESO PSO 6-Year Avg. Software PS SaaS PS 12.6% 11.0% 10.1% 13.0% 11.6% Americas EMEA APac Hardware PS IT Consulting 11.9% 11.0% 6.8% 13.3% 13.9% Under Mgmt. Cons. Advertising 8.1% 10.5% 11.6% 6.6% 15.8% Over 700 Arch./Engr. Other PS Figure 20 shows the most prevalent percentage change in employee headcount was between zero and 5%. Professional service organizations grew revenue at a rate of 11.5 % in 2012 but average headcount growth was only 8.9%, much of this additional revenue was generated by existing staff and third party resources. Each year SPI Research has seen revenue growth exceed headcount growth, meaning PSOs continue to ratchet up productivity. At some point incremental productivity improvements will not be possible but these figures demonstrate just how flexible PSOs are. Figure 20: Year-over-Year Change in PS Headcount Table 16 shows the year-over-year change in PS headcount (8.9%) is 12% lower than in last year's survey (10.1%), and 6% higher than the past fiveyear's survey average (8.4%). The table shows parity between independent and embedded services organizations in terms of 2013 Service Performance Insight Sponsored by NetSuite 30

44 headcount growth (8.9%). Organizations based in EMEA had the highest (9.3%) yearover-year change in PS headcount, while those from APac had the lowest (5.8%). Organizations with employees had the highest (12.9%) year-over-year 8.9% Americas 9.3% 8.9% EMEA 5.8% 8.4% APac 3.8% 10.0% Hardware PS 5.6% 8.5% IT Consulting 10.5% change in PS headcount, Under Mgmt. Cons. Advertising while those with between % 5.5% 9.8% 8.2% 10.6% - 30 employees had the lowest (5.5%). SPI Research found the Advertising/ Marcom market reported the largest year-over-year gain in % % Over % Arch./Engr. 3.9% Other PS 6.7% PS headcount (10.6%), while those in the Architecture/Engineering market had the smallest (3.9%). % of Employees Billable or Chargeable Table 16: Year-over-Year Change in PS Headcount % 2.8% 6.9% 10.1% 8.9% ESO PSO 6-Year Avg. Software PS SaaS PS Figure 21 shows most professional services organizations have at least 70% of their employees billable, meaning the administrative costs associated with non-billable employees is less than 30%. This metric is important as excessive non-billable headcount places a burden on billable employees to work harder and charge more to achieve profitability goals. Excessive non-billable headcount produces a top-heavy organization or is a symptom of poor sales and marketing effectiveness and/or systems. But as in all things PS, there is a delicate balance which must be maintained. Non-billable headcount and time is a necessary component of developing infrastructure, systems and tools which support growth, consistency and quality. Table 17 shows the percentage of employees billable or chargeable (75.2%) is 1% higher than in last year's survey (74.2%), and 5% higher than the past five-year's survey average (71.8%). Figure 21: Percentage of Employees Billable/Chargeable 2013 Service Performance Insight Sponsored by NetSuite 31

45 The table shows independent service providers had values 10% higher than embedded services organizations (77.7% vs. 70.6%). Organizations from North America had the highest (75.7%) percentage of billable employees, while those from EMEA had the lowest (72.6%). Table 17: Percentage of Employees Billable/ Chargeable % 69.6% 70.8% 74.2% 75.2% ESO PSO 6-Year Avg. Software PS SaaS PS 70.6% 77.7% 71.8% 70.8% 67.6% Americas EMEA APac Hardware PS IT Consulting 75.7% 72.6% 73.6% 80.6% 76.2% Under Mgmt. Cons. Advertising Organizations with employees had the highest (80.3%) percentage of billable employees, while those with less than 10 employees had the lowest 71.3% % 72.3% % 75.5% Over % 79.7% Arch./Engr. 73.1% 81.0% Other PS 75.4% (71.3%). SPI Research found the Advertising/Marcom market shows the highest percentage of billable employees (81.0%), while those in the SaaS PS market had the smallest (67.6%). % of PS revenue delivered by 3rd-parties Figure 22 shows the majority of organizations derived between 1% and 10% of total revenue from subcontractors, which has been consistent for the past six years. Given the high growth rates of 2011 and 2012, SPI Research expected this number to rise. As growth rates exceed 10% PSOs begin to hire more, however, utilizing third-party contractors continues to be a good way to manage the volatility in service demand. Table 18 shows the percentage of PS revenue delivered by 3rd-parties (11.1%) is 15% lower than in last year's survey (13.1%), and 9% lower than the past five-year's survey average (12.2%). This statistic shows more and more qualified consultants are choosing full-time employment over the more mercenary highs and lows of operating as an independent consultant. Figure 22: Percentage of PS Revenue Delivered by 3rd-parties 2013 Service Performance Insight Sponsored by NetSuite 32

46 The table shows independent service providers had values 5% higher than embedded services organizations (11.3% vs. 10.8%). Organizations from APac had the highest (12.0%) percentage of PS revenue delivered by 3rdparties, while those from EMEA had the lowest (10.6%). Table 18: Percentage of PS Revenue Delivered by 3rd-parties % 12.2% 11.5% 13.1% 11.1% ESO PSO 6-Year Avg. Software PS SaaS PS 10.8% 11.3% 12.2% 11.2% 10.2% Americas EMEA APac Hardware PS IT Consulting 11.1% 10.6% 12.0% 12.8% 12.1% Under Mgmt. Cons. Advertising 9.3% 11.6% 10.8% 13.8% 9.5% Organizations with over 700 employees had the highest (15.3%) percentage of PS revenue delivered by 3rdparties, % % Over % Arch./Engr. 10.7% Other PS 6.4% while those with less than 10 employees had the lowest (9.3%). SPI Research found the Management Consulting market shows the largest percentage of PS revenue delivered by 3rd-parties (13.8%), while those in the Other PS market had the smallest (6.4%) Service Performance Insight Sponsored by NetSuite 33

47 5. PS BUSINESS APPLICATIONS The Professional Service industry continues to undergo a profound transformation that demands improved quality, efficiency, timeliness and accuracy in order to achieve first-rate execution at price points that guarantee repeat business and referrals. This transformation places increased emphasis on using information technology (IT) to improve business performance. Over the past 15 years PS executives have taken advantage of specialized business applications to improve visibility, predictability and profitability. The availability of cloud-based business applications has made this transition easier and less costly. This chapter provides PS executives and software application providers insight into the level of market adoption, integration and satisfaction with core Professional Service business applications from this year s benchmark survey. The business applications highlighted in this chapter help PSOs optimize operational effectiveness through increased visibility, streamlined business processes and cost control. Primary PS Business Applications Professional Service software providers segment their products into a variety of core application modules that emphasize the management of costs, clients and resources. The most commonly used applications are shown in Figure 23. Figure 23: Core PS Business Solutions 2013 Service Performance Insight Sponsored by NetSuite 34

48 In this year's benchmark SPI Research added Social Media (SM) applications to those studied was a year where social media applications, such as Twitter, Yammer, LinkedIn, and even Facebook, became increasingly important to PSOs for brand building, lead generation and recruiting. This year's analysis of the survey data shows a slight decrease in adoption of commercial solutions from the 2011 benchmark. This comparison reflects a higher percentage of smaller, emerging organizations that generally lack a sophisticated technology infrastructure. However, many Table 19: Commercial Solution Adoption smaller organizations have adopted IT solutions from the get-go to enable them to grow efficiently, instantiating best practices and methods, so that as they expand, they Solution Enterprise Resource Planning (ERP) Client Relationship Management (CRM) % 86.3% % 85.7% don t face the technology paranoia that Remote Service Delivery (RSD) 83.4% 82.7% grips many organizations in growth mode. Social Media (SM) N/A 80.1% Furthermore, cloud-based business applications that support the PS sector have become so easy-to-use and cost-effective that most new, young PS organizations depend on them from inception. Professional Services Automation (PSA) Knowledge Management (KM) Human Capital Management (HCM) Business Intelligence (BI) 76.4% 59.5% 49.5% 42.9% 73.5% 54.4% 48.2% 30.0% Table 19 shows once again (commercial) financial systems are the most prevalent technology solution for the PS market, closely followed by client relationship management. Remote service delivery technologies, such as Citrix and WebEx, have become core to the virtual delivery of services, as PSOs work to reign in travel time and costs to operate at higher levels of efficiency. Figure 24: Commercial Solution Adoption 2013 Service Performance Insight Sponsored by NetSuite 35

49 Figure 24 compares commercial solution adoption to those organizations that have built their own system internally or have no system at all. What stands out is that over 10% of the organizations surveyed have no formal ERP solution, meaning they probably use Excel or paper to run the business. As these organizations grow, ERP is the first solution that should be purchased. Both embedded and independent professional service organizations require most of the functions and information of larger corporations. Today s service organizations, although always focused on billable resources and time and billing, now include functions for finance and accounting, IT, legal, human resources and sales and marketing. The service industry s use of technology has typically lagged the manufacturing sector but the global size and complexity of today s service businesses has increased the need for specialized applications and the demand for real-time information. Table 20 shows the various departments within a typical professional services organization (with more than 30 people), and depicts departmental requirements and core business applications. Table 20: PSO Departments and Information Needs Department Core Requirements Core Applications Executive & Administrative Human Resources Strategic planning, budgeting, management reporting, decision support Payroll, Benefits, Recruiting, Hiring, Training, Compensation, Performance and Career Management Business Intelligence, Budgeting & Planning Human Capital Management Legal Patents, law suits, contract management and approvals Case Management Finance & Accounting Marketing & Sales Financial management, operations, planning, forecasting, budgeting. Time & expense capture, billing, collections. Marketing automation, sales force automation, account, contact and territory management, pricing & proposals. Financials, Budgeting & Planning, BI Client Relationship Management Purchasing Material, equipment and external service procurement. Procurement Service Delivery Information Technology Research & Development Estimating, Project Management, Resource management and staffing, Knowledge Management and Collaboration, Quality Management. Web 2.0 social networking tools and web and video conferencing and remote service delivery tools. Project scheduling, technology evaluation, systems development and implementation New service development; knowledge sharing; template, tool and methodology development Project Management, Resource Management, Knowledge Management, Collaboration Remote Service Delivery Application Lifecycle Mgmt., Project Portfolio Management Knowledge Management Product Management The following sections analyze the survey findings for each of the core business applications. For a more detailed analysis of business applications used in the Professional Services sector, please refer to SPI Research s 2010 Professional Services Business Application Market Adoption report: Service Performance Insight Sponsored by NetSuite 36

50 Solution Satisfaction Table 21 shows that application satisfaction (1: very dissatisfied to 5: very satisfied) has declined slightly from last year s survey, although for remote service delivery and collaboration tools satisfaction has risen. Table 21: Solution Satisfaction Solution Remote Service Delivery and Collaboration Social Media N/A N/A 4.02 Client Relationship Management (CRM) Professional Services Automation (PSA) Part of the reason both remote service delivery and social media tools receive such high user satisfaction is due to their cost and ease of use. Other, more transactionintensive Enterprise Resource Planning (ERP) Knowledge Management (KM) Business Intelligence (BI) Human Capital Management (HCM) applications are critical for PS management, control and regulatory reporting. Financial Management Applications (Enterprise or Service Resource Planning) Finance and Accounting, (ERP or SRP), is the primary application required to accurately collect, bill and report financial transactions. It collects and manages all financial information (expenses, invoices, etc.) to provide management reporting and visibility into total service cost and profitability. Figure 25 shows once again QuickBooks from Intuit was the leading financial solution in this year's benchmark at nearly 30%. Microsoft Dynamics took over as the number two provider in this year's survey, taking the place of SAP, which declined by almost 9%. While this chart (and all of the subsequent charts on solutions) is not meant to be a market penetration survey, it does reflect leading providers in the professional services vertical. Project-driven, human capital intense businesses like professional services have unique financial management requirements including support for complex contract types and billing arrangements. Revenue recognition is also complex and must conform to local accounting and taxation rules while providing support for multicurrency, multilingual transactions for global firms. Seamless integration between the system of record (PSA) for managing resources and projects and the financial management solution for payroll, expense management, invoicing, revenue recognition and project accounting is critical. The figure also highlights (in orange) that a number of firms use either homegrown solutions, other commercial solutions not included on the list, or no official financial solution at all. Generally, some of the smaller firms use Microsoft Excel as their financial management solution. The financial management solution is critical for managing PS finance and accounting, regulatory reporting and profit analysis Service Performance Insight Sponsored by NetSuite 37

51 Figure 25: Financial Management Solution Used Client Relationship Management (CRM) CRM supports the management of client relationships and is designed to improve sales and marketing effectiveness. CRM automates lead, contact and campaign management, sales pipeline forecasting and territory management. Many CRM applications also provide powerful call center functionality for issue management; call handling; trouble ticketing and problem resolution. CRM allows PSOs to track clients through the engagement lifecycle, and to specifically target customer segments and offers by understanding details of the relationship. CRM supports client, geo and portfolio analysis. Figure 26 results are fairly similar to last year's survey, as Salesforce.com dominates all other applications with 50% of the organizations surveyed using it. The number two CRM provider, Microsoft, is a distant second with approximately 10% market-share. Again, while this report is not meant to be a market penetration analysis, it does point to a strong prevalence of Salesforce.com in the professional services market. As Salesforce.com continues to build out its force.com platform, bringing in other partners with complementary solutions (such as Financialforce.com) its market share could rise even further. Almost all PSA suppliers are keenly aware of SF.com predominance and provide good integration tools to allow their clients to integrate their PSA and CRM applications. Unfortunately only 20% of the organizations surveyed take advantage of the power of integrating these two platforms. Interestingly, only 20 firms out of 234 reported using no CRM as compared to 25 with no financial solution and 44 with no PSA meaning even the smallest firms are likely to have invested in some type of a CRM application. This finding means the potential for selling new greenfield CRM applications is relatively low while there is still plenty of opportunity for net new PSA sales Service Performance Insight Sponsored by NetSuite 38

52 Figure 26: Client Relationship Management (CRM) Solution Used Table 22 compares organizations using CRM to those not using it. While most PSOs use CRM, over 10% currently do not. What SPI Research found interesting was the average size of the organization using CRM was approximately 55% higher than those not using CRM, yet the profit was over 100% greater for PSOs using CRM. This finding is important, as it shows a high degree of correlation between the use of CRM and profitability. Table 22: Impact Client Relationship Management (CRM) Use KPI CRM Used CRM Not Used Survey responses N/A PSO size (employees) % EBITDA (mm) $16.0 $ % Year-over-year change in PS revenue 12.6% 4.7% 170% New clients 30.9% 25.8% 20% Deal pipeline relative to qtr. bookings forecast 203% 148% 37% Average revenue per project (k) $179 $106 68% Quarterly revenue target in backlog 44.6% 36.1% 24% There were a number of other key performance indicators that reflected the benefits of using CRM. For instance, those organizations using CRM grew at over twice the rate as those organizations not using it. Much of this growth can be attributed to new client acquisition. Those organizations using CRM showed larger pipelines and revenue per project when compared to organizations not using CRM. And finally, the table highlights an increase in backlog as CRM is used. Like most technologies, using CRM does not guarantee success in terms of new clients and growth. However, it is an extremely valuable tool to help the organization better manage its sales and marketing initiatives, which ultimately show up in higher levels of sales performance and profitability Service Performance Insight Sponsored by NetSuite 39

53 Table 23 further breaks down CRM impact, comparing those organizations not using CRM to those organizations using nonintegrated CRM solutions, and comparing them to organizations utilizing CRM integrated to the core financial solution. This table shows definite improvement across a variety of KPIs. While not every key performance indicator shows improvement as CRM is integrated with the core financial solution, the overall impact of integrated CRM is noteworthy. Table 23: Impact Commercial CRM Integration KPI CRM Not Used Used, Not Integrated Used, Integrated Survey responses Year-over-year change in PS revenue 4.7% 12.8% 11.5% Satisfaction with CRM solution Deal pipeline relative to qtr. bookings forecast Concurrent projects managed by project manager Annual revenue per billable consultant (k) 148% 193% 214% $199 $200 $214 This table highlights a higher deal pipeline, more projects run concurrently by a project manager, and higher annual revenue per billable consultant, as CRM is deployed and integrated with the core financial solution. Professional Service Automation (PSA) PSA provides the systems basis for initiation, planning, execution, close and control of projects and service delivery. It helps manage key service execution processes including resource management and staffing, project management and collaboration, along with time and expense capture and billing. As management and control of service execution has become more important, and the applications have matured to become easy to use and implement, PSA solutions have become increasingly popular. Figure 27 shows Projector as the most adopted PSA solution in this year's survey with 52 out of 234 organizations, closely followed by NetSuite with 51 firms. These results are reversed from last year's survey. However, like last year's survey, there were a number of organizations with no PSA solution at all (20%); while 18% developed their own homegrown solution or used another solution not listed. Remarkably, the average size of the firms who do not use a PSA is 165 employees, which means these organizations are handling complex tasks like resource management and time and expense capture manually. Surprisingly, many firms still staff and manage projects by spreadsheet certainly contributing to errors, lost hours and inefficiency. The good news for the PSA suppliers is the market for resource management, scheduling and time and expense capture is growing so there should be plenty of opportunity for growth for years to come. Given the virtual nature of today s projects and teams, cloud-based PSA applications are a good fit for the service market. A primary benefit of PSA is matching the right resources, with the right skills at the right time with the right opportunities. PSA is an important component of efficient scheduling; high resource productivity and high billable utilization which translates to high revenue and profit per employee, subcontractor and project. SPI Research recommends PSA to all project-oriented businesses with 10 or more employees Service Performance Insight Sponsored by NetSuite 40

54 Figure 27: Professional Services Automation (PSA) Solution Used Table 24 compares those organizations using professional services automation solutions to those not using it. Similar to the CRM analysis, it is noteworthy that while organizations using PSA are approximately 25% larger than those not using PSA, their organizational profitability is over four times greater. Table 24: Impact Professional Services Automation (PSA) Use There are also other benefits from using PSA. Both annual revenue per billable consultant and billable Survey responses PSO size (employees) EBITDA (mm) $ $4.3 25% 326% employee is approximately 14% Deal pipeline relative to qtr. book. forecast 198% 184% 8% higher for those organizations Employee utilization 70.8% 68.5% 3% using PSA. Also, the average size of the project for organizations using PSA is much larger. Employee billable utilization is 3% higher for those organizations using PSA, (much lower than the Annual revenue per billable consultant (k) Annual revenue per employee (k) Average revenue per project (k) $214 $174 $185 $188 $153 $134 14% 14% 38% 5% - 7% improvement SPI Research typically sees). Although the use of PSA does not guarantee success, it does provide PSOs with the infrastructure necessary to more efficiently staff, deliver and complete work, which shows up in higher revenue and profit. PSA provides real-time visibility into all aspects of projects ensuring budget overruns and work at risk (funding exceeded) are eliminated or minimized. KPI PSA Used PSA Not Used 2013 Service Performance Insight Sponsored by NetSuite 41

55 Human Capital Management (HCM) Human Capital Management (HCM) solutions also known as talent management solutions give employers the tools to effectively recruit, manage, evaluate and compensate employees. By tracking performance, skills and career progression, Talent Management software helps companies create and maintain a high-performance workforce. Key software modules include employee learning, skills, compensation, performance management, policy compliance, and succession planning each of which help organizations manage personnel growth and development. HCM benefits the PSO by maintaining a database of skills, benefits and pay rate information that is used for resource scheduling, recruiting and performance and career management. Effective HCM solutions provide rich applications that allow consultants to manage their own careers and skill development (training) and bid on the projects of greatest interest for them. Figure 28: Human Capital Management (HCM) Solution Used Studies consistently show that effective HCM applications facilitate career and performance management resulting in improved employee satisfaction and retention. With the war for talent intensifying particularly in the most-required areas of science, technology, engineering and math (STEM) service organizations should start to seriously consider adding dedicated HCM applications. Leading ERP suppliers (Oracle and SAP) have certainly taken note of the vast potential for cloud-based HCM applications as they have gobbled up the early leaders like Taleo, RightNow and SuccessFactors leaving Workday as the dominant independent HCM supplier. The market is certainly getting interesting as Workday has now aligned with Salesforce.com Service Performance Insight Sponsored by NetSuite 42

56 Table 25 compares organizations using human capital management solutions to those that do not. The survey shows that approximately half of the organizations use some type of HCM solution. However, they are generally larger than those not using HCM. The most noteworthy finding from analyzing human capital management use is the fact that even though the PSOs are approximately five times the size of those not using HCM, their profitability is over 16 times higher. Obviously, all of this is not due to the use of HCM, but it does Table 25: Impact Human Capital Management (HCM) Use highlight the importance of successfully managing talent in a workforce driven industry. HCM solutions provide better visibility into employee skills, preferences, training and career advancement. They ensure equitable compensation and are an integral component of pay for performance and reward systems and metrics. Talent management is central to PS performance as the skills and attitudes of the consulting workforce provide tangible evidence of consulting value. The results of an emphasis on human capital management are a more skilled workforce; larger deal pipelines; shorter time to recruit and ramp new hires; better career management; higher billable utilization resulting in higher revenue per employee. KPI HCM Used HCM Not Used Survey responses PSO size (employees) % EBITDA (mm) $26.4 $ % Deal pipeline relative to qtr. book. forecast 203% 187% 8% Time to recruit and hire for standard positions (days) % Well-understood career path for all emp % Employee utilization 71.5% 69.3% 3% Annual revenue per billable consultant (k) $218 $197 10% Annual revenue per employee (k) $179 $161 11% Business Intelligence (BI) Business Intelligence integrates information from core business applications to improve analysis, demand and capacity planning, budgeting, forecasting and financial planning. BI solutions continue to increase in adoption in PSOs. As PS organizations mature, BI becomes a more critical tool to provide real-time visibility to all aspects of the operation allowing executives to spot trends and take corrective action early. It also is an important solution used in annual planning, as PS executives try to uncover areas where additional growth and profit can be extracted. Figure 29 shows relatively low adoption levels of business intelligence in this year's survey. While SPI Research has seen adoption increase over the past six years, the BI adoption levels are still very low relative to the other core industry applications. However, because the leading independent BI providers have been acquired by the large enterprise vendors over the past few years, SPI Research expects adoption levels to rise as new cloud-based BI applications come to the forefront Service Performance Insight Sponsored by NetSuite 43

57 Figure 29: Business Intelligence (BI) Solution Used The good news for the service industry is that all the major ERP providers both on-premise and cloud - now offer rich reporting and graphical analysis tools out-of-the box obviating the need to purchase dedicated BI applications. Table 26 compares organizations using commercial business intelligence solutions to those not using a commercial BI solution. Slightly less than one third of the organizations surveyed use a commercial BI solution, while others have developed homegrown solutions and are not included in this analysis. As one might expect, BI is most prevalent in the larger PSOs, as shown in the table. Table 26: Impact Business Intelligence (BI) Use SPI Research found that while the organizations using BI solutions are over five times larger than those organizations not using BI, their profitability is over 2000% higher. SPI Research also found the organizations using BI did a slightly better job of meeting annual revenue and margin targets, but did a much better job in terms of revenue per employee, highlighting overall organizational effectiveness. KPI BI Used BI Not Used Survey responses PSO size (employees) % EBITDA (mm) $43.5 $ % Management to employee ratio % Percent of annual revenue target achieved 92.5% 90.5% 2% Percent of annual margin target achieved 90.6% 86.7% 5% Revenue per employee (k) $298 $191 56% 2013 Service Performance Insight Sponsored by NetSuite 44

58 Knowledge Management (KM) Knowledge Management should be a core application for all PSOs as knowledge, unique intellectual property, methods and tools are the primary source of service provider differentiation. Yet over 50% of the organizations surveyed reported they do not use a knowledge management application. Knowledge Management adoption rates are certainly not as high as they should be. As the workforce becomes more global and intellectual property more valuable, it becomes increasingly important to have shared processes, procedures and templates. SPI Research sees knowledge management as a key source of differentiation, consistency and quality. With the advent of inexpensive cloud-based knowledge management applications we expect significant investment in this area. Figure 30 shows in this year's survey, similar to last years, Microsoft s SharePoint is the market leader with almost 25% market-share. SharePoint s dominance has led to a rich after-market for add-ons which make the product easier to use and more powerful. While these are not official market penetration numbers, they are fairly representative of the market in general. There are a variety of solutions available, SPI Research found Microsoft s SharePoint to be the industry leader by a wide margin. Surprisingly, Salesforce.com is the second most prevalent KM application which means many service providers are initially investing in it for CRM and then take advantage of its collaboration and document management functionality. Figure 30: Knowledge Management (KM) Solution Used Table 27 compares organizations using knowledge management solutions to those that do not. The table shows that over 50% of the organizations surveyed use some type of knowledge management solution, and they are roughly 60% larger in size on average. While KM solutions generally help PSOs improve project planning and delivery, some of their benefits are highlighted in increased revenue per billable consultant and employee Service Performance Insight Sponsored by NetSuite 45

59 Table 27: Impact Knowledge Management (KM) Use KPI KM Used KM Not Used Survey responses PSO size (employees) % Deal pipeline relative to qtr. bookings forecast 217% 167% 30% Billable Utilization 79.4% 77.4% 3% Annual revenue per billable consultant (k) $212 $197 7% Annual revenue per employee (k) $174 $160 9% Average revenue per project (k) $186 $158 18% Remote Service Delivery (RSD) and Collaboration Tools Like Knowledge Management (KM), Remote Service Delivery and collaboration tools have become increasingly important for virtual project delivery and collaboration. They provide a platform for individuals and clients to work together, regardless of physical location. Professional services consultants utilize these technologies to serve several clients on a daily basis, whereas in the past they could only serve one, with expensive and time-consuming travel the norm. Advances over the past years have added video, recording, editing and white-boarding functionality, meaning team members can now see each other (if desired) along with sharing information and computer screens. Figure 31: Remote Service Delivery and Collaboration Tool Used 2013 Service Performance Insight Sponsored by NetSuite 46

60 Figure 31 shows in this year s survey, WebEx, Citrix and Microsoft lead in adoption. Given the relatively low cost and ease of use of these tools, SPI Research expects even greater adoption going forward, regardless of the size of the organization. Social Media 2013 marks the first time SPI Research included social media as part of its application analysis. There is no denying the fact that in professional services, and probably all markets, social media has gained in popularity and importance, as firms work both internally and externally to find and hire the best people, as well as build their brands through thought leadership and market outreach. Over the next 3 to 5 years SPI Research expects social media to take on even greater importance in the professional services market. By nature, PS projects are collaborative and social so including broadcast updates and status alerts has become an attractive alternative for keeping all informed. Not only will organizations further utilize this technology, but so will individual consultants regardless of whether the platform has been approved as a corporate standard or not. Even the most controlling organizations must recognize and support the trend toward personal devices and social media if they wish to attract and retain young, connected workers. The downside of the social media explosion is that it can easily become a time-sink and source of unproductive web-surfing hours so the trick is to exploit collaboration, knowledge-sharing and crowd-sourcing without lost productive time. Figure 32 shows in the first year of research, LinkedIn is the dominant social media platform, with almost 40% of the organizations surveyed using it. Other platforms, such as Chatter, Facebook, Yammer and Twitter, continue to grow in relevance and importance. While Facebook is often seen as a nonbusiness related application, many organizations are starting to use it given its flexibility, ease-of-use, and cost. Figure 32: Social Media (SM) Solution Used 2013 Service Performance Insight Sponsored by NetSuite 47

61 Application Integration While the core business solutions support individual departments in their efforts to become more productive and profitable, as these solutions are integrated with the core financial management solution (ERP) they create additional insight and value. For instance, CRM integrated with ERP provides sales executives with the insight necessary to develop a pricing strategy, which supports the highest probability of winning the bid with maximum profitability. Without this integration it would be much more difficult to conduct this type of analysis. Today s PS organizations simply cannot operate with functional silos as the lines between sales, delivery and accounting become blurred. Table 28 shows a lower level of integration in this year's benchmark, when compared to the prior studies. Generally, SPI Research has seen gradual improvements in integration. This year's study could be an anomaly, as smaller organizations tend to purchase departmental solutions to meet specific needs. Table 28: Integration with Core Financials Solution Client Relationship Management (CRM) 36.0% 34.1% 25.4% Professional Services Automation (PSA) 45.2% 51.1% 46.4% Business Intelligence (BI) 46.8% 55.5% 52.9% Human Capital Management (HCM) 37.0% 43.4% 31.0% Traditionally, SPI Research has been most concerned with integration of the various Figure 33: Is CRM Integrated with PSA? applications with the core financial management solution. For the second year, participants were asked is CRM and PSA were directly integrated, highlighting the importance of connecting sales and service delivery for a more complete view of clients (Figure 33). This year's survey showed only 20% of the PSOs surveyed integrated CRM with PSA. Not surprisingly, the organizations without this integration show lower performance than those who partially or fully integrate CRM and PSA. Obviously, cost comes into play when the solutions are developed by different providers. Typically, application suites, such as Microsoft, NetSuite and SAP offer out-of-the-box integration between their core business solutions making a 360-degree view of clients and projects possible Service Performance Insight Sponsored by NetSuite 48

62 The Professional Service IT Maturity Model While every PSO uses technology somewhat differently with different applications and varying levels of integration SPI Research believes one of the best ways to improve organizational performance is to deploy integrated applications to provide a 360 degree view of clients and projects to facilitate decision-making. Figure 34 highlights the PS IT Maturity Model. Figure 34: Professional Service IT Maturity Level As PSOs move from more manual solutions (spreadsheet or paper-based) toward integrated and single user-interface solutions, performance improves. The following section provides insight into SPI Research s PS IT Maturity Model levels. Level 1: Initiated Ad Hoc: Most PSOs begin with manual or spreadsheet-based tools to run the business. Time and expense capture is manual, sporadic and ad hoc. Billing is performed manually or through the backend financial application. Level 2: Piloted Application Specific: As they grow and engage in more structured processes, organizations deploy task specific applications (time & expense), project management (PM) and knowledge management (KM), client relationship management (CRM), etc. to better manage work and to create an audit trail, albeit rudimentary, for tracking work. Many of these task specific applications provide a database to improve reporting. Level 3: Deployed Integrated Applications: As organizations mature they deploy greater integration of business applications with the core financial enterprise resource planning (ERP) solution. At this Level they begin to evaluate the time and cost factors associated with integration of various point releases. Emphasis at this level is on creating effective management reports to provide visibility into all facets of the business. Level 4: Institutionalized Extended ERP: An increasing number of PSOs at this level of maturity begin to add various components of ERP applications rather than continually integrate disparate applications. SPI Research uses the term extended ERP or SRP (Service Resource Planning). Now professional services organizations are purchasing both core financials as well as other pre-integrated application suites from the same ERP solution provider. Currently CRM is the most popular application that is purchased pre-integrated with financials, closely followed by professional service automation. Other applications that are being acquired from the same ERP vendor include human capital management, business intelligence, and procurement Service Performance Insight Sponsored by NetSuite 49

63 Level 5: Optimized Extended ERP and Analytics: Finally, as the PSO has significant integration in its application infrastructure it turns the solution loose to efficiently surface and report data to optimally measure and transform the organization. Most, if not all, core applications are integrated to provide visibility into the work being sold, executed, and closed. While not every PSO is run with a completely integrated set of business applications, SPI Research has seen the level of integration increase significantly over the past five years. This development will continue regardless of the economy as many PS firms see IT as a way to not only cut costs, but also as a means to improve operational efficiency and effectiveness Service Performance Insight Sponsored by NetSuite 50

64 6. LEADERSHIP (VISION, STRATEGY & CULTURE) PILLAR Intuitively, we know that best-in-class professional services organizations (PSOs) are based on exceptional consultants. We also know that it takes strong leadership to inspire organizations to achieve greatness. But what SPI Research hasn t been able to measure until now is the direct impact of PS leadership on the bottom-line. SPI Research believes readers will be as astounded as we were to discover that great or poor leadership permeates every facet of PSO performance. In the 2013 PS Maturity survey, SPI Research asked a series of questions regarding various aspects of professional services vision, strategy and leadership including confidence, clarity and alignment. Strategic decisions set the direction and tone for the PSO and affect all functions because vision and strategy dictate the goals and objectives for the organization, the types of clients to pursue, the types of services to offer and the interrelationship between functions. Table 29: The Leadership Maturity Model Phase 1 Initiated Phase 2 Piloted Phase 3 Deployed Phase 4 Institutionalized Phase 5 Optimized Leadership Initial strategy is to support product sales and provide reference customers while providing workarounds to complete immature products. Leaders are doers. PS has become a profit center but is subordinate to product sales. Strategy is to drive customer adoption and references profitably. Leaders focus on P&L and client relationships. PS is an important revenue and margin source but channel conflict still exists. Services differentiate products. Leadership development plans are in place. Leaders have strong background & skills in all pillars. Service leads products. PS is a vital part of the company. Solution selling is a way of life. PS is included in all strategy decisions. Succession plans are in place for critical leadership roles PS is critical to the company. Service strategy is clear. Complimentary goals and measurements are in place for all functions. Leaders have global vision and continually focus on renewal & expansion. Leadership Styles by Maturity Stage The Entrepreneur. Leaders are doers. In small companies, PS leaders are technically competent and directly perform engagement activities in addition to recruiting and ramping new consultants. Typically they possess stronger technical than business or leadership skills. The Generalist. The emerging PS leader must start to focus on HR, Finance and Operations while nurturing close relationships with clients and partners. At this stage, setting strategic vision and strategy are less important than strong operational management skills. The General Manager. By the deployed stage, the PS leader must start to focus on setting vision and strategy and forging strong partnerships with clients and the cross-functional leadership team. The PS leader must exhibit strong operational and process management skills. He must have a strong background in Sales and Finance and Operations. Focus at this stage is on recruiting strong functional leaders to scale the organization. The Strategist. By the institutionalized phase, the PS leader has developed a strong leadership team and institutionalized operating processes in all five service performance pillars. His primary focus is strategy, business planning and establishing strategic partnerships and alliances. At this stage, he must lead, inspire and communicate. He must be able to attract and retain high quality functional leaders. The Leadership Team. As the PS organization matures, the leader becomes more strategic and able to effectively communicate and inspire. All functional areas have strong, sustainable operating processes. His focus is on ensuring alignment within the organization while continually forging new business partnerships. The Leadership Team constantly focuses on innovation and operational excellence. Great service leaders must wear many hats simultaneously. They manage and inspire the human side of the business developing a vision, walking the talk and building a great team. They are constantly on the lookout to find ways to improve execution by streamlining the business, while searching for new 2013 Service Performance Insight Sponsored by NetSuite 51

65 avenues for growth. They have an innate sense of what tomorrow's business should be, and steer their organization into a position to prosper even more in the future. Based on Best-of-the-Best firm interviews, the leading firms are captained by strong, visionary, hands-on leaders who play to win. A consistent theme from the Best-of-the-Best firms is their demand for excellence they are driven to be the absolute best, most respected and preferred service provider in their space. These firms are built from the ground-up to be focused and specialized with zero tolerance for mediocrity. Symptoms of Leadership Issues Service Performance Insight s experience has shown that when things go wrong, it most often starts at the top and then cascades downward throughout the organization, ultimately showing up in lackluster financial performance. Eliminating the root causes of dysfunction and inefficiency goes a long way toward driving organizational success. The most common issues facing PSOs include: Unclear strategy lack of clarity around target markets, target clients and why we win. Inability to capitalize on market opportunities due to lack of alignment, lack of employee engagement or leadership and cultural issues. No leverage to drive repeat sales, limited competitive differentiation, poor sales and marketing execution. Murky service charter particularly a problem for embedded PSOs with conflict between driving financial PS revenue and margin versus helping the overall company achieve its objectives of market expansion and client delight. Silos exist in all companies they usually occur in the choppy waters between groups or functions where responsibility and accountability are blurry. A classic example who is responsible for driving new service revenues is it sales or delivery? How can disconnected processes and poor handoffs be improved? Skills imbalance the logical extension of organizational silos where all parties are not aligned not selling what we can deliver or not being able to deliver what has been sold. Not enough or too many people with the right skills, excessive non-billable headcount, sub-par utilization, revenue per person, difficulty in recruiting, ramping, retaining, inability to quickly, easily staff projects. Immature processes disparate or poor systems and tools. Inconsistent project methods; lack of tools and intellectual property leading to low repeatability and inability to drive efficiency and reuse. Poor quality and customer satisfaction Failed projects, cost overruns, difficulty securing references. No quality review processes and/or poor project visibility into budget to actuals. Poor financial performance Revenue and margin below targets, poor forecasting accuracy, unpredictability and high levels of risk. Based on more than 30 years of facilitating meaningful and lasting change, SPI Research has found the most common reasons for these issues: Leadership team s inability to effectively confront the reality of the current business environment with a realistic fact base and competitive benchmarks. Focused on too many sometimes competing and overlapping priorities. Lack of alignment across all parts of the organization around a core set of measurable improvement initiatives Service Performance Insight Sponsored by NetSuite 52

66 Inability to rapidly engage the full organization in translating improvement plans into operational tactics and job-level objectives. No follow-through to accelerate the learning and performing cycle while creating committed leaders at all levels of the organization. Business Plan Essentials A strong business planning process addresses three areas: 1. Strategy Strategic challenges are indicated by a slowing of top-line revenue growth or failure to gain market share vis-a-vis competitors. If revenue growth is failing to meet expectations, it s time to re-evaluate strategic alternatives. 2. Alignment Easy to say, hard to do. Lack of supporting and congruent goals is at the heart of business plan failure. Too often, the mission and charter of the professional services organization are not clear or not universally supported. Fundamental decisions around the primary charter must be made to propel execution. Once the charter is determined and the business plan is put in place communication and congruent goals and measurements must cascade across the organization. People-based organizations work best when the mission and charter are clear with supporting goals, measurement and compensation tied to success. 3. Execution One of the most important questions to ask when determining key strategic initiatives and business goals is Can we execute? Signs of execution failure manifest in below-target profits or employee burnout. Both of these danger signs point to poor processes and systems or cumbersome or haphazard ways of doing business. If poor systems and processes are the root cause of execution challenges, then key initiatives must address Figure 35: SPI Research Business Plan Structure improvements. Do we have the people, systems and processes to deliver? If the answer is yes, great. Move on. If the answer is no, the team collectively determines the actions that must be taken to improve execution. The annual business planning process can be a catalyst for open dialogue leading to breakthrough and exponential improvement. When creating a business plan, applying the following principles leads to an effective and executable plan: Establish a strategic foundation for the business plan. Develop a common understanding of your business and opportunity. Define success. Create a road map short term and long term to achieve your goals Service Performance Insight Sponsored by NetSuite 53

67 Identify a few but impactful action plans. Apply appropriate monitoring, measurement and compensation. SPI Research recommends capitalizing on the annual planning process by incorporating three critical actions that will position the team for a more successful and sustaining rollout and accomplishment of the company s strategy and plan. 1. Conduct a preplanning fact-based assessment. Perform both a quantitative and qualitative assessment of the business to facilitate confronting reality based on facts, not theory. 2. Set up business plan essentials. Create an environment and a set of ground rules for planning meetings that promote and maintain robust dialogue, realism and clarity. 3. Establish the business plan: less is more. Galvanize the team around a realistic and measurable plan. To be successful, the plan should be grounded with three, but no more than five, overarching priorities. Gain commitment to maintaining an open, honest dialogue throughout the year to establish accountability to the team, company and strategy. Business Planning Steps The first step is to build a shared vision of success. It might sound easy, but it is a critical component of beginning the year with a clear and concise view of where you want to go (Figure 36). A vision statement outlines what a company wants to be. It concentrates on the future; it is a source of inspiration and provides a clear picture of the future. It sets the direction for business planning. Figure 36: Service Planning Pyramid Planning does not need to be a necessary evil it can be the most important and empowering tool in a PSO s arsenal to get the entire organization on the same page to achieve truly great things. Effective planning creates a safe, fact-based, and reality-based environment where new ideas can flourish. Figure 37 shows an example of the process SPI Research uses to help clients gain both quantitative and qualitative insight into their current reality Service Performance Insight Sponsored by NetSuite 54

68 Figure 37: Confronting Reality The final step is to create the initiatives that will propel the organization into the new year and beyond. By now the executive team should have galvanized the planning team around a shared view of the future, and its priorities. Now is the time to take action with realistic success measures and clear roles, responsibilities and timelines. The team that ends up with a laundry list of 15 to 20 key priorities is doomed to failure before it starts. Figure 38 provides an example of a key initiative template. Please contact for help with your business planning process. Figure 38: Use Tools to Organize, Strategize and Prioritize 2013 Service Performance Insight Sponsored by NetSuite 55

69 Survey Results The following section reviews and analyzes 2013 PS Maturity benchmark results from 234 participating professional services organizations. In this section SPI Research analyzes 20 Leadership KPIs that are critical to defining the vision and strategy for the organization along with ensuring goals and measurements drive execution and are aligned with the stated strategy and direction. Leadership Index SPI Research asks a series of questions related to key aspects of leadership. The leadership questions have evolved into eight core questions that examine how various dimensions of leadership impact performance. The questions ask, please rate the following aspects of your organization in terms of how well it operates (1: not well - 5: very well) : 1. The vision, mission and strategy of the PSO is well understood and clearly communicated 2. Employees have confidence in PS Leadership 3. It is easy to get things done within the PS organization 4. Goals and measurements are in alignment for the service organization 5. Employees have confidence in the future of the PS organization 6. The organization effectively communicates with employees 7. The organization embraces change, it is nimble and flexible 8. The organization focuses on innovation and is able to rapidly take advantage of changing market conditions This year SPI Research created a Leadership Index by ranking the aggregate leadership scores for all eight questions by participant. Therefore, the minimum answer for the leadership index would be eight, if the survey participant stated 1 - not well for each of the eight questions. The maximum would be 40, if the participant stated 5 - very well, for each question. Table 30 depicts the percentage of survey respondents by overall leadership index rating compared to key operational measurements. Table 30: Leadership Rating Compared to Core KPIs Leadership Score Survey EBITDA Bid-to- Win Ratio Pipeline Recom. Revenue / Billable Emp. (k) Revenue / Employee (k) % of Revenue Target % of Margin Target % 4.8% % 3.37 $171 $ % 82.9% % 12.2% % % 91.5% % 16.7% % % 89.0% % 19.2% % % 96.3% Total/Avg % 13.5% % 4.20 $197 $ % 89.6% 2013 Service Performance Insight Sponsored by NetSuite 56

70 As statisticians, a perfect day is when a key performance measurement clearly correlates with most measures of performance. Well, the dimensions of leadership are one of those perfect statistics. As the leadership dimensions improve, so do all major key performance metrics. One might expect Confidence in Leadership and Confidence in the Future to improve along with clarity of vision and strategy but the truly remarkable finding around leadership is that all the major operational metrics revenue per person, utilization, project margin and on-time project completion improve as well. It is amazing how strategic clarity permeates all aspects of operational performance. If the strategy is clear and compelling, people-based organizations will find a way to accomplish it. Clear leadership direction and effective bi-directional communication are critical success factors. Employees who lack an understanding of the service vision, mission and strategy have no ability to work toward achieving it whereas those who comprehend, espouse and internalize the goals of the organization will work tirelessly to achieve them. Table 30 compares leadership answers to the organization s profitability (Earnings before Income Taxes, Depreciation & Amortization) and other key measurements. The results show consistent profitability improvements as the leadership KPIs increase. PS Goals In reality, there are four fundamental interrelated but somewhat mutually exclusive goals for a professional services organization: Figure 39: PS Goals Customer satisfaction. Revenue. Profit. Driving market share growth. Establishing a clear charter ensures that all future decisions support the strategy and drive execution. As shown in Figure 39 the primary goal for most PS organizations is achieving high levels of client satisfaction for without satisfied and referenceable clients the organization cannot prosper. Achieving acceptable levels of revenue and margin are secondary but necessary goals as client satisfaction without mutual profit is a going out of business strategy. Table 31 shows client satisfaction is the primary goal for all organizations and geographies. The PS profit motive is less important in embedded service organizations as compared to independents. PS revenue is most important in the Americas and least important in EMEA. Service profit and market expansion are more important in APac and least important in EMEA Service Performance Insight Sponsored by NetSuite 57

71 Table 31: PS Goals by Organization Type and Geographic Region PS Goals Survey ESO PSO Americas EMEA APAC Client satisfaction PS revenue Service margin Market expansion Table 32 shows the emphasis on profit as a primary goal increases with the size of the organization. Growth for growth sake is the least prevalent goal as most PSOs see market expansion as an outcome of a focus on client satisfaction but not the primarily goal. Service Performance Insight s research and consulting has have found PSOs encounter speed bumps along the road to growth. Small PSOs initially focus on a specific client business challenge with an intimate team of subject matter experts; many small independent PSOs are created as lifestyle businesses. As they grow they must add more structure while ensuring they don t lose their original focus. Table 32: PS Goals by Organization Size PS Goals Under Over 700 Client satisfaction PS revenue Service margin Market expansion Table 33 shows the majority of organizations across all verticals are primarily focused on driving high levels of client satisfaction while achieving revenue and margin targets. Market expansion is not the primary consideration. Table 33: PS Goals by Service Market Vertical PS Goals Client satisfaction Software PS SaaS PS Hardware PS IT Consult Mgmt. Consult. Advertise Arch./ Engr. Other PS PS revenue Service margin Market expansion Service Performance Insight Sponsored by NetSuite 58

72 Leadership s Impact Table 34 is fascinating because it depicts all dimensions of the leadership pillar and portrays a picture that most PSOs achieve high levels of confidence in the future but innovation is the hardest dimension to attain. Interestingly, leadership scores went up significantly compared to last year, we attribute this significant improvement in leadership scores to the economy as most survey participants described a rosier picture. In this year s survey, the independents gave higher leadership marks than embedded organizations; in past years this trend was reversed as embedded service organizations had an easier time of weathering the recession than their independent counterparts. Now that the economy has begun to improve, independents are thriving while embedded PSOs are struggling with classic charter and identity issues. Table 34: Leadership Impact by Organization Type and Geographic Region Leadership Dimension Survey ESO PSO Americas EMEA APAC Employees have confidence in PSO's future Ease of getting things done Confidence in PS leadership Goal and measurement alignment Well understood vision, mission and strategy Effectively communicates w/employees Embraces change - nimble and flexible Innovation focused The table shows across all leadership dimensions firms headquartered in Asia Pacific expressed the highest levels of confidence and alignment. Somewhat surprisingly, given European financial turmoil, European-headquartered firms expressed higher levels of confidence in the future and leadership and with their ability to embrace change than their North American counterparts. North American organizations give leadership lower marks in most categories. Well Understood Vision, Mission and Strategy Clear leadership direction and effective bi-directional communication are critical success factors. Employees who lack an understanding of the service vision, mission and strategy have no ability to work toward achieving it whereas those who comprehend, espouse and support the vision of the organization will work tirelessly to achieve it. Table 35 shows the significant impact strategic clarity has on all other aspects of the firm. With clarity, organizations are able to achieve high levels of growth and profit Service Performance Insight Sponsored by NetSuite 59

73 Table 35: Impact Well-understood Vision, Mission and Strategy Well-understood Career Path Survey Percent Revenue Growth Bid-to-win ratio Target Margin Achieved 1 Not very well 2.8% 11.7% % 2 6.9% 5.7% % % 12.1% % % 14.6% % 5 Very well 25.5% 16.1% % Total/Average 100.0% 13.7% % Confidence in PS Leadership The tools for effective leadership, clarity of purpose and alignment exist within all service organizations. By investing in these critical aspects, service organizations can create their own economic stimulus plan. Table 36: Impact Confidence in Leadership Confidence in Leadership Survey Percent Revenue Growth Bid-to-win ratio Employee Attrition 1 Not very well 0.9% -10.0% % 2 2.8% 17.1% % % 8.0% % SPI Research continues to discover % 14.0% % every critical key performance 5 Very well 28.7% 17.1% % measurement improves as confidence in leadership increases. According to survey results, few other factors have the same Total/Average 100.0% 13.7% % profound impact on the overall health and well-being of the service organization. Poor leadership creates a negative spiral effect poor human capital results (high attrition, low morale, poor employee satisfaction) which in turn lead to low levels of client satisfaction and poor financial results. Because PSOs rely on the quality and commitment of the consulting staff, poor leadership produces an immediate and long-lasting negative effect. Fortunately, positive changes in leadership can also produce immediate improvements because PSOs exhibit resiliency and are able to heal and regenerate themselves rapidly. Unlike product-based organizations, extremely rapid turnarounds are possible in people-based PS organizations Service Performance Insight Sponsored by NetSuite 60

74 Goals and Measurements in Alignment Another survey question asked, "Are goals and measurements in alignment for the service organization?" Alignment speaks to a clearly articulated strategy with goals and measurements reinforcing the organization s purpose and stimulating action. It appears that alignment has steadily improved year-over-year with ESOs reporting slightly better alignment than PSOs. Hardware PSOs reported the lowest level of alignment while Marketing and Advertising firms reported the best. Table 37: Impact Goals and Measurements are in Alignment Alignment Survey Percent Target Revenue Achieved Target Margin Achieved EBITDA 1 Not very well 4.2% 80.0% 72.5% 4.8% % 87.6% 90.8% 3.8% % 91.5% 85.0% 5.5% % 95.0% 92.1% 18.3% 5 Very well 18.5% 96.4% 94.1% 20.1% Total/Average 100.0% 93.0% 89.6% 13.5% Alignment or lack of alignment has a significant impact on bottom-line performance. Lack of alignment emanates from a lack of clarity and conflicting or too many priorities. It is characterized by low levels of employee engagement and functional silos or factions. The highest performing service organizations exhibit clarity of purpose and alignment around a succinct set of core values and initiatives. Effective measurements and compensation reinforce those values, linking strategy to execution. Employees Have Confidence in the PSO's Future The level of employee confidence in the future of the PS organization has a profound impact on almost all key performance measurements. Firms with the highest levels of employee confidence experienced the highest levels of revenue and employee growth, and had the highest levels of billable utilization. They also reported the highest levels of strategic clarity, ease of Table 38: Impact Confidence in the PSO s Future Confidence in PSO Future Survey Percent Recom. to Fam/Frd On-time Delivery Employee Attrition 1 or 2 Not well 4.8% % 7.8% % % 7.9% % % 7.5% 5 Very well 35.5% % 6.5% Total/Average 100.0% % 7.2% getting things done and alignment between goals and measurements. In fact, almost every key performance measurement, from project margins to attrition to annual revenue target attainment had a positive correlation with employee confidence in the future of the PS organization. The world loves a winner seems to be an appropriate description for the positive results of the organizations with the 2013 Service Performance Insight Sponsored by NetSuite 61

75 highest level of employee confidence. A key chicken or egg question always arises around Confidence in the future as typically the highest performing and fastest growing organizations propel employees to have confidence in the future, while low confidence is indicative of organizations in turmoil or going through massive change as they reposition to take better advantage of the future. Effective Communication Respondents were asked to rate Our organization effectively communicates with employees. Independents reported better communication than ESOs. The level of effective communication declined directly in proportion to the size of the organization. In other words, the smallest organizations exhibited the best communication while the largest showed the worst. Table 39: Impact Effective Employee Communication Effective Communication Survey Percent Revenue Growth Bid-towin ratio Employee Attrition 1 Not very well 2.3% 12.5% % 2 8.8% 7.9% % % 12.9% % % 15.0% % 5 Very well 15.3% 15.5% % Total/Average 100.0% 13.7% % The most startling aspect of poor communication is its effect on employee morale and attrition (Table 39). Firms with poor communication experienced extremely high attrition; low confidence in leadership; lack of goal alignment; and would not recommend their company as a great place to work. Talk may be cheap but without bidirectional communication, employees quickly become disenfranchised. Creating an effective communication plan should make the short list for any improvement initiative. Organizational Challenges In the 2012 survey SPI Research asked participants to rank the key challenges facing them. This year talent management overtook supporting rapid growth and expansion as the number one challenge was a watershed year in PS with annual growth of 13.7%. In 2012 top-line growth slowed to 11.5% as PSOs struggled to find and ramp the talent they needed to handle all the new business landed the year before. Going forward the ever-growing technical talent shortage will continue to be a top challenge across PS as attracting the best and brightest talent is the cornerstone of high value consulting. According to Aaron Kinnari, Founder of The Future Forum America has a talent problem. For years, we have been able to outcompete and out-innovate other nations in large part because we have had a constant stream of human capital, fueled by a strong education infrastructure and an immigration system that attracted the best, brightest and hardest working from around the world. These two pieces, coupled 2013 Service Performance Insight Sponsored by NetSuite 62

76 with policies that promoted growth and development and protected intellectual and individual property, drove our economy forward and kept the American Dream alive. However, today our education system is in disarray and our immigration system is broken. Our K-12 schools are lagging behind other developed countries. On the 2009 Program for International Student Assessment (PISA) exam, out of 34 countries, our students ranked 25 th in math, 17 th in science and 14 th in reading. And our high school graduates are not going on to fields of study that will prepare them for careers of the future, such as science, technology, engineering and mathematics (STEM). As a result, the U.S. will face a projected shortage of more than 200,000 workers in these critical fields by When comparing the key challenges of embedded versus independent service providers (Table 40), the number one challenge for ESO s is improving quality and consistency. SPI Research sees keen interest from ESOs around service packaging, knowledge management and methodology development all designed to help them improve the quality and consistency of service delivery. Table 40: Organizational Challenges by Organization Type and Geographic Region Organizational Challenge Survey ESO PSO Americas EMEA APAC Talent management Improve quality and consistency Improve sales and marketing Achieve revenue and margin targets Support rapid growth and expansion Improve / expand portfolio and markets Alignment between functions or groups Improve knowledge management For independents, the top challenge is talent management closely followed by the age-old challenge of improving sales and marketing. When analyzing key challenges by geography, an interesting picture emerges. Double digit growth in the Americas in 2011 and 2012 has translated into significant talent shortages. At the same time, assimilating the huge uptick in business has led to quality and consistency concerns as the number two challenge. If the US is unable to fix its education system, immigration policies and spiraling healthcare costs it may lose its dominance as the number one producer and exporter of Professional Services. Surprisingly, the number one challenge for EMEA headquartered PSOs is supporting rapid growth and expansion while simultaneously battered by the European debt crisis, achieving revenue and margin targets is the second greatest challenge. Based on lower than expected revenue growth in the APac region in 2012, improving sales and marketing has become the number one challenge closely followed by achieving revenue and margin targets. Whether growing or holding their own, these challenges point to the critical supply and demand balancing act which is characteristic of the professional service 2013 Service Performance Insight Sponsored by NetSuite 63

77 industry. Feast years lead to talent and quality concerns followed by famine years where sales and marketing and achieving revenue targets become the primary stress points. When SPI Research examined top challenges by organization size an interesting picture emerges (Table 41). The largest organizations rank their number one challenge as achieving revenue and margin targets closely followed by improving quality and consistency whereas the smallest organizations are primarily concerned with improving sales and marketing. Mid-size organizations with 30 to 300 employees are most concerned with talent management. Table 41: Organizational Challenges by Organization Size Organizational Challenge Under Over 700 Talent management Improve quality and consistency Improve sales and marketing Achieve revenue and margin targets Support rapid growth and expansion Improve / expand portfolio and markets Alignment between functions or groups Improve knowledge management Table 42 provides an interesting comparison of key challenges for ESOs. Software PSOs are intently focused on quality, talent management and achieving targets. SaaS ESOs are most concerned with supporting rapid growth and expansion followed by improving quality. The number one challenge for Hardware and Networking ESOs is achieving revenue targets followed by improving quality. Quality is an important concern for all ESOs as they are typically the client reference engines for product companies. They must develop repeatable methods and tools to ensure quality. Table 42: Organizational Challenges by Embedded Service Market Organizational Challenge Software PS SaaS PS Hardware PS Improve quality and consistency Talent management Achieve revenue and margin targets Support rapid growth and expansion Improve sales and marketing Improve / expand portfolio and markets Alignment between functions or groups Improve knowledge management Service Performance Insight Sponsored by NetSuite 64

78 A somewhat different picture emerges when we examine the top challenges for independents (Table 43). Marketing and communication firms struggle with improving sales and marketing. Management consultancies are focused on achieving revenue and margin targets. IT consultancies and Architects and Engineers are struggling with attracting and retaining the skilled talent they need. Table 43: Organizational Challenges by Independent Service Market Organizational Challenge IT Consult. Mgmt. Consult. Advertising Arch./ Engr. Other PS Talent management Improve sales and marketing Improve quality and consistency Support rapid growth and expansion Achieve revenue and margin targets Improve / expand portfolio and markets Alignment between functions or groups Improve knowledge management Service Performance Insight Sponsored by NetSuite 65

79 7. CLIENT RELATIONSHIP PILLAR The Client Relationship Pillar focuses on the activities associated with business development and client management. Finding and retaining customers is a primary means of growing a business, and is one of the top challenges for PS firms. In this chapter SPI Research introduces our new Service Lifecycle Management Maturity Model and SLM3 framework to help PSOs with their service productization initiatives. We examine the age-old divide between sales and delivery along with service sales roles, compensation, client mix and a host of sales and marketing effectiveness metrics. Since referrals are a primary driver of repeat business we also explore the correlation between client satisfaction and business success. Cultivating new and repeat clients is the lifeblood of the service industry. Professional services organizations are in business to provide knowledge and expertise. Their sales and marketing organizations must define target markets and clients and craft unique solutions. The job of service sales and marketing is to generate awareness and identify and close opportunities. Services are intangible so the job of service sales and marketing has the added difficulty of creating concrete proof of the firm s knowledge, experience and differentiation. The effectiveness of the organization s sales and marketing efforts determines the quality and size of the pipeline; bid-to-win ratios; discounts; client satisfaction and the length of the sales cycle. Effective sales and marketing organizations continually uncover new opportunities while ensuring existing customers continue to buy and refer. Today s successful PSO, whether embedded or independent, is increasingly taking charge of its own destiny by investing in sales and marketing. The following table highlights the five levels of maturity in the Client Relationship Pillar. As sales and service delivery processes mature, organizations move from selling anything and everything to anyone, to a more careful and selective approach to client selection; solution creation; deal capture; contract and pricing management and reference building. Table 44: Client Relationship Business Process Maturity Level 1 Level 2 Level 3 Level 4 Level 5 Client Relationships Opportunistic. No defined solution sets or Go to Market plan. Focus is on new customers and reference building. Individual heroics, no consistent sales, marketing or partnering plan or methodology. Ad hoc, one-off projects. Start to use marketing to drive leads. Multiple sales models. Start investing in sales training, CRM & sales methodology. Manual integration with PSA. Start measuring sale effectiveness & customer satisfaction. Start developing partners and partner programs. Some level of proposal reviews and pricing control. Marketing, inside sales, solution sales with defined solution sets. CRM integrated with PSA. Deal, pricing and contract reviews. Partner plan and scorecard. Tight pricing and contract mgmt. controls. High levels of customer satisfaction. CRM, PSA, ERP integration provides 360 degree view of client relationships. Business process, vertical and horizontal solutions. Vertical centers of excellence. Top client and partner programs. Global contract and pricing management. Key partner relationships. Strong customer reference programs. Executive relationships. Thought leadership. Brand building and awareness. High customer satisfaction. Integrated sales, marketing and partnering programs. High quality references Service Performance Insight Sponsored by NetSuite 66

80 Client Relationships Trends Growth - ability to support rapid growth and expansion Sales and Marketing - improving sales and marketing effectiveness and collaboration Solution portfolio - focus on improving/expanding our portfolio and markets Service Lifecycle Management Most professional service organizations have a service delivery methodology or blueprint. Many already have some type of service productization initiative. Typically, when PSOs define service products they limit the scope and therefore the impact of a comprehensive service product portfolio. SPI Research defines service productization as: The process of delineating, building, deploying and improving a clearly defined, tested, packaged service product to achieve operational improvements in support of an organization s strategic objectives Simply defined, "productization means creating a tangible product based on the services provided with the following core attributes: Defined service offering with supporting marketing materials detailing client value and benefits; Comprehensive sales playbook with supporting sales collateral and materials; Clearly defined and bounded service delivery scope, assumptions, processes, tasks, roles, staffing requirements, duration, pricing structure and outcomes; Standardized delivery methods, templates and tools; Embedded quality controls and project governance; and Enforced feedback and continuous improvement. Productized services can be stand-alone, fast start offerings, or they can be components of an overall service portfolio. An organization can offer productized services in one or hundreds of locations. Regardless of its reach, the service must possess the core attributes that make the training, sales and delivery processes clear, consistent and repeatable. Moreover, a productized service demonstrates the PSO has a consistent knowledge base and unique intellectual property. This approach shows the PSO has the skills to deliver the service within a predefined time and cost. Without productizing, professional services are less tangible and the benefits harder to define. Why Productize? PSOs consider service productization as they face increased global competition, strategic sourcing adoption, technological complexity and pressure to improve project time-to-value. Embedded PSOs face constant pressure to reduce the cost and complexity of implementation and integration as the 2013 Service Performance Insight Sponsored by NetSuite 67

81 parent product organization sees professional services primarily as a means to rapidly install products to secure product revenue. Independent PSOs view service productization as a means of branding, protecting valuable intellectual property and highlighting their differentiation. Service productization provides these benefits: Increased proposal-to-sales conversion ratios; Improved estimating and forecasting accuracy; Accelerated recruiting, hiring and ramping of new consultants; Reduced risk and improved service delivery consistency and quality; Superior project governance with built-in quality control; More predictable costs, resources, time and deliverables; Faster revenue recognition conforming to accounting standards; Improved client satisfaction and loyalty; and Improved intellectual property value capture around methods, tools, and processes. Firms adopting a well-coordinated service productization initiative gain a clearer understanding of how their skills and business processes support their service business strategy. By necessity, the process of service productization clarifies the firm s objectives and exposes existing competencies and skill gaps. Service productization forces the firm to identify best reusable methods, tools, templates and practices. This change helps propel consistent service execution while protecting reputation and quality. As PSOs expand internationally, service productization provides a valuable method to standardize service offers across geographies, languages and cultures. Service Lifecycle Management A Cautionary Tale When SPI Research began this study, two facts were clear: Significant and growing interest exists around the topic of professional service productization. Based on Service Performance Insight s research, no other topic has garnered the same level of fascination and confusion. Only the largest companies that have been delivering professional services for a long time, such as IBM, Oracle and SAP, have broken the code on service productization. Before these companies attempted to create service products they had a well-established professional service sales and delivery discipline in place with a supporting sales methodology and deeply entrenched service delivery methods, systems and tools. What SPI Research did not know was: The discipline of service productization is nascent. Very few firms have well-established service productization methodologies, or trained and dedicated service productization teams. And, only limited executive sponsorship in the form of formal reporting structures and funding exists Service Performance Insight Sponsored by NetSuite 68

82 Current expenditure on service productization is significant. Nearly 2% of professional services revenue is invested annually, which means many organizations are spending more on service productization than they are on business applications or employee training. The results for the very few firms that have successfully implemented service productization and made it central to their value proposition are extraordinary with 60% of all services sold as products, 28.5% net profit and $285k revenue yield per consultant. What SPI Research now knows: Service productization is extremely difficult to do well with high failure rates. Many well-run PSOs are on their third, fourth or fifth incarnation of service productization with significant wasted time, money and effort spent on failed attempts. Successful service productization requires a long-term focus with dedicated, empowered, experienced teams, executive and cross-functional support and consistent long-term funding. Expectations that service productization will provide a quick fix for effective solution selling or service delivery consistency are false but the effort is well-worth it if organizations go into it with their eyes wide open. The only way to guarantee success is to follow a service lifecycle management methodology, which is why SPI Research developed SLM3. We are at the start of a new service trend that will be as impactful as advances in objectoriented programming and agile service development techniques, but will require at least the same amount of focus and discipline to produce successful results. The bottom-line: Service productization is well worth the effort but requires a service productization plan, discipline and consistent focus with a time horizon of years, not months. A key finding from this research is that Professional Service organizations should have reached PS Maturity Level 3 or above (deployed) across all five service performance pillars before a major service productization effort begins. This point means the organization needs to have in place sustaining policies, processes, systems and tools for all major PS business functions before a serious service productization effort can be successful. Without a strong foundation based on a clear strategy, repeatable and consistent business development and service delivery methods and tools, a comprehensive and sustaining service productization initiative will not succeed. Introducing SLM3 There is no single method to instantly create high-quality service products. Many service product development teams do not follow a service product development roadmap. To fill this void, SPI Research has developed a five-phase, closed-loop Service Lifecycle Management framework (SLM3 ) to help manage the service productization process (Figure 40) Service Performance Insight Sponsored by NetSuite 69

83 Figure 40: SPI Research s Service Lifecycle-Management Framework SLM3 Service productization is more successful when an organization uses a framework to choreograph roles and responsibilities with clear outcomes defined by phase. This approach leverages client knowledge from existing projects. Speed and quality of service productization improve with experience. Each step outlines key decision points and deliverables that break the service productization effort into its measurable and actionable components. The five phases of SPI Research s SLM3 service productization methodology are: 1. Innovate Identify service productization candidates; conduct research; analyze the market; fund the effort. 2. Define Plan the overall effort; define requirements and content; design service productization methods, tools, and processes. 3. Develop Build service products based on best practices, consistent methodology, and tools; test assumptions. 4. Launch Conduct beta tests; assemble sales, marketing, and delivery documents; train sales and service professionals; execute sales and marketing campaigns; deliver with quality. 5. Optimize Develop measurements and rewards; garner sales, PSO, and client feedback; identify areas for improvement. Propose significant changes and add-on services back through the Innovate stage. Please refer to SPI Research s 2012 Service Lifecycle Management Maturity Model Benchmark Service Performance Insight Sponsored by NetSuite 70

84 Building the Professional Services Lifecycle Management Maturity Model SPI Research constructed a new Service Lifecycle Maturity Management Model focused on defining and measuring the core business processes and critical success factors associated with Service Productization. SPI Research uncovered great disparity between the most and least mature service productization efforts (Figure 41). Figure 41: Service Lifecycle Management Maturity Model 60% of the participants are operating at maturity Level 0 or Level 1, meaning they are interested in learning more about service lifecycle management but have not yet begun to standardize an approach. The remaining 40% of benchmark participants are somewhat evenly distributed across maturity levels 2 through 5 with respectively 15% operating at level 2; 10% each at levels 3 and 4; and only 5% at level 5. What is significant is the greatest breakthroughs in performance occur between Maturity Level 1 and 2 and Level 4 and 5. The Level 5 organizations derive over 60% of their revenues from the sale and delivery of productized services; 88% of their clients are referenceable; 95% of their projects are delivered on-time and they produce 28.5% in net profit. Level 3 is the typical PSMM aspirational target but it appears Level 4 or 5 maturity should be the service lifecycle management goal. Figure 42 shows results from the 2012 Service Lifecycle Management Maturity Model benchmark based on 104 organizations. In service packaging, maturity matters a great deal. In fact, many 2013 Service Performance Insight Sponsored by NetSuite 71

85 organizations are wasting money on service packaging unless they have a dedicated, funded team and consistent approach to bring new service packages to market. Figure 42: Service Lifecycle Management Maturity Matters! Figure 43 shows average spending on service packaging is 1.7% on par with PS IT spending. Properly managed, investments in service productization can pay off handsomely with significant improvement in margin, revenue per person and ability to sell and deliver larger projects. Figure 43: Service Productization Creates Value 2013 Service Performance Insight Sponsored by NetSuite 72

86 Delivering Client Value Outcome-based Engagements With the 2008 economic downturn, advent of cloud computing and maturing business process/it outsourcing market, traditional professional services (PS) engagement models have come under greater scrutiny. No longer are effort-based time and materials, or even output-based fixed-fee engagements, satisfactorily meeting businesses need for vendor control and budget management. As professional services firms develop expertise and choose to share risks, an outcome-based model becomes relevant whereby services compensation is based on the contribution to the outcomes of the client s business. In fact, Forrester predicts that about 10% of service contracts will be comprised of outcome-based engagements by Outcome-based engagements may not be broadly applicable. But given the right conditions, outcomebased contracts can be successfully crafted to deliver mutually beneficial results. The ideal outcome-based engagement So, what are the criteria to consider before pursuing an outcome-based contract? Outcome-based models become relevant when the objective of the relationship goes beyond cost to delivering a measurable impact on business results. Further, the client s and service firm s interests must align so they can work collaboratively towards the same goal. A successful partnership in a performance-based engagement depends on many factors. Following are the ideal conditions: 1. Mature relationship Services firm has an exceptional working relationship with client, access to its executives, a defined issue escalation path and enjoys trusted advisor status. 2. Client business insight Firm maintains insight into client s business model, operations and industry nuances. Client keeps services firm in the communication loop when making major decisions regarding business direction or response to market conditions. 3. Engagement impacts business outcome The scope of work directly affects the business outcome. Client and services firm have a clear understanding of what constitutes a successful outcome. The PS has a well-defined and managed scope and scope change management process. 4. Process control Services firm has the ability to control elements of the process that affect the business outcome. 5. Risk control Risk involved is at least partially within firm s control. Risks can be calculated for each stage of the engagement with an acceptable mitigation strategy. External variables affecting outcome must be minimal enough so the firm can influence the outcome. 6. Accurate baselines Client provides accurate baselines and historical data. 7. Measurable outcomes Service levels and performance goals are clearly defined and measurable. All data, variables, formulas and reports used to compute results and measure outcomes are thoroughly discussed, and easy to develop or readily available Service Performance Insight Sponsored by NetSuite 73

87 8. Defined risk-reward strategy Reporting to calculate rewards, penalties and pricing is thoroughly discussed and can be documented in contract. 9. Proven delivery Firm has proven delivery capabilities for this engagement. Inherently, an outcome-based contract is a more sophisticated pricing model that requires clear definition of outcomes and assessment of value creation in order to develop an agreement. This model works best in engagements where the outcome is based on meeting service level agreements, deliveries or deadlines. This model is increasing in use by offshore business process outsourcing and IT managed service firms. Services firms are also beginning to adopt this model for outsourced product engineering services including software maintenance and new product development. Benefits of outcome-based engagements For the client, this type of engagement provides assurance that the services firm shares the risk. Thus, a better guarantee of the outcome exists by rewarding the result instead of the effort. Other benefits include cost predictability and reduced total cost of investment, which are critical in lean economic times. For the services firm, an outcome-based engagement provides great motivation and incentive to innovate to complete the work faster, meet or exceed client s expected results and deliver profit back to the firm. Typically, the driver of this type of engagement is the services firm, not the client. Many firms see this model as a way to break out of the linear growth model and delink pricing from effort and head count. Also, more progressive firms that learn to manage risk effectively can use this approach as a powerful market differentiator. Challenges of outcome-based engagements Challenges exist for both the client and the services firm when entering into and managing an outcomebased engagement. Implementing state-of-the-art performance-based contracting requires new evaluation techniques, new management approaches, improved top-level know-how for designing and managing contract relationships, better logistics systems and a whole new set of client skills. Perhaps most importantly, what is needed is a changed mindset in which clients are rewarded for effectively managing projects and services providers rather than for the number of direct employees under their supervision. The services firm must comprehensively conduct its due diligence, execute an airtight contract (specifying client obligations) and assign a highly talented and well-assembled team who are prepared to manage to performance commitments. Engagement evaluation processes (frequency and intensity of oversight, reporting, meetings) should align with the amount of risk undertaken by the project with predefinitions for how the risks are distributed, planned for, and mitigated between the client and services firm. Conceptually, an outcome-based engagement could have a lower risk than a time and materials or fixed-fee engagement as the services firm has assumed more accountability and responsibility for the integrity of the delivery process Service Performance Insight Sponsored by NetSuite 74

88 A services firm must also define the amount of bearable risk given the firm s process maturity and state of its business before offering an outcome-based model. The ability to accurately calculate process costs is critical to determining risk throughout the engagement. External economic, technological and outsourcing forces have accelerated the introduction and adoption of outcome-based engagement models. This type of engagement model can be effective and mutually beneficial to the services firm and client with the presence of the right set of conditions. And, most importantly, reaching a common beneficial outcome requires a strong and open relationship between the two parties. Survey Results The following section reviews and analyzes 2013 PS Maturity benchmark results from 234 participating Professional services organizations. In this section SPI Research analyzes 33 Client Relationship key performance measurements that are critical for measuring sales and marketing effectiveness. Type of Work Sold Last year SPI Research added a question about the mix of services sold. Similar to last year, the highest percentage of work sold was IT consulting. Given the mix of participants, this finding was not surprising. However, there is a growing demand, regardless of the PS vertical, for business and management consulting, which was reflected in this year's survey. Also, it should be noted that both staff augmentation and managed services declined in this year's survey. Both of these business lines are drifting toward commoditization with too many competitors chasing too few opportunities. The margins in this low end of the market have become razor thin as large buyers demand vendor service agreements with low rates for common skills. Mergers and acquisitions in both staff augmentation and managed services are common as suppliers seek to improve their economies of scale. Figure 44: Type of Work Sold Table 45 breaks down the results by both embedded and independent service providers, as well as by major geographic regions. The results are not surprising considering a majority of the embedded service providers are part of software, SaaS or hardware firms, and therefore a majority of their work is technology consulting. One interesting finding from this table is that the Asia Pacific region is focused much more heavily on technology than organizations based in the rest of the world. This heavy Asia 2013 Service Performance Insight Sponsored by NetSuite 75

89 Pacific focus on technology could lead to price pressure if suppliers are not able to add more valuable business and management consulting services. Table 45: Type of Work Sold by Organization Type and Geographic Region Type of Work Sold Survey ESO PSO Americas EMEA APAC Technology or IT Consulting 47.1% 62.0% 38.9% 45.5% 49.8% 64.1% Business / Management Consulting 28.9% 17.0% 35.4% 29.2% 29.8% 21.6% Managed Services 7.3% 8.8% 6.5% 6.6% 11.7% 4.1% Staff Augmentation 5.7% 4.7% 6.3% 6.1% 2.9% 8.9% Other 11.0% 7.6% 12.9% 12.6% 5.9% 1.4% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Table 46 shows the smallest firms are more focused on business and management consulting, as many of the smaller firms in the survey tend to be very specialized boutiques with a laser focus on specific disciplines such as strategy, marketing, or business operations. Interestingly, the largest firms have a much higher percentage of managed services than their smaller competitors, as they tend to be global firms who focus on outsourcing and managed services to drive greater cost efficiency and scale than their smaller counterparts. Further, most large corporations prefer to work with the large global firms for bet-your-business outsourcing deals which involve significant risk and sophisticated service level agreements. Table 46: Type of Work Sold by Organization Size Type of Work Sold Under Over 700 Technology or IT Consulting 32.3% 47.4% 44.0% 59.6% 63.1% 39.9% Business / Management Consulting 53.2% 26.7% 27.8% 21.4% 22.5% 16.3% Managed Services 4.6% 8.7% 8.0% 4.8% 2.0% 21.4% Staff Augmentation 2.5% 5.1% 4.7% 7.6% 11.4% 10.0% Other 7.3% 12.1% 15.5% 6.7% 1.0% 12.5% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Table 47 compares the embedded service providers to each other, and as previously noted, they spend approximately two-thirds of their time delivering technology oriented consulting. SPI Research expects increases in business and management consulting as their customer base demands more from their technology investments, besides implementation and integration. Over the next several years the ability to increase technology leverage and business value will become increasingly important in order to remain competitive Service Performance Insight Sponsored by NetSuite 76

90 Table 47: Type of Work Sold by Embedded Service Market Type of Work Sold Software PS SaaS Hardware Technology or IT Consulting 64.3% 58.3% 80.9% Business / Management Consulting 20.3% 14.3% 2.4% Staff Augmentation 3.9% 16.5% 4.4% Managed Services 5.1% 4.5% 4.4% Other 6.4% 6.3% 7.8% Total 100.0% 100.0% 100.0% Table 48 compares the independent service providers to each other. The results for IT consultancies and management consultancies are as expected. Table 48: Type of Work Sold by Independent Service Market Type of Work Sold IT Consult. Mgmt. Consult. Advertising Arch./ Engr. Other PS Technology or IT Consulting 69.1% 13.3% 5.6% 30.7% 9.1% Business / Management Consulting 13.9% 73.7% 28.1% 17.1% 42.1% Staff Augmentation 5.7% 2.7% 7.5% 8.6% 15.0% Managed Services 8.9% 5.6% 1.3% 0.7% 1.1% Other 2.4% 4.6% 57.5% 42.9% 32.6% Total 100.0% 100.0% 100.0% 100.0% 100.0% New Client Penetration Prior to this year's benchmark, SPI Research asked the percentage of revenue coming from both new and existing clients, further broken down by new versus existing services. In this year's benchmark the focus of the survey was on new client revenue, and therefore SPI Research looked to gain new knowledge and insight based on the percentage of business from new clients, regardless of whether or not there were sold new services. When this information is compared to prior years, it is important to note a significant decline in new client penetration. Almost 40% of service revenue in prior benchmarks was sold to new clients compared to only 30% this year. While it might be difficult to read too much into this answer, as the question was modified to solely focus on new client revenue, the importance of new clients cannot be underestimated. A constant supply of new clients is necessary for both professional and organizational growth; reliance solely on existing customers increases risk without increasing knowledge Service Performance Insight Sponsored by NetSuite 77

91 Table 49 shows the percentage of new client revenue is 22% lower (30.0%) than in last year's survey (38.6%), and 17% lower than the past six-year's survey average (36.0%). The table shows independent service providers had values 19% lower than embedded services organizations (27.7% vs. 34.2%). Table 49: New Client Penetration N/A 39.0% 37.0% 38.6% 30.0% ESO PSO 6-Year Avg. Software PS SaaS PS 34.2% 27.7% 36.0% 34.7% 37.7% Americas EMEA APac Hardware PS IT Consulting 30.1% 30.4% 26.8% 28.9% 27.9% Under Mgmt. Cons. Advertising 30.9% 34.3% 31.3% 29.1% 26.7% Organizations from EMEA had the highest percentage (30.4%) of new client revenue, while those from % % Over % Arch./Engr. 22.1% Other PS 27.3% APac had the lowest (26.8%). Organizations with employees had the highest (34.3%) new client revenue, while those with between employees had the lowest (17.4%). SPI Research found the SaaS PS market shows the highest percentage of new client revenue (37.7%), while those in the Architecture/Engineering market had the smallest (22.1%). Primary Service Sales Measurement Figure 45: Primary Service Sales Measurement In the 2012 survey, SPI Research asked about the primary measurements for service sales people. The overwhelming answer was Service Revenue with 40% (Figure 45). The second-most prevalent sales measurement is service bookings with 21% closely followed by all of the above with 20% meaning service reps are measured on service revenue, service bookings, margin and client satisfaction. 11% of the organizations measure their service sales people on margin; 7% on client satisfaction. Year-over-year the percentage of sales people measured on all of the above declined while the percentage measured on client satisfaction, service margin and service bookings increased slightly Service Performance Insight Sponsored by NetSuite 78

92 SPI Research frequently receives questions regarding how the service sales force should be measured. Table 50 provides a fascinating view of the cause and effect of service sales measurements. Table 50: Impact - The Effect of Sales Measurements on Performance Primary Service Sales Measurement Survey Annual Revenue Growth Bid- Win Ratio Size of Pipeline Refer. Clients Util. On-time project delivery Rev. per billable consult. Fixed Price Project Margin Service Revenue 40.2% 11.4% % 76.8% 70.3% 81.2% $ % Service Bookings 21.0% 15.2% % 68.2% 70.0% 75.7% $ % Service Margin 11.4% 12.1% % 76.4% 75.8% 79.2% $ % Client Satisfaction 7.3% 8.8% % 70.9% 64.3% 66.0% $ % All of the Above 20.1% 11.6% % 81.1% 72.3% 80.9% $ % Survey Average 100% 11.5% % 75.4% 70.3% 78.6% $ % Although service revenue measurements are the most common (40%), they appear to produce mediocre performance in most areas. Overall the best results correspond with service bookings as the primary sales measurement with the highest revenue growth; largest sales pipelines and highest revenue per consultant but they also produced the fewest referenceable clients. Care must be taken to ensure a service booking measurement does not encourage reps to chase as many deals as possible nor should they be incented to sell and run. Many firms are switching to Service Margin as a primary metric but they use average cost figures to calculate deal margin to simplify sales compensation. Interestingly, service margin as the primary sales measurement appears to have few draw-backs except the lowest win-to-bid ratio. Surprisingly, by far the worst service sales measurement is client satisfaction although it is used by only 7.3% of the benchmark respondents. With client satisfaction as the primary measurement, service sales people have a vested interest in the quality and timeliness of project delivery although in this year s survey this primary measurement produced the poorest on-time project delivery. Amazingly, client satisfaction as the primary sales metric resulted in the lowest growth; smallest sales pipeline; lowest utilization; poorest revenue per consultant and the lowest project margin. The pursuit of client satisfaction at any cost incents the sales force to drive service delivery to do whatever it takes without regard to margin. A blended all of the above metric is used by 20% of benchmark respondents; this analysis shows this strategy produces reasonably good performance across the board and is the best measurement for producing reference clients and high project margins. A big drawback is incenting sales with too many metrics because they are hard to measure and enforce Service Performance Insight Sponsored by NetSuite 79

93 Primary Service Target Buyer SPI Research asked who is the primary buyer for your services? For the 234 benchmark respondents, the primary target buyer is most likely to be a line of business executive (43%); CIO (25%); other (19%); CEO (7%); COO (6%); only one firm out of 234 primarily sells to purchasing. Table 51 correlates primary buyer type with other key metrics. Without knowing other aspects besides the primary buyer it is hard to come up with definitive best practices but this analysis does reveal some interesting comparisons. Although calling at the top is a favored strategy, it appears firms who primarily sell to the CEO experience low levels of growth; lackluster pipelines; poor client satisfaction; low revenue per consultant and poor project margins; presumably because it is hard to get to the CEO and if the CEO is really the decision-maker the project is either very strategic or the organization is very small. Figure 46: Primary Service Target Buyer Table 51: Impact - The Effect of Primary Buyer Type on Performance Primary Target Buyer Survey Annual Rev. Growth Bid- Win Ratio Size of Pipeline Reference Clients Util. On-time project delivery Rev. per billable consultant Fixed Price Proj. Margin CEO 7.5% 6.9% % 72.8% 65.0% 77.4% $ % COO 5.8% 8.5% % 83.1% 73.5% 81.9% $ % CIO 25.2% 12.2% % 79.3% 70.4% 80.3% $ % Line of Business 42.5% 13.0% % 72.5% 70.8% 77.0% $ % Purchase. 0.4% -5.0% % 75.0% 65.0% 95.0% $ % Other 18.6% 11.1% % 76.8% 70.1% 79.1% $ % Average 100% 11.5% % 75.4% 70.3% 78.6% $ % Firms that sell to the Chief Operating Officer have a hard time with growth but have the highest percentage of reference clients, utilization and revenue per consultant. The majority of firms sell to a line of business executive. Selling to this buyer type resulted in the highest growth and the best win-tobid ratios. Selling to the CIO produced reasonably good results with the largest pipeline. By far the worst strategy is to sell to purchasing although only one respondent reported this as the primary buyer type. Selling professional services to purchasing is a sure indication that the services or bodies have 2013 Service Performance Insight Sponsored by NetSuite 80

94 become commoditized with negative growth; poor win-to-bid ratios; poor pipeline; low utilization and the worst revenue per consultant in the study. Table 52 shows independents primarily sell to the line of business (37%) and the COO (26.7%) while ESOs primarily sell to line of business executives. By geography, target buyers in APAC are primarily COOs while they are line of business executives in the Americas and EMEA. After line of business executives, COOs are the second most important buyers in the Americas followed by purchasing; Europeans predominantly sell to line of business executives and CEOs. Table 52: Primary Service Target Buyer by Organization Type and Geographic Region Primary Service Target Buyer Survey ESO PSO Americas EMEA APAC Line of Business 42.5% 52.5% 37.0% 42.5% 50.0% 18.2% CIO 25.2% 22.5% 26.7% 26.3% 11.1% 54.5% Other 18.6% 15.0% 20.5% 20.7% 13.9% 0.0% CEO 7.5% 3.8% 9.6% 5.6% 16.7% 9.1% COO 5.8% 6.3% 5.5% 5.0% 5.6% 18.2% Purchasing 0.4% 0.0% 0.7% 0.0% 2.8% 0.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Solution Importance to Client's Business In the 2012 survey, respondents were asked to rate the importance of their solutions to their client s business with 1 = little or no impact and 5 = mission critical impact. Interestingly, a majority of respondents rated their solutions as having very high to mission critical impact. Table 53: Impact of Solution Importance to Client s Business on Performance Solution Import. Survey Annual Rev. Growth Bid-to- Win Ratio Size of Pipeline Referenc e. Clients Util. On-time project delivery Rev. per billable consultant Fixed Price Project Margin 1 - Low 0.0% NA NA NA NA NA NA NA NA 2 5.3% 9.8% % 72.9% 65.0% 73.8% $ % % 11.1% % 73.1% 67.4% 76.3% $ % % 11.4% % 77.0% 70.8% 79.1% $ % 5 - High 31.6% 12.7% % 75.9% 72.5% 80.1% $ % Avg % 11.5% % 75.4% 70.3% 78.6% $ % This metric appears to be one of the most important KPIs in the benchmark as all other measurements revenue growth, size of the pipeline, billable utilization and profitability are directly correlated with the importance of the solution. In SPI Research s consulting projects we find companies who are not 2013 Service Performance Insight Sponsored by NetSuite 81

95 focused on solving important client business problems struggle to grow and prosper. For firms struggling to find relevance or who discover their solutions are no longer mission-critical, they may have inadvertently moved into a commoditizing space. Realistically, PS only exists in the land of significant business problems or hard-to-find skills and knowledge. If your firm has fallen into a commoditizing space, you need to develop a new, more relevant business proposition or remake your firm to be the low-cost, most efficient provider. Table 54 shows the average solution importance to client's business (4.01) is essentially the same as in last year's survey (4.00). The table shows independent service providers had values 1% lower than embedded services organizations (3.99 vs. 4.05). Organizations from North America reported the highest (4.06) solution importance to the client's business, while those from EMEA reported the lowest (3.83). Table 54: Solution Importance to Client's Business N/A N/A N/A ESO PSO 6-Year Avg. Software PS SaaS PS Americas EMEA APac Hardware PS IT Consulting Under Mgmt. Cons. Advertising Over 700 Arch./Engr. Other PS Organizations with over 700 employees had the highest (4.60) solution importance to the client's business, while those with fewer than 10 employees had the lowest (3.57). SPI Research found the Software PS market shows the highest solution importance to client's business (4.24), while those in the SaaS PS market had the least (3.70). Table 55 shows profit by the solution importance. While the results are not completely conclusive, they do show a trend toward greater profitability as the importance increases. Table 55: EBITDA by Solution Importance and Organization Type and Geographic Region Solution Importance Survey ESO PSO Americas EMEA APAC 2 Unimportant 6.2% 1.8% 7.4% 13.4% -19.0% N/A % 30.3% 11.6% 19.0% 30.0% 7.7% % 17.5% 9.0% 10.5% 21.3% 8.4% 5 Very Important 23.2% 25.3% 21.7% 25.1% 12.4% 15.5% Total 16.4% 22.2% 13.0% 17.1% 16.0% 9.1% 2013 Service Performance Insight Sponsored by NetSuite 82

96 Solution Uniqueness Respondents were asked to rate the uniqueness of their solutions with 1=commodity and 5= no one else provides. As Table 56 shows the uniqueness of the solution also appears to have a major impact on all other performance metrics although the sweet spot for solution uniqueness appears to be at level 3 or above because the solution is not so unique that it has no competition but unique enough to warrant consideration and premium pricing. By far the place to be in PS is to offer a unique solution to a common and urgent business problem specialization and depth normally trump breadth. Profit is not necessarily associated with solution uniqueness. In other words, service providers can make a very good living by providing mission-critical answers to common problems. Table 56: Impact - Solution Uniqueness Effect on Performance Solution Import. Survey Annual Rev. Growth Bid-to- Win Size of Pipeline Reference Clients Utilization On-time project delivery Rev. per billable consultant Fixed Price Project Margin 1 - Low 2.7% 10.4% % 65.8% 68.3% 78.3% $ % 2 9.8% 7.7% % 65.7% 59.1% 80.0% $ % % 11.9% % 78.1% 72.1% 79.6% $ % % 12.0% % 75.2% 71.6% 77.4% $ % 5 - High 8.4% 13.9% % 80.0% 70.0% 78.2% $ % Avg % 11.5% % 75.4% 70.3% 78.6% $ % Table 57 shows solution uniqueness (3.43) is 3% lower than in last year's survey (3.52). The table shows independent service providers had values 1% lower than embedded services organizations (3.41 vs. 3.45). Organizations from EMEA had the highest (3.63) solution uniqueness, while those from APac had the lowest (3.18). Organizations with between employees had the highest (3.56) solution Table 57: Solution Uniqueness N/A N/A N/A ESO PSO 6-Year Avg. Software PS SaaS PS Americas EMEA APac Hardware PS IT Consulting Under Mgmt. Cons. Advertising Over 700 Arch./Engr. Other PS Service Performance Insight Sponsored by NetSuite 83

97 uniqueness, while those with between employees had the lowest (3.28). SPI Research found the Management Consulting market shows the highest solution uniqueness (3.76), while those in the Hardware & Networking market had the lowest (3.11). Bid-To-Win Ratio Another critical KPI in the Client Relationship pillar is the Bid-to-Win ratio which measures the number of wins per ten bids. Bid-to-win ratio is a powerful metric for judging sales and marketing Figure 47: Bid-To-Win Ratio effectiveness, but must be analyzed in conjunction with the size of the pipeline; the length of the sales cycle and the cost to pursue the bid. If the bid-to-win ratio is too high it may be an indication that the organization is not aggressive enough in targeting new clients and new services. If it is extremely low it is an indication the firm is competing in a commoditized market or it is not wellpositioned or is not calling at the right level. Of course the best deals of all are those that don t require a bid (sole source) because the client has done business with the firm before and knows they will do a good job on the current project. Table 58 shows the bid-to-win ratio (per 10 bids)(5.19) is almost the same as last year's survey Table 58: Bid-To-Win Ratio (5.21), and 1% lower than the past six-year s survey average (5.24). The table shows independent service providers had values 4% ESO PSO Year Avg Software PS SaaS PS 4.43 higher than embedded Americas EMEA APac Hardware PS IT Consulting services organizations ( vs. 5.06). Organizations from APac had the highest (5.50) bid-to-win ratio, while those from EMEA had the lowest (4.66). Under Over Mgmt. Cons Arch./Engr Advertising 4.90 Other PS 4.74 Organizations with between 2013 Service Performance Insight Sponsored by NetSuite 84

98 employees had the highest (5.58) bid-to-win ratio, while those with between employees had the lowest (4.98). SPI Research found the Architecture/Engineering market shows the largest bid-to-win ratio (6.17), while those in the SaaS PS market had the smallest (4.43). Deal Pipeline Relative to Quarterly Bookings Forecast The deal pipeline as compared to the quarterly bookings forecast is an important leading indicator that provides insight into sales effectiveness and future revenue. The size of the deal pipeline shows direct correlation to all major growth indicators revenue growth; revenue per billable employee; percentage achievement of the annual revenue plan and billable utilization. Figure 48: Deal Pipeline Relative to Quarterly Bookings Forecast Table 59 shows the deal pipeline relative to the quarterly bookings forecast(193%) is 5% lower than in last year's survey (202%), and 1% lower than the past six-year s survey average (196%). PS executives should closely monitor this change as it could negatively impact future revenue and profitability. The table shows independent service providers had values 6% lower than embedded services organizations (189% vs. 201%). Organizations from APac had the highest (227%) deal pipeline relative to the quarterly bookings forecast, while those from EMEA had the lowest (181%). Organizations with employees had the strongest (215%) deal pipeline relative to qtr. bookings forecast, while those with fewer than 10 employees had the lowest (144%). SPI Research found the Hardware & Networking PS market shows the largest deal pipeline relative to qtr. bookings forecast (233%), while those in the Management Consulting market had the smallest (153%). Table 59: Deal Pipeline Relative to Quarterly Bookings Forecast % 182% 196% 203% 193% ESO PSO 6-Year Avg. Software PS SaaS PS 201% 189% 196% 205% 191% Americas EMEA APac Hardware PS IT Consulting 193% 181% 227% 233% 214% Under Mgmt. Cons. Advertising 144% 189% 204% 153% 156% Over 700 Arch./Engr. Other PS 203% 215% 206% 200% 176% 2013 Service Performance Insight Sponsored by NetSuite 85

99 Length of the Sales Cycle The length of the sales cycle measures the time it takes to move a qualified lead to a signed contract. Table 60 shows the sales cycle (96 days) is 5% shorter than in last year's survey (101), and 1% shorter than the past sixyear s survey average (97). While not significantly shorter, the sales cycle was reduced by four days, which means improved sales effectiveness. Table 60: Sales Cycle (days) ESO PSO 6-Year Avg. Software PS SaaS PS Americas EMEA APac Hardware PS IT Consulting Under Mgmt. Cons. Advertising Over 700 Arch./Engr. Other PS The table shows independent service providers had values 12% lower than embedded services organizations (91 vs. 104). Organizations from EMEA had the longest (113) sales cycle, while those from APac had the shortest (81). Organizations with over 700 employees had the longest (107) sales cycle, while those with fewer than 10 employees had the shortest (80). SPI Research found the Software PS market shows the longest sales cycle (109), while those in the Advertising/Marcom market had the shortest (76). Service Sales Effectiveness Service Sales Effectiveness is a subjective question but typically refers to the percentage of sales people who achieve quota and the probability that the sales organization will achieve its targets. For the third year in a row, SPI Research asked respondents to rank the effectiveness of the service sales organization on a scale from 1 to 5 with 5 representing perfection. Just as was seen with solution importance, sales effectiveness has a profound impact on all aspects of PS but unfortunately 15% give sales effectiveness a failing grade of 1 or 2; 51% give sales effectiveness and OK score of 3 while only 35% give sales effectiveness high marks. As Table 61 shows, SPI Research found a high degree of correlation between service sales effectiveness and all other major key performance measurements. Increasingly service sales effectiveness is one of the most important metrics tied directly to the overall growth and profitability of the firm. Why is PS sales effectiveness so hard to achieve? First and most importantly the best solution sellers are typically the best solution consultants because they intimately understand their client s business challenges and how to address them. So off the bat, there is a built-in conflict with having the best solution consultants focused exclusively on selling they don t like it! Secondly, it is extremely hard to sell high value consulting the best clients are ones that are already familiar with the reputation and approach of the 2013 Service Performance Insight Sponsored by NetSuite 86

100 firm meaning referral selling is best. It takes a team to craft market positioning statements and develop clients and proposals so expecting one rainmaker to be able to carry the entire selling weight is not realistic. PS providers will be well-advised to invest in marketing and sales leading with thought leadership and well-crafted marketing messages opens doors to allow senior business development teams to be more effective in their sales pursuits. Table 61: Impact - Sales Effectiveness Impact on Performance Sales Effect. Survey Annual Rev. Growth Bid- Win Ratio Size of Pipeline Reference Clients Utilization On-time project delivery Rev. per billable consultant Fixed Price Project Margin 1 3.6% 2.8% % 65.0% 58.8% 70.0% $ % % 8.0% % 63.5% 65.4% 67.2% $ % % 12.6% % 75.3% 70.1% 80.4% $ % % 11.9% % 79.2% 73.3% 80.8% $ % 5 4.5% 19.4% % 85.0% 73.5% 82.5% $ % Avg. 100% 11.5% % 75.4% 70.3% 78.6% $ % In most embedded service organizations, the product sales team also sells services. This scenario can cause problems if services are given away, or at a low price, in order to realize product revenue. However, if the charter of the embedded service organization is to meet both client satisfaction and profit margin goals, the sales team must be effective in how they present and sell the services component of the deal. Lackluster Sales Effectiveness, in conjunction with the fact the majority of organizations consistently report Sales as the area in need of the most improvement, points to Improving Sales Effectiveness should be a priority for almost all PS organizations. Table 62 shows the service sales effectiveness (3.20) is 1% lower than in last year's survey (3.25), and 2% higher than the past six-year s survey average (3.14). The table shows independent service providers had values 10% higher than embedded services organizations (3.31 vs. 3.00). Organizations from North America had the highest (3.23) service sales effectiveness, while those Table 62: Service Sales Effectiveness N/A ESO PSO 6-Year Avg. Software PS SaaS PS Americas EMEA APac Hardware PS IT Consulting Under Mgmt. Cons. Advertising Over 700 Arch./Engr. Other PS Service Performance Insight Sponsored by NetSuite 87

101 from APac had the lowest (3.09). Organizations with over 700 employees had the highest (3.44) service sales effectiveness, while those with between employees had the lowest (2.97). SPI Research found the Advertising/Marcom market shows the highest service sales effectiveness (3.50), while those in the SaaS PS market had the lowest (2.74). Service Marketing Effectiveness For those organizations with a service marketing group, SPI Research asked how effective service marketing was on a scale of 1 to 5, with 5 representing excellent. Having a service marketing focus is not enough. Marketing must develop effective thought leadership, marketing campaigns, sales tools and provide sales enablement to increase the firm s brand awareness, showcase thought leadership and bring in qualified leads. The most successful PS marketing efforts require a strategic focus to ensure they augment and enhance the firm s strategy. Marketing should be charged with bringing the firm s vision and strategy to light through effective positioning. Without a seat at the executive table, marketing will be relegated to tactical lead generation. Effective marketing requires dedicated, skilled personnel along with sustained funding. Marketing effectiveness has consistently been given an even worse score than sales effectiveness (2.61 out of 5). The majority of firms (46%) give their marketing organizations a failing grade of 1 or 2. For the 25% of firms who gave their marketing efforts a passing score of 4 or 5, marketing had a significant positive impact on most client relationship metrics. Organizations with high service marketing effectiveness showed high customer satisfaction scores, larger pipelines and higher revenue per employee. However marketing effectiveness did not have a significant impact on financial metrics like project margin. Table 63 shows service marketing effectiveness (2.61) significantly improved over all prior benchmarks and is 9% higher than in last year's survey (2.39), and 9% higher than the past sixyear s survey average (2.41). Table 63: Service Marketing Effectiveness N/A ESO PSO 6-Year Avg. Software PS SaaS PS Americas EMEA APac Hardware PS IT Consulting The table showed Under Mgmt. Cons. Advertising independent service providers had values 26% higher than embedded services organizations (2.81 vs. 2.23). Organizations from APac had the highest (2.82) Over Arch./Engr Other PS 2.84 service marketing effectiveness, while those from EMEA had the lowest (2.46) Service Performance Insight Sponsored by NetSuite 88

102 Organizations with over 700 employees had the highest (2.78) service marketing effectiveness, while those with between employees had the lowest (2.33). SPI Research found the Advertising/Marcom market shows the highest service marketing effectiveness (3.60), while those in the Software PS market had the lowest (2.14). Referenceable Clients The percentage of reference clients is considered one of the most important KPIs in the professional services sector. This year client referenceability improved to a more satisfactory level of 75.4%. Table 64 shows 47% of the benchmark respondent s claim over 80% of their clients are referenceable. On the other hand, 20% report less than 70% of their clients are referenceable. Client references have a strong correlation with service marketing effectiveness; the length of the sales cycle; ease of getting things done and whether employees would recommend the PSO as a great place to work. The relationship between client and employee satisfaction is irrefutable. Client references are a leading indicator of organizational success. As this percentage increases, so does the probability of high levels of growth; higher bid-to-win Table 65: Percentage of Referenceable Clients ratios and lower sales costs. Any maturity improvement plan must address measuring and improving client satisfaction and building references % ESO 67.3% Americas % PSO 80.0% EMEA % 6-Year Avg. 73.1% APac % Software PS 66.9% Hardware PS % SaaS PS 68.3% IT Consulting Table 65 shows the % of "referenceable" clients (75.4%) is 6% higher than in last year's survey (71.4%), and 3% higher than the past six-year s survey average (73.1%). The table showed Table 64: Impact - Client References Score Survey Response Revenue Growth Bid-to-Win Rev./ Consultant Under 50% 13.9% 10.3% 4.43 $197 50% - 60% 6.7% 14.5% % - 70% 10.3% 8.9% % - 80% 20.6% 12.6% % - 90% 16.6% 14.4% Over 90% 30.0% 10.9% Total 100.0% 11.5% 5.19 $ % 73.1% 72.0% 63.9% 79.2% Under Mgmt. Cons. Advertising 74.8% 77.5% 76.0% 83.1% 80.6% Over 700 Arch./Engr. Other PS 75.8% 70.6% 67.8% 80.0% 77.4% 2013 Service Performance Insight Sponsored by NetSuite 89

103 independent service providers had values 19% higher than embedded services organizations (80.0% vs. 67.3%). Organizations from North America had the highest (76.1%) % of "referenceable" clients, while those from APac had the lowest (72.0%). Organizations with employees had the highest (77.5%) % of "referenceable" clients, while those with over 700 employees had the lowest (67.8%). SPI Research found the Management Consulting market shows the highest % of "referenceable" clients (83.1%), while those in the Hardware & Networking PS market had the lowest (63.9%). Primary Responsibility for New Solution Development New solution development has become increasingly important as PSOs look to expand their service portfolios as a means of differentiating themselves from the competition. SPI Research asked which organization has the primary responsibility for new solution development. The choices included: a dedicated solution development group; service marketing; service engineering; operations or other. This performance indicator speaks to where solutions are developed and how much emphasis the PSO places on new solution development. In SPI Research s experience, where solution development occurs is far less important than having a solution development methodology (service lifecycle management framework) to ensure solutions are actually tied to client needs and organizational capabilities. As service solutions become increasingly important they must be developed with the care and discipline of traditional products to ensure clients actually need the service and to ensure it can be Figure 49: Primary Responsibility for New Solution Dev. marketed, sold, priced and delivered effectively. At one end of the spectrum, hardware and networking organizations often try to productize and part number every service. At the other end of the spectrum, management consultancies often don t use a standard methodology at all and depend on handcrafting each client engagement. An effective approach to solutions is to create discovery or assessment offers focused on jointly discovering and developing client requirements. Figure 49 shows 22% of firms now have a dedicated solutions development group(down from 25% last year); 26% use other ; 23% perform solution development within operations; another 19% have a dedicated service engineering function and only 7% perform solution development within a 2013 Service Performance Insight Sponsored by NetSuite 90

104 marketing organization. Dedicated solution development groups were given the best solution development effectiveness score of 3.5; marketing was given a solution effectiveness score of 3.1; operations 2.98; service engineering 2.9; and 2.7 for other. Solution Development Effectiveness SPI Research has spent the past several years developing a new solution development framework, methodology and toolkit called SLM3 so SPI Research has keenly measured the impact of solution development effectiveness. Along with asking which organization has primary responsibility for new solution development, SPI Research asked how effective the new solution development process was, on a scale from 1 to 5, with 5 being excellent. As shown in Table 66 the impact of solution development effectiveness is fascinating. Solution Development effectiveness went up directly as the size of the organization decreased, in other words, smaller organizations gave higher marks to solution development effectiveness than larger ones did. Solution Development effectiveness had a dramatic, positive impact on revenue growth; employee satisfaction; reference clients; annual revenue target attainment and on-time project delivery. This KPI highlights satisfaction, or frustration, with the solution development process and demonstrates a focus on solution development is worth the effort. Table 66: Impact - The Impact of Solution Development Effectiveness on Performance Solution Effect. Survey Org. Size Rev. Growth Recommend as a great workplace Reference Clients Rev. Target Achievement On-time delivery 1 - Low 5.5% % % 90.9% 75.8% % % % 90.4% 76.5% % % % 91.0% 78.3% % % % 92.0% 79.6% 5 - High 4.6% % % 96.9% 85.0% Avg % % % 91.2% 78.6% High-growth organizations tended to have effective solution development methods which involve expert resources in the process. The slowest growing organizations gave the poorest marks to solution development suggesting a direct correlation between solution development and market expansion. Table 67 shows solution development effectiveness (3.02) is 2% lower than in last year's survey (3.07), and the same as the past six-year s survey average (3.03). The table shows independent service providers had values 2% higher than embedded services organizations (3.04 vs. 2.99). Organizations from North America had the highest (3.05) solution development effectiveness, while those from APac had the lowest (2.91). Organizations with between employees had the highest (3.19) solution development effectiveness, while those with over 700 employees had the lowest (2.63). SPI Research found the 2013 Service Performance Insight Sponsored by NetSuite 91

105 Management Consulting market shows the highest solution development effectiveness (3.13), while those in the Hardware & Networking PS market had the lowest (2.78). Table 67: Solution Development Effectiveness N/A ESO PSO 6-Year Avg. Software PS SaaS PS Americas EMEA APac Hardware PS IT Consulting Under Mgmt. Cons. Advertising Over 700 Arch./Engr. Other PS Pricing and Deal Structure Until this year, SPI Research has seen a shift in engagement contract and billing methods, as clients have become increasingly concerned about risk and cost overruns, and have pushed more accountability to the PSO through fixed fee or shared risk contracts. However in 2012 the trend reversed itself with an increase in time and materials priced projects. Perhaps this is a sign of a seller s market as there is more PS demand than supply so service providers can afford to move back to time and expense pricing which provides more flexibility and lower risk. This is an important KPI to watch. Time and expense based pricing puts emphasis on accurate resource management, time collection and reporting. Fixed price pricing puts an emphasis on project profitability and change management. Either way PSA applications are critical to support accurate time and expense capture and billing. Table 68: Fee Structure by Organization Type and Geographic Region Fee Structure Survey ESO PSO Americas EMEA APAC Time & Expense 54.7% 53.4% 55.4% 55.2% 48.1% 67.3% Fixed Time / Fixed Fee 42.8% 45.1% 41.5% 42.5% 48.4% 30.9% Shared Risk / Performance-based 1.4% 1.0% 1.6% 1.3% 1.6% 1.8% None of the Above 1.1% 0.5% 1.4% 1.0% 1.9% 0.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Table 68 compares billing models between embedded and independent PSOs. For the first time in four years the percentage of time and materials priced projects increased while the percentage of fixed price contracts decreased. Interestingly, until this year ESOs have been selling more and more fixed price contracts but the trend reversed in 2012: 45% in 2012; 47% in 2011; 39% in 2010 compared to 34% in 2013 Service Performance Insight Sponsored by NetSuite 92

106 2009. Independents still prefer time and materials contracts. They sold 41% fixed price contacts in 2012 as compared to 44% in 2011; 35% in 2010 and 37% in By Geography, time and materials is still the prevalent pricing structure in the Americas and APac but in EMEA contracts are evenly divided between fixed price and time and materials. Table 69 shows only the smallest organizations primarily sell fixed fee contracts. SPI Research has also seen a decline in the number of shared risk or performance-based contracts. Table 69: Fee Structure by Organization Size Fee Structure Under Over 700 Time & Expense 44.0% 54.4% 55.2% 62.3% 59.9% 47.2% Fixed Time / Fixed Fee 55.6% 43.2% 42.8% 33.5% 38.9% 41.5% Shared Risk / Performance-based 0.4% 1.5% 0.8% 3.3% 1.1% 3.1% None of the Above 0.0% 0.8% 1.3% 0.8% 0.0% 8.2% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Table 70 shows only hardware and marketing and advertising firms favor fixed fee contracts. This is a fairly major shift from last year s benchmark in which fixed fee pricing was prevalent also in SaaS and other PS. As the SaaS market has become more mature a greater emphasis is being placed on PS profitability so these firms are moving away from fixed fee contracts. Table 70: Fee Structure by Service Market Vertical Fee Structure Software PS SaaS PS Hardware PS IT Consult Mgmt. Consult. Advertise Arch./ Engr. Other PS Time & Expense 55.2% 50.6% 49.0% 63.4% 49.0% 37.8% 52.0% 51.2% Fixed Time / Fixed Fee Shared Risk / Perform.-based 43.3% 47.6% 51.0% 32.7% 48.0% 61.1% 48.0% 46.3% 0.8% 1.2% 0.0% 2.3% 0.8% 1.1% 0.0% 2.0% None of the Above 0.6% 0.7% 0.0% 1.6% 2.3% 0.0% 0.0% 0.5% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Who Sells Services? The survey asked respondents Who sells professional services? Tables in the following sections show the types of service sales representatives; their bookings targets; annual base compensation and ontarget variable. Embedded PS organizations rely primarily on the product sales force for service leads and sales; many of these organizations compensate their product sales reps equally for products and services. In other 2013 Service Performance Insight Sponsored by NetSuite 93

107 cases, the product sales force receives a lower commission on services as compared to products but achievement of the service quota is a requirement for achieving club. Most embedded PSOs don t carry the entire cost of sales or marketing in their profit and loss statements. Top-performing embedded PS organizations have developed service packages and service estimating tools to help the product sales force articulate and sell the value of services. In many cases, the product sales organization is allowed to price and quote service packages as long as no discounts are given. SPI Research found the parent companies of top-performing embedded PS organizations also showed strong year-over-year revenue growth meaning they were well-positioned in a growing market so it was relatively easy for the captive PS organization to prosper. Product sales reps are backed up with PS engagement managers or solution architects with a team selling approach. This hunterskinner model is reasonably effective with hunters focused on new business development while skinners bring in business domain and consulting knowledge to develop requirements and proposals. Independents have two primary sales models: senior partner led or dedicated solution sales. There are pluses and minuses with both approaches. In the traditional consulting pyramid, new college hires (at the bottom of the pyramid) work their way up to partner status over a period of years or even decades. The traditional consulting pyramid relies on junior consultants, fresh out of college or graduate school, to perform the majority of analysis and technical work. As they grow in domain knowledge and consulting and leadership skills they move up the pyramid to become case team leaders, project leaders, program leaders and ultimately, if they are good enough, they are offered partnership status to share in the firm s direction and profits. The benefit of the traditional consulting pyramid is that it provides a constant source of fresh new talent and ideas from the leading universities while offering significant rewards to those who stay with the firm and make it to the top. The downside is that it is an expensive model, and the cost to recruit the top students from the top universities has become prohibitive. Further, today s top college graduates are no longer apt to stay with the same firm for decades to repay their years of apprenticeship. The new model for independents is to hire dedicated solution sellers often from technology firms. This model is far less expensive the cost to recruit and ramp a new hire is a fraction of the apprenticeship model but the downside is that very few product sales people are able to become effective solution sellers. There simply is no substitute for domain knowledge and experience gained from years of delivering consulting. So in this model we see a revolving door of sales people who don t make the grade because they are unable to develop new opportunities without substantial support from the consulting organization. The most effective model is a hybrid combination of the two whereby senior solution consultants are groomed to become solution sellers. This new approach ensures domain expertise and intimate knowledge of consulting delivery without the overhead of partnership profit and loss management. The challenge is to convince senior consultants and solution architects to move into full-time business development roles. Selling aptitude, training and compensation are required Service Performance Insight Sponsored by NetSuite 94

108 Professional Services Sales Quotas Table 71 analyzes the distribution of service bookings quota, base and variable for product sales and dedicated service sales professionals. It shows dedicated service sales representatives carry the highest average PS Bookings quota of $2.23mm while product sales representatives carry an average PS quota of $1.78mm. In general dedicated service sellers carry a higher quota but also receive a significantly higher base salary and on-target variable. Table 71: Professional Services Sales Quotas, Base and Variable by Job Title Sales Representatives Annual PS Booking Target % of Product Sales Product Sales Base (k) Product Sales Variable % of Service Sales Service Sales Base (k) Service Sales Variable Under $1mm 22% $ % 8% $ % $1mm - $1.5mm 15% % 11% % $1.5mm - $2.0mm 5% % 11% % $2.0mm - $2.5mm 2% % 6% % $2.5mm - $3.0mm 5% % 5% % Over $3mm 18% % 21% % N/A 33% % 37% % Average Target $1.78mm $ % $2.23mm $ % Table 72 analyzes the distribution of service quota, base and variable for service delivery managers and firm or practice managers. As expected, firm or practice managers receive both the highest base and variable compensation but carry a lower PS bookings quota ($1.78mm on average) than either product sales or dedicated service sales professionals. Service Delivery Managers carry the lowest sales quota ($1.42mm) with a higher base salary and lower variable component. Table 72: Professional Services Sales Quotas, Base and Variable by Job Title - Management Annual PS Booking Target % of Serv. Del. Mgrs. Serv. Del. Mgr. Base (k) Serv. Del. Mgr. Variable % of Firm or Prac. Mgr Firm or Prac. Mgr. Base (k) Firm or Prac. Mgr. Variable Under $1mm 25.2% $ % 18.8% $ % $1mm - $1.5mm 7.4% $ % 7.6% $ % $1.5mm - $2.0mm 5.2% $ % 6.9% $ % $2.0mm - $2.5mm 5.9% $ % 3.5% $ % $2.5mm - $3.0mm 3.0% $ % 5.6% $ % Over $3mm 6.7% $ % 12.5% $ % N/A 46.7% $ % 45.1% $ % Average Target $1.42mm $ % $1.78mm $ % 2013 Service Performance Insight Sponsored by NetSuite 95

109 Table 73 is interesting because it shows (in general) embedded service sales people carry higher quotas than their independent counterparts this has reversed from last year s benchmark. Dedicated service sales professionals carry higher service quotas but also have a higher base than product sales people who also sell services. Firm or practice managers carry the highest service quotas but also receive the highest base and variable. For both product sales and service sales quotas and compensation are highest in APAC and lowest in EMEA. Service delivery managers and partners carry the highest quotas and compensation in the Americas and lowest in APac. Table 73: Professional Services Sales KPI s by Organization Type and Geography Key performance indicator (KPI) Survey ESO PSO Americas EMEA APAC Organization Size (people) Product Sales number of reps selling Prod. Sales Ann. PS Bookings Target (mm) $1.78 $1.80 $1.76 $1.87 $1.34 $2.13 Product Sales Annual Rep. Base Pay (k) $97.2 $102.3 $91.8 $97.5 $89.3 $120.0 Product Sales On-target Variable 25.6% 30.3% 19.9% 24.0% 31.2% 29.0% Service Sales number of reps selling Service Sales Ann. PS Book. Target (mm) $2.23 $2.40 $2.18 $2.23 $1.91 $2.68 Service Sales Annual Rep. Base Pay (k) $105.2 $113.5 $102.6 $106.1 $87.7 $124.4 Service Sales On-target Variable 25.4% 27.3% 24.7% 24.6% 28.1% 28.4% Service Mgr. number of reps selling Service Mgr. Ann. PS Bookings Target (mm) $1.42 $1.42 $1.42 $1.50 $0.97 $1.13 Service Managers Annual Base Pay (k) $117.8 $112.1 $121.1 $118.9 $104.4 $125.0 Service Managers On-target Variable 16.3% 17.1% 15.8% 16.2% 19.2% 11.9% Partner Annual number of reps selling Partner Annual PS Booking Target (mm) $1.78 $2.46 $1.65 $1.95 $1.33 $1.00 Partner Annual Base Pay (k) $133.9 $133.3 $134.1 $138.0 $106.7 $140.0 Partner On-target Variable 21.0% 23.1% 20.5% 20.8% 18.1% 26.7% 2013 Service Performance Insight Sponsored by NetSuite 96

110 Table 74 shows that both quotas and compensation go up with the size of the organization. It also shows the largest organizations shift to a higher component of leveraged compensation; in other words, lower base salary and a higher component of commission or variable compensation. Table 74: Professional Services Sales KPI s by Organization Size Key performance indicator (KPI) Under Over 700 Organization Size (people) ,023 Product Sales number of reps selling Prod. Sales Ann. PS Bookings Target (mm) $1.06 $1.34 $2.31 $1.75 $1.65 $3.00 Product Sales Annual Rep. Base Pay (k) $72.5 $92.9 $101.4 $94.5 $113.5 $92.5 Product Sales On-target Variable 14.4% 26.9% 23.2% 26.9% 27.3% 29.2% Service Sales number of reps selling Service Sales Ann. PS Book. Target (mm) $0.50 $1.95 $2.19 $2.43 $2.80 $2.94 Service Sales Annual Rep. Base Pay (k) $60.0 $105.6 $104.7 $105.8 $110.9 $110.0 Service Sales On-target Variable 8.8% 25.3% 23.7% 29.4% 25.0% 30.0% Service Mgr. number of reps selling Service Mgr. Ann. PS Bookings Target (mm) $0.50 $1.11 $1.32 $2.19 $1.58 $2.38 Service Managers Annual Base Pay (k) $90.8 $108.4 $124.6 $121.3 $132.0 $110.0 Service Managers On-target Variable 16.7% 15.1% 15.3% 15.1% 23.3% 16.3% Partner Annual number of reps selling Partner Annual PS Booking Target (mm) $0.56 $1.57 $1.93 $2.46 $2.11 $2.75 Partner Annual Base Pay (k) $103.8 $130.6 $135.0 $152.4 $152.1 $115.0 Partner On-target Variable 27.2% 16.4% 20.6% 20.8% 24.5% 22.5% 2013 Service Performance Insight Sponsored by NetSuite 97

111 Table 75 compares the base, service bookings quota and variable by PS Market. Software product and service sales people receive the highest base salary while their hardware counterparts have the highest variable percentage. SaaS product and service sales people have the highest service bookings quotas but receive a lower base than their enterprise software counterparts. SaaS PS leaders (firm or practice managers) receive the highest base compensation while their hardware counterparts have the highest variable (leveraged) compensation component. Table 75: Professional Services Sales KPI s by Position by PS Market Key performance indicator (KPI) SW PS SaaS PS HW PS IT Consult Mgmt. Consult. Advert. Arch./ Engr. Other PS Organization Size (people) Product Sales number of reps selling Prod. Sales Ann. PS Bookings Target (mm) Product Sales Annual Rep. Base Pay (k) Product Sales On-target Variable Service Sales number of reps selling Service Sales Ann. PS Book. Target (mm) Service Sales Annual Rep. Base Pay (k) Service Sales On-target Variable Service Mgr. number of reps selling Service Mgr. Ann. PS Bookings Target (mm) Service Managers Annual Base Pay (k) Service Managers Ontarget Variable Partner Annual number of reps selling Partner Annual PS Booking Target (mm) Partner Annual Base Pay (k) $1.64 $2.16 $1.50 $1.76 $1.50 N/A $2.00 $2.13 $108.7 $88.6 $102.0 $90.9 $108.1 N/A $72.5 $ % 29.6% 37.0% 20.0% 21.4% N/A 25.0% 15.0% $2.10 $2.94 $2.50 $2.24 $2.06 $2.38 $1.92 $2.33 $124.2 $107.0 $87.5 $100.9 $114.2 $60.0 $93.3 $ % 17.5% 36.3% 27.6% 20.6% 25.0% 21.3% 16.4% $1.58 $1.20 $1.06 $1.47 $1.05 $0.92 $2.00 $1.78 $110.5 $118.5 $103.8 $122.3 $123.0 $93.3 $115.0 $ % 15.3% 21.3% 16.9% 15.6% 7.5% 15.0% 12.0% $2.63 $2.31 $1.75 $1.62 $1.53 $2.25 $0.50 $1.91 $128.9 $148.8 $122.5 $135.9 $126.3 $130.0 $131.7 $142.3 Partner On-target Variable 18.2% 26.9% 32.5% 21.9% 18.6% 7.5% 20.0% 19.1% 2013 Service Performance Insight Sponsored by NetSuite 98

112 8. HUMAN CAPITAL ALIGNMENT PILLAR The Human Capital Alignment pillar encompasses all elements of the PSO s workforce strategy. Human Capital Alignment focuses on both the people and management processes required to recruit, attract, retain and motivate a high quality consulting workforce. Changing workforce dynamics and a critical technical skills shortage have dictated that talent management must be a primary focus. The new world of work depends on a multi-lingual, global, technically-skilled, projectbased workforce. Today s Professional Service leaders must squarely confront the realities of attracting and retaining a new generation of consultants against the backdrop of technical labor shortages as skilled baby boomers retire. Globalization has significantly impacted workforce strategies with many service providers providing hybrid on and off-site resources via regional and global competency centers. Based on advances in technology, emphasis is shifting toward business process and vertical expertise while demand for horizontal application and technical skills also remains high. The number one challenge, according to the benchmark survey of 234 firms, is attracting, retaining and energizing a high quality workforce. The recession did not reduce the pace of globalization nor alleviate skilled talent shortages; it only accelerated them as emerging markets have become the new centers of growth. The following table shows how PSOs mature across the Human Capital Alignment pillar: Table 76: Performance Pillars Mapped Against Service Maturity Level 1 Initiated Level 2 Piloted Level 3 Deployed Level 4 Institutionalized Level 5 Optimized Human Capital Alignment Hire as needed. Generalist skills. Chameleons, Jack of all Trades. Individual heroics. May perform presales as well as consulting delivery. Inconsistent performance & compensation mgmt. Begin forecasting workload. Start developing job and skill descriptions & compensation plans. Performance management. Rudimentary career paths & mentoring programs. Start measuring employee satisfaction. On-boarding, ramping and mentoring programs. Resource, skill and career management. Effective Performance Mgmt. Employee satisfaction surveys. Training plans. Goals and measurements aligned with compensation. Attrition <15% Business process and vertical skills in addition to technical and project skills. Career ladder and mentoring programs. Training investments to support career growth. Low attrition, high satisfaction. Continually staff and train to meet future needs. Highly skilled, motivated workforce. Outsource commodity skills or peak demand. Sophisticated variable on and off-shore workforce model. A handful of Goliath service organizations are no longer the only ones to offer everything from strategy to implementation to business process outsourcing. Now, in addition to the Goliaths, thousands of boutique PS organizations provide a comprehensive portfolio of high-quality services at competitive prices Service Performance Insight Sponsored by NetSuite 99

113 Human Capital Alignment Trends In 2000, approximately 605 Table 77: An Aging Workforce Marginalized Youth million people were 60 years or older. By 2050, that Age Group number is expected to be Persons employed 59.8% 59.7% 53.9% 45.0% close to 2 billion. At that Persons employed 79.7% 81.5% 79.3% 75.1% time, seniors will outnumber children 14 and under for the Persons employed 54.0% 57.8% 60.8% 60.3% first time in history. Every Source: OECD Factbook day over 10,000 Americans turn 60. That equates to 3,650,000 new seniors every year. If you are in the nursing home business these numbers are music to your ears but if you are in professional services there is growing awareness and concern that a whole generation of skilled baby boomer knowledge workers are exiting the workforce at an alarmingly fast pace without enough skilled millennials to replace them. According to the OECD over the period from 1990 to 2010 employment rates for the youngest age group (15 to 24) have declined by more than 10 percentage points leading to an ever increasing problem of marginalized and disenfranchised youth. Clearly these statistics show PS organizations must make talent development a cornerstone of their growth strategies. Creating the changing workforce Changing workforce dynamics are driving PS executives to create a different type of workforce that requires technical and client management competency with equal parts of flexibility, autonomy and accountability. This change means one of the most important challenges for today s PS leaders is competing for top talent in a level, global, web-enabled playing field of digital natives who value collaboration and cool, new technologies more than security and remuneration. Today s human capital alignment challenges include: Attracting, retaining and motivating top talent Managing through a technical labor shortage Managing a global, multi-lingual, multi-cultural workforce Managing a variable and/or contingent workforce According to a Towers Watson Global Workforce Study, competitive base pay, an organization s reputation as a great place to work and a senior management team who is sincerely interested in employee well-being are the top drivers of employee attraction, retention and engagement. Surveys continually show that creating a high-performance employee culture involves leadership, effective teamwork, access to high-quality training and career development plans rather than compensation alone Service Performance Insight Sponsored by NetSuite 100

114 One of the more interesting aspects of Service Performance Insight s research is the importance of an integrated human capital strategy. Finding, hiring, motivating and retaining key employees are just the beginning. SPI Research found human capital alignment metrics contain the highest number of performance indicators with extremely strong correlation to success meaning how employees perform once onboard dictates ultimate success or failure. Service Performance Insight s research shows major growth in the use of flexible scheduling options 40 percent more organizations have telecommuting programs compared to a year ago. And more than half of all companies now offer flextime so employees can adjust work hours to minimize commutes and accommodate required travel and childcare. Remote service delivery has rapidly become standard for PSOs; 40 percent or more of all PS work is now delivered virtually from an off-site location. Table 78: Most Effective Retention Strategies by Generation Rank Generation Y (Under 30) Generation X (Ages 30 to 44) Baby Boomers (Ages 45 to 64) Veterans (Over Age 65) 1 Company Culture (21%) Additional Bonus or financial incentives (21%) Additional benefits (health & pensions) (26%) Additional Bonus or financial incentives (25%) 2 Flexible Work Arrangements (20%) Additional compensation (19%) Additional Bonus or financial incentives (23%) Additional benefits (health & pensions) (24%) 3 New Training Programs (19%) Strong leadership/ organizational support (19%) Additional compensation (21%) Flexible Work Arrangements (20%) 4 Recognition from supervisors (19%) Customized/individual career planning (18%) Strong leadership /organizational support (21%) Corporate social responsibility (20%) 5 Succession Planning (18%) Source: Deloitte Talent Edge 2020 The Talent Cliff The talent cliff has become one of this year s hottest topics based on interviews with firms from around the world. They are seeing a trifecta of forces come together to produce a talent tsunami: Baby Boomers exiting the workforce without enough skilled gen X and gen Y workers to replace them; underfunding of education particularly in Science, Technology, Engineering and Math meaning not enough college graduates with the requisite skills; combined with unenlightened immigration policies which have capped the number of visas for skilled knowledge workers. All of this at exactly the same time that growth in professional service revenue is surging and buy local has become a new mantra! According to Gartner A big data talent shortage looms large, and until more workers are educated to meet the demand, nothing can save us from going over the talent cliff. Big Data will drive $34 billion of IT spending in 2013; by million IT jobs will be created globally to support big data. Of these, 1.9 million will be in the US. However, Gartner predicts only one-third of these jobs will be filled because there is not enough talent in the industry to support these demands. Peter Sondergaard, Gartner, Says Big Data Creates Big Jobs 2013 Service Performance Insight Sponsored by NetSuite 101

115 Talent Strategies To fill the workforce void more and more PSOs are developing innovative new talent strategies: close partnerships with local universities; new hire internships; job-sharing programs; flexible work study childcare options; on-boarding programs; on-the-job training and mentoring combined with extensive on-shore assignments for off-shore employees. Increasingly the reputation of the firm as a great place to work is just as important as client referrals. What this all boils down to is that talent is fast becoming the number one make-it or break-it element in professional service growth.or even survival. To meet these demands, top PSOS are: Focusing on programs to hire and train entry-level talent with skills in science, technology, math and engineering Investing in internships and college hiring to groom the next generation of consultants Cross-training current employees who have strong analytic abilities Sponsoring training and work visas for international workers with strong background and skills Offering flexible work arrangements work from home, job-sharing, remote service delivery, child care options Building a culture of excellence the best and brightest are attracted by leading edge technologies, clients and projects plus a culture that supports collaboration and innovation Paying for performance linking compensation to knowledge and skills growth along with contributions to the practice not just revenue generation alone Investing in employee engagement - Communication, training and recognition are essential to keep a talented workforce engaged Talent Management is the Number One Challenge Table 79 compares the most significant challenges PS executives faced in 2012 versus those in Supporting rapid growth and expansion, the top challenge in 2011, has been replaced by talent management in 2012 as firms struggle to attract and retain the skilled talent they need to support their growth. What this table shows is that talent, and the ability to improve quality and consistency has moved to the forefront of organizational challenges. After Table 79: Year-over-year Change in Talent Management Challenges Challenge Change Talent management % Improve quality and consistency % Improve sales and marketing % Achieve revenue and margin targets % Support rapid growth and expansion % Improve / expand portfolio and markets % Alignment between functions or groups % Improve knowledge management % Average % 2013 Service Performance Insight Sponsored by NetSuite 102

116 two years of torrid growth and expansion, many firms are now struggling to keep up with the tremendous growth they have experienced. In interviews, several firms reported they plan to slow growth and acquisitions because their infrastructure and culture cannot keep up. For the fastest growing firms, 2013 will be an investment year they plan to update or replace systems; enhance training and invest in their culture to ensure they will be able to recruit and retain a high quality workforce. The Impact of Attrition Annual attrition in the professional services sector over the past two years has averaged 7.3%. With the economy continuing to pick up, and more new jobs available, SPI Research expects attrition to climb back to historic levels of 10% or higher. Three years of layoffs and general cost-cutting reduced bench strength. It now takes management longer to approve positions, and to hire, train and deploy new employees. The current average length of time to hire is 63 days, and it takes an additional 64 days for a new hire to become productive making it hard to increase revenue and margins when firms must backfill leaving employees. Table 80 shows the correlation between happy employees and satisfied clients. This table shows the negative consequences of high attrition rates. As attrition rises, PSOs lose talent necessary to broaden the client base. The probability of ontime project delivery decreases while average project overruns increase. Remaining employees have to pick up Table 80: The Impact of Attrition Attrition Rate New Clients On-time Delivery Project Overrun Third-party Contractors None 34.8% 80.0% 8.8% 8.6% 1 to 5% 31.2% 77.6% 9.5% 11.0% 5 to 10% 28.2% 78.4% 10.3% 11.2% the pieces from exiting workers and must quickly come up to speed and reestablish client relationships. Clients must back-track to reestablish previous decisions and vendor commitments. Organizations with high levels of attrition often turn to third-party contractors to supplement or temporarily backfill positions. While subcontractors can help keep costs down, too heavy a reliance on them has the potential negative consequence of reducing morale, overall productivity and quality. Contract workers have less loyalty to their temporary employers so communication and teamwork can suffer. Workforce distribution Workforce distribution is anther operational challenge impacting talent management. Service Performance Insight s research shows the new world of work is increasingly global, making remote service delivery, collaboration and communication tools critical for success. While almost 80% of this survey s participants are North American-based PSOs, over 40% of the workforce is located overseas, 2013 Service Performance Insight Sponsored by NetSuite 103

117 and less than 25% are based within the confines of corporate headquarters. Having workers in many locations worldwide can create serious issues in employee productivity and efficiency. Over the past several years, the amount of work PS consultants deliver on the client's site has reduced significantly. Based on client and service-provider desire to reduce the cost of travel and the availability of powerful remote service delivery tools, consultants are performing more and more PS work virtually. These changes have caused PS executives to reevaluate their hiring practices, globally sourcing employees with solid core skills and with the ability and attitude to work independently. Except for the most difficult technical problems, a "can do attitude" combined with a strong work ethic and great communication skills are the most-prized virtues of today's consultants. Virtual Teams Clients and professional service providers have moved to virtual project teams. The benefits of "virtual" projects are reduced travel costs and the ability to use the best available resources, regardless of location. The negative aspect of global project delivery is more hours spent on administration and communication. Often global projects require both an onshore and an offshore project manager. The onshore manager is responsible for client relationships, requirements, budget and timeline, while the offshore project manager keeps the offshore team on schedule and ensures the client requirements are translated into a detailed work plan. More project overhead and management duality is a necessary component of ensuring offshore teams meet schedules, and client requirements are reflected in the work product. This area cannot be underestimated, as project management and administrative time account for a greater percentage of work-hours than ever before. Over the past year, SPI Research has seen the percentage of work monitored by a project management office (PMO) go from 37 percent to 42 percent. What Shape is your Pyramid? The traditional consulting pyramid (Figure 50) is a workforce model based on Finders, Minders and Grinders. The Managing Partner (PS VP) is the chief client relationship manager, responsible for developing a trusted advisor relationship with key clients. The Managing Partner is responsible for developing new business and managing the profitability of the practice. The Minders are the regional managers, project managers, engagement managers and case team leaders responsible for translating the customer s requirements into a project plan and then managing all aspects of project delivery. In the traditional consulting pyramid, the Grinders are the technology and business consultants who perform the majority of the work. In the traditional model, the Grinders (young consultants fresh outof-college or graduate school), deliver the majority of project billable hours and profit Service Performance Insight Sponsored by NetSuite 104

118 Figure 50: The Traditional Consulting Pyramid Responsibilities Set strategy, vision, goals Lead & Manage PS Establish/maintain executive relationships Grow PS Sell PS Manage Multiple Accounts Manage Multiple Projects Manage Consultants Manage profit and loss Manage Multiple Projects Manage cost, timelines, deliverables Manage Consultants Deliver projects Create client deliverables Technical Installation Business Process modeling Interface Design Report Writing Practice Directors Managing Principals Project Managers Consultant CEO PS VP Business Reporting Technical Skills Required Executive client relationships Leadership skills Profit and Loss Selling Experience Relationship Management Account Management Domain Business Process Project Management Consulting Experience Process oriented Consulting Experience Technical & Domain Knowledge Technical Configuration Business Process Workflow Interface Design Report Writing Based on years of PS human capital management research, SPI Research has been able to model the workforce pyramids of the sub-verticals within the Professional Services industry. SPI Research discovered the traditional pyramid is alive and well within IT consulting and embedded software and SaaS organizations where the majority of work and revenue is generated by business and technical consultants at the bottom of the pyramid. Figure 51: The Professional Services Pyramid All PS Markets (30+ consultants) The pyramid takes on a pineapple shape in management consultancies, meaning the firm is more heavily weighted with executives and business consultants with a lower percentage of project managers and 2013 Service Performance Insight Sponsored by NetSuite 105

119 technical consultants. In management consultancies the majority of work is delivered by business consultants combined with high rates and revenues generated by senior partners and managers. Hardware and Networking service providers are heavily weighted toward project managers and technical consultants with primarily non-billable management roles and a very limited reliance on business consulting roles. In management consultancies the consulting pyramid takes on a pineapple shape with the majority of revenues generated by senior managers, partners and business consultants. Project managers make up less than 15% of the workforce as this role is played by case team leaders who are responsible for both managing the client and project team while also delivering the work. Depending on the focus of the firm, technical consultants are responsible for data analysis and design. A typical strategy project ranges from $50k to $500k and is comprised of a portion of a senior manager or partner, a dedicated case team leader and several business consultants and analysts. Management consultancies produce the highest overall annual revenue yield averaging over $230k per consultant. Across all billable job titles, management consultancies average 1,168 annual billable hours per person. Figure 52: Management Consulting PS Pyramid (30+ consultants) The traditional consulting pyramid within both independent IT consultancies and embedded software and SaaS organizations is heavily weighted towards business and technology consultants. Today s smaller, faster IT projects require more nimble consultants who can effectively manage projects and clients as well as deliver the work. This new paradigm requires senior technical consultants with excellent client-facing skills. Quite a tall order! On small, inexpensive projects, traditional project managers are an unaffordable luxury. This new model requires Super Consultants. This change is one of the reasons why many firms take six months to a year to ramp new consultants. Unfortunately, a generalist, Super Consultant model is not financially viable. Rather than tasking Super Consultants to be excellent at client, business, financial and technical management, firms 2013 Service Performance Insight Sponsored by NetSuite 106

120 should consider investing in project coordinators who can manage the financial, business and client aspects of many small projects, freeing consultants to focus on technical project delivery. By creating multiple, more specialized roles firms can shorten both recruiting and ramping time and cost. Across all billable job titles, IT consultancies average 1,314 annual billable hours per person with an average revenue generation of $201k. Figure 53: IT Consulting PS Pyramid (30+ consultants) Both embedded Software and SaaS PS organizations are based on a classic consulting pyramid with a heavy reliance on business and technical consultants to perform the majority of the work. Interestingly, SaaS PSOs have a higher concentration of managers and project managers than their more traditional software counterparts. SaaS PSOs generate substantially higher revenue per person ($236k versus $228k) because they are able to command higher bill rates for all positions. In this survey, SaaS firms realized $194 per hour while software organizations saw their realized rates decline to $173 per hour. For economic students, this rate variance reflects the effect of supply and demand. The SaaS PSOs represented in this study are still achieving double digit annual revenue and headcount growth while the traditional software PSOs are relatively stagnant. The SaaS firms are taking market-share from their more traditional enterprise software competitors and are able to charge higher rates. SaaS PSOs also have the advantage of delivering the majority of their work remotely which reduces travel burden and enhances their ability to multi-task and handle multiple clients at the same time Service Performance Insight Sponsored by NetSuite 107

121 Figure 54: PS within Software Company PS Pyramid (30+ consultants) The increase in productivity for SaaS PSOs is reflected in lower billable hours per year with SaaS PSOs billing only 1,252 hours per person/year across all billable roles while traditional software PSOs are billing 1,298 hours per person/year across all billable roles. One need look no further to see the dramatic effect of productivity and bill rate improvements as shown in the comparison between SaaS and traditional enterprise software providers. Figure 55: The SaaS PS Pyramid 2013 Service Performance Insight Sponsored by NetSuite 108

122 Survey Results The following section reviews and analyzes 2013 PS Maturity benchmark results from 234 participating professional services organizations. In this section SPI Research analyzes 52 Human Capital Alignment key performance measurements that are critical to attaining superior employee performance. Recommend Company to Friends and Family One of the most important employee engagement measurements is whether an employee would recommend their company as a great place to work to their friends and family. More than any other key performance measurement in the Human Capital Alignment pillar, recommending one s company as a great place to work is considered the litmus test of employee engagement. Table 81: Impact of Recommend to Family and Friends (1-No, 5-Yes) Score Survey Percentage Attrition Time to Recruit Time to Ramp Utilization 1 0.4% 20.0% % 2 1.8% 2.0% % % 7.2% % % 8.4% % % 6.4% % Avg % 7.2% 63 days 64 days 70.3% Table 81 shows 48% would strongly recommend their company to friends/family; this is 4% higher than in last year's survey and 2% higher than the five-year survey average. In general, as the score goes up (meaning employees would more strongly recommend their organization as a great place to work) other key performance indicators also improve; making it Table 82: Recommend Company to Friends and Family easier to recruit and ramp new employees while ensuring employees stay with the firm. Utilization and recommendation are not strongly correlated ESO PSO Year Avg Software PS SaaS PS 4.22 As Table 82 shows 2012 was a good year in PS with the recommend company to friends/family index (4.29) rising 2% from last year's survey (4.20), and on-par with the past six-year s Americas EMEA APac Hardware PS IT Consulting Under Mgmt. Cons. Advertising Over 700 Arch./Engr. Other PS Service Performance Insight Sponsored by NetSuite 109

123 survey average (4.28). The table shows independent service providers had values 6% higher than embedded services organizations (4.38 vs. 4.12). Organizations from APac had the highest (4.36) recommend company to friends/family, while those from EMEA had the lowest (4.23). Organizations with between employees had the highest (4.41) recommend company to friends/family, while those with between employees had the lowest (4.11). SPI Research found both the Advertising/Marcom market (4.50) and the Architecture/Engineering market reported the highest recommend company to friends/family (4.50), while those in the Hardware & Networking PS market had the lowest (3.89). Employee Annual Attrition Employee attrition is defined as the average number of employees who left the company, either voluntarily or involuntarily, over the past year divided by the number of starting employees. Voluntary attrition, employees who leave that are not asked to leave, is one of the most important key performance indicators in the services sector as employees are the most valuable resource. During the dot.com era, attrition in many professional services organizations averaged over 25% annually. However, as market conditions deteriorated, this figure has gone down significantly. Studies show young employees just out of college may try up to 10 different jobs in the first ten years after college while older employees are more likely to stay over three years. Finding employees who are a good fit for the job and culture is an important Table 83: Impact Annual Employee Attrition Annual Employee Attrition Survey Percent Revenue Growth New Clients EBITDA None 13.1% 9.3% 34.8% 11.9% 1% - 5% 33.9% 10.8% 31.2% 19.5% 5% - 10% 24.0% 14.2% 28.2% 19.1% 10% - 15% 14.9% 12.2% 27.7% 10.2% 15% - 25% 13.1% 11.7% 29.1% 16.8% Over 25% 0.9% -8.8% 20.0% 3.1% Total/Average 100.0% 11.6% 30.0% 16.5% Table 84: Annual Employee Attrition % 6.1% 6.8% 7.4% 7.2% ESO PSO 6-Year Avg. Software PS SaaS PS 6.4% 7.7% 6.9% 5.7% 6.3% Americas EMEA APac Hardware PS IT Consulting 7.9% 4.7% 4.1% 9.2% 8.5% Under Mgmt. Cons. Advertising 1.5% 5.7% 7.8% 5.8% 13.5% Over 700 Arch./Engr. Other PS 10.0% 11.3% 12.5% 6.9% 6.6% 2013 Service Performance Insight Sponsored by NetSuite 110

124 component of increasing engagement and retention; this is why many firms are adding psychological profiling and cultural fit to their recruiting strategies. Table 84 shows the employee annual attrition (7.2%) is 2% lower than in last year's survey (7.4%), and 4% higher than the past six-year s survey average (6.9%). While not as high as last year's attrition rate, SPI Research still believes attrition will rise as the economy strengthens and more employees look for better paying opportunities. The table shows independent service providers had values 20% higher than embedded services organizations (7.7% vs. 6.4%). Organizations from North America had the highest (7.9%) employee annual attrition, while those from APac had the lowest (4.1%). Organizations with over 700 employees had the highest (12.5%) employee annual attrition, while those with fewer than 10 employees had the lowest (1.5%). SPI Research found the Advertising/Marcom market showed the highest employee annual attrition (13.5%), while those in the Software PS market had the lowest (5.7%). Why Employees Leave This year s survey marks the third year SPI Research asked why employees leave? Obviously, employees leave for a variety of reasons, but in many cases there is one primary motivation which is the catalyst for moving on. Figure 56: Why Employees Leave Figure 56 shows the top reasons why employees leave professional services organizations. The number one rationale is better opportunity which translates to a better work environment and perhaps better compensation. As the economy continues to improve and the talent shortage worsens, attrition will only rise. Other covers a magnitude of issues work/life balance or leaving the industry entirely. Lack of career advancement has moved into the third most prevalent reason employees leave as a younger, less traditional workforce requires challenging projects; exposure to hot new technologies and leading edge clients plus training to remain engaged. Travel is and will continue to be a major reason consultants quit, oftentimes for less-interesting, but more stable internal positions. Fortunately, remote service delivery tools and the ability to deliver more and more work virtually are having a beneficial effect on reducing travel time, cost and employee burnout. The Best-of-the-Best firms place a premium on their employees finding ways to include career development; challenging and exciting projects with family/life/work balance and a measure of fun Service Performance Insight Sponsored by NetSuite 111

125 Management-to-Employee Ratio The management-to-employee ratio divides the number of employees by the number of people managers. Management-to-employee ratio (also referred to as span of control ) is an important measurement of management effectiveness and is an indication of lean or excessive management overhead. The average management-to-employee ratio in 2011 rose to 1:10 after a steep decline to 1 to 8.9 in 2010 during the depths of the recession suggesting firms laid off proportionately more individual contributors than managers. In 2012, with a significant upturn in business, firms are starting to hire again and are finding the burden of recruiting and ramping new employees is putting tremendous pressure on already stretched managers. Few small and medium-size firms have effective management training programs so we are seeing a significant number of battle-field promotions without the requisite support structure. The Best-of-the-Best organizations are starting to add a team leader position to groom the next generation of leaders. Table 85 is interesting because it shows the effect of management to employee ratios. It appears that a larger management span of control has a beneficial effect on performance. Of course this implies that employees clearly understand the work they are asked to perform and have a rich support structure of mentors, tools and knowledge to guide them so they don t have to rely solely on management for direction. Table 85: Impact Management-to-Employee Ratio Management-to- Employee Ratio Survey Percent Revenue / Billable Employee (k) Ann. Margin Target Achieve. EBITDA 1:5 41.3% $ % 14.7% 1: % % 17.0% 1: % % 18.8% 1:20 4.0% % 13.5% Over 1:20 1.3% % 28.1% Total/Average 100.0% $ % 16.3% The table compares the management to employee ratio to other key performance indicators for the 234 PSOs in the survey. Over 80% of the organizations maintain a less than 1:10 management to employee ratio. As the ratio increases, so do many of the key financial metrics. However, it should be cautioned that organizations with too high of a ratio tend to show poorer long-term results. Table 86 shows the management to employee ratio (9.24) is 5% lower than in last year's survey (9.76), and 5% lower than the past six-year s survey average (9.76). This insight shows employers have bolstered their management ranks over the past year and reduced the span of control with fewer direct reports. In professional services, a majority of the managers also work on projects or business development; however, there is still an increased amount of overhead added to the organization, which ultimately reduces profitability Service Performance Insight Sponsored by NetSuite 112

126 The table shows independent service providers had values Table 86: Management-to-Employee Ratio 11% lower than embedded services organizations (8.89 vs. 9.9). Organizations from EMEA had the highest (10.4) management to employee ratio, while those from APac had the lowest (7.7). Organizations with over ESO 9.9 Americas 9.1 Under PSO 8.9 EMEA Year Avg. 9.8 APac Software PS 10.2 Hardware PS 11.1 Mgmt. Cons SaaS PS 9.1 IT Consulting 10.2 Advertising employees had the highest (12.2) management to Over 700 Arch./Engr. Other PS employee ratio, while those with fewer than 10 employees had the lowest (6.4). SPI Research found the Hardware & Networking PS market shows the highest management to employee ratio (11.1), while those in the Management Consulting market had the smallest (7.3). Time to Recruit and Hire for Standard Positions SPI Research considers the length of time to recruit and ramp new employees to be very important determinants of overall performance and sustainable growth. Ramping time is critical because it not only focuses on making employees productive faster, but also reduces the non-billable time and cost of other resources who support the hiring and ramping process. Most firms do not track the full cost of recruiting and hiring, but it is substantial, over 50% of the first year new hire base salary. The most mature firms create a dedicated recruiting function, provided with in-depth skill profiles for targeted positions. Since all indicators point to a continuing upturn in PS firms would be well-served to examine and improve their recruiting and training functions. Recruiting must be closely aligned with the sales pipeline and resource management plan. Table 87 compares the time required to recruit for standard positions (such as consultants) to other key performance indicators for the 223 PSOs answering the question. This table highlights that as it takes longer to recruit and hire, billable utilization suffers, as Table 87: Impact Time to recruit and hire for standard positions Time to recruit and hire for standard positions Survey Percent Billable Util. On-time Projects EBITDA Under 1 month 24.7% 75.5% 82.5% 14.3% days 29.6% 70.1% 78.6% 15.8% days 18.4% 67.5% 77.4% 17.7% days 16.6% 69.7% 76.6% 13.6% Over 120 days 10.8% 65.6% 77.0% 21.5% Total/Average 100.0% 70.4% 78.8% 16.1% 2013 Service Performance Insight Sponsored by NetSuite 113

127 current employees spend more time helping out with the process, which limits their billable time. However, the profitability results are mixed, which means that recruiting and ramping time, although expensive and time consuming is not the major determinant of bottom-line profitability. Table 88 shows the time to recruit and hire for standard Table 88: Time to Recruit and Hire for Standard Positions (days) positions (62.8) is 4% higher than in last year's survey (60.1), and 4% higher than the past six-year s survey average (60.7). This key ESO PSO Year Avg Software PS SaaS PS 76 performance indicator shows Americas EMEA APac Hardware PS IT Consulting the war for talent is intensifying. PS executives would prefer a faster hiring cycle for employees, however, finding talent is difficult, and the amount of time required to verify employment information and Under Over Mgmt. Cons. 61 Arch./Engr. 77 Advertising 57 Other PS 58 pass new, tighter security checks can be significant. The table shows independent service providers had values 18% lower than embedded services organizations (58.3 vs. 71.0). Organizations from EMEA had the highest (69.0) time to recruit and hire for standard positions, while those from APac had the lowest (53.2). Organizations with fewer than 10 employees had the highest (75.0) time to recruit and hire for standard positions, while those with between employees had the lowest (58.6). SPI Research found the Architecture/Engineering market shows the longest time to recruit and hire for standard positions (77.1), while those in the IT Consulting market had the shortest (55.8). Time for a New Hire to Become Productive Once employees are hired, there is always some ramp time involved in preparing consultants to become billable. Many firms report they invest a minimum of six to nine months in new-hire orientation, training programs and on-the-job mentoring before a new-hire is able to become fully billable. Due to the high cost of employee ramping, during periods of rapid expansion, ramping time and cost must be factored into growth plans because overall profitability will take a hit. Table 89 shows the time for a new hire to become productive (64) is 3% lower than in last year's survey (67), and 4% lower than the past six-year s survey average (67). The results of this year's survey show continued improvement in the time it takes for new employees to become billable. More effective new hire orientation and training programs enable PSOs to recoup new hire investments much faster than in the past Service Performance Insight Sponsored by NetSuite 114

128 The table showed independent service Table 89: Time for a New Hire to Become Productive (days) providers had values 29% lower than embedded services organizations (56 vs. 79). Organizations from EMEA had the highest (70) time for a new hire to become productive, while ESO 79 Americas 64 PSO 56 EMEA 70 6-Year Avg. 67 APac 53 Software PS 81 Hardware PS 85 SaaS PS 72 IT Consulting 56 those from APac had the Under Mgmt. Cons. Advertising lowest (53). Organizations with over 700 employees had the longest (93) time for a new hire to become productive, while those with between employees Over Arch./Engr. 77 Other PS 58 had the shortest (59). SPI Research found the Hardware & Networking PS market shows the longest time for a new hire to become productive (85), while those in the Advertising/Marcom market had the shortest (33). Guaranteed Training Days per Employee per Year The guaranteed number of training days per employee per year is the average number of training days budgeted each year per employee. Similar to the annual training budget, this indicator while promised to employees, is not necessarily utilized, but does reflect the organization's commitment to employee development and shows the organization is investing in the future of its employees. Best-of-the-Best organizations mandate more than a week of training per year. Some firms provide over four weeks of training per year. As the economy improves, PSOs will find investments in both technical and interpersonal skill building will pay dividends. Access to high quality training is a major attraction driver for new hires. Many firms report they bring together the entire consulting team twice a year for skillbuilding, reinforcing the company s direction and strengthening collaboration and team-building. Team meetings give consultant road warriors a break and allow them to establish new friendships and partnerships while rejuvenating their return to client projects. Several of the Best-of-the-Best firms include significant others and spouses in their annual events to thank them for holding down the fort while their road-warrior partners delight clients. Table 90 shows the guaranteed training per employee per year (7.7) is 5% lower than in last year's survey (8.1), and 33% higher than the past six-year s survey average (5.8). Training continues to be important in professional services, as the number of days have almost doubled from a few years ago. Training not only improves efficiency and effectiveness, it also positively impacts employee morale and client satisfaction Service Performance Insight Sponsored by NetSuite 115

129 The table shows independent service providers had values 20% lower than embedded services organizations (7.1 vs. 8.8). Organizations from APac had the highest (8.0) guaranteed training per employee per year, while those from EMEA had the lowest (7.3). Table 90: Guaranteed Training Days per Employee per Year ESO PSO 6-Year Avg. Software PS SaaS PS Americas EMEA APac Hardware PS IT Consulting Under Mgmt. Cons. Advertising Organizations with over employees had the highest Over 700 Arch./Engr. Other PS (10.0) guaranteed training per employee per year, while those with employees had the lowest (6.9). SPI Research found the Software PS market shows the largest guaranteed training per employee per year (9.0), while those in the Advertising/Marcom market had the smallest (3.8). Well-Understood Career Path for all Employees The survey asked if the organization provides a well understood employee career path, meaning as employees are hired and move within different positions, is there a planned next step for their career progression (Table 91). This KPI is important because it shows the firm s commitment to employee skill growth and career development. Even though this question is subjective, and answered by PS executives, who might have a bias, Table 91: Impact Well-understood Career Path Well-understood Career Path Survey Percent Billable Util. On-time Completion Revenue / Billable Employee (k) 1 Not very well 7.2% 62.7% 71.9% $ % 65.0% 76.3% % 70.8% 78.8% % 72.7% 79.9% Very well 9.5% 76.5% 88.6% 213 Total/Average 100.0% 70.2% 79.0% $206 the results show how important career development is. It shows employees with a well-defined career path are much more engaged with their work, delivering higher levels of billable utilization and on-time project completion. This table highlights the important role management plays in helping employees plan their careers while ensuring they have both the tools and opportunity for career growth. Numerous studies have shown 2013 Service Performance Insight Sponsored by NetSuite 116

130 that employees become increasingly productive with longer tenure with the same firm so keeping them engaged is an investment worth making. Table 92 shows career path clarity (3.10) is 6% lower than in last year's survey (3.28), and 6% higher than the past six-year s survey average (2.93). This KPI dipped slightly in 2012 from its fiveyear slow but steady rise. Part of this reduction could be due to uncertainty regarding the economic climate and how it will impact employees future roles and responsibilities. Table 92: Well-Understood Career Path for all Employees ESO PSO 6-Year Avg. Software PS SaaS PS Americas EMEA APac Hardware PS IT Consulting Under Mgmt. Cons. Advertising Over 700 Arch./Engr. Other PS Regardless, PS executives would be wise continue to monitor this metric, which impacts morale and increases employee engagement. The table shows independent service providers had values 6% higher than embedded services organizations (3.16 vs. 2.97). Organizations from North America had the best (3.11) understood career paths. Organizations with between employees had the highest (3.59) well-understood career path, while those with over 700 employees had the lowest (2.75). SPI Research found the IT Consulting market shows the highest well-understood career path (3.25), while those in the SaaS PS market had the poorest (2.70). Figure 57: Employee Satisfaction Survey Frequency Annual Employee Satisfaction Survey Does the organization conduct an annual employee satisfaction survey? Answers are Annually; Biannually; Sporadically or Never. This key performance indicator signifies the organization's commitment to better understand its employee base, employee needs and issues. Employee satisfaction surveys without clear resulting management action can be more detrimental than beneficial. The chart shows 42% of the organizations conduct an annual survey; 22% sporadically conduct an employee survey; 20% never conduct a survey and 14% conduct a survey biannually Service Performance Insight Sponsored by NetSuite 117

131 Table 93 shows the frequency of conducting an Table 93: Frequency of Conducting an Employee Satisfaction Survey (years) annual employee satisfaction survey (1.77) is 5% higher 2008 N/A 2009 N/A than in last year's survey ESO PSO 6-Year Avg. Software PS SaaS PS (1.68), and the same as the past six-year s survey average (1.76). It is important to note that this question only analyzes those Americas 1.80 Under 10 EMEA APac Hardware PS 1.75 Mgmt. Cons. IT Consulting 1.57 Advertising organizations that do in fact conduct employee Over 700 Arch./Engr. Other PS satisfaction surveys, meaning many of the firms answered never. Generally, SPI Research recommends an annual employee satisfaction survey with focused management attention and communication around the results and actions to be taken going forward. Table 93 shows independent service providers had values 1% higher than embedded services organizations (1.78 vs. 1.75). Organizations from North America had the highest (1.80) frequency of conducting annual employee satisfaction surveys, while those from EMEA had the lowest (1.65). SPI Research found the Advertising/Marcom market shows the highest frequency of annual employee satisfaction surveys (2.20), SPI Research found the Architecture/Engineering market shows the highest frequency of annual employee satisfaction survey (2.20), while those in the SaaS PS market had the lowest (1.44). Consultant Billable Utilization SPI Research defines employee utilization on a 2,000 hour per year basis. Employee utilization is calculated by dividing the total billable hours by 2,000. This key performance indicator is central to organizational profitability. Utilization is consistently the most measured key performance indicator but must be examined in conjunction with overall revenue and profit per person along with leading indicators like backlog and size of the sales pipeline to become truly meaningful. Utilization is a major indicator of opportunity and workload balance as well as a signal to expand or contract the workforce. Table 94 compares the impact of employee billable utilization on other key performance indicators for the 221 PSOs answering the question. As one might expect, billable utilization is critical in terms of meeting deadlines and profit margin targets. High billable utilization is directly tied to the percentage of employees who are billable. This chart shows firms with very high utilization are also very lean with the least number of non-billable roles Service Performance Insight Sponsored by NetSuite 118

132 Although PS firms would like to abandon the billable utilization metric (and all the accompanying time tracking it entails), Billable Utilization unfortunately there is no other metric which provides as good a picture of workforce productivity. Perhaps as more and more firms shift to fixed price work the focus on billable utilization will decline but if this is the case firms will have to ratchet up their focus on project accounting and budget to actual performance. But here again, how can budget to actual performance be measured without tracking work hours? Table 95 shows employee utilization (70.3%) is 1% higher than in last year's survey (69.6%), and 3% higher than the past six-year s survey average (68.3%) is the first year the average billable utilization rose over 70%, which is the minimum recommended by SPI Research. The table shows independent service providers had values 13% higher than embedded services organizations (73.2% vs. 65.1%). Organizations from Table 95: Consultant Billable Utilization APac had the highest (73.2%) employee utilization, while those from EMEA had the lowest (68.5%) % ESO % PSO % 6-Year Avg % Software PS % SaaS PS Organizations with over 700 employees had the highest (75.0%) employee utilization, while those with fewer than 10 employees had the lowest (63.9%). SPI Research found the Other PS market shows the highest employee utilization (77.2%), while those in the SaaS PS market had the smallest (61.3%). Table 94: Impact Billable Utilization Survey Percent On-time Project Completion Ann. Margin Target Achieve. % Billable Emp. Under 50% 6.3% 72.3% 89.6% 65.0% 50% - 60% 14.5% 76.2% 82.3% 68.1% 60% - 70% 19.9% 71.9% 84.1% 72.5% 70% - 80% 38.5% 79.9% 91.3% 76.7% 80% - 90% 17.6% 85.1% 85.7% 80.5% Over 90% 3.2% 87.9% 95.8% 89.3% Total/Average 100.0% 78.5% 87.6% 75.2% 65.1% 73.2% 68.3% 65.3% 61.3% Americas EMEA APac Hardware PS IT Consulting 70.5% 68.5% 73.2% 68.9% 72.5% Under Mgmt. Cons. Advertising 63.9% 68.2% 71.6% 71.7% 76.1% Over 700 Arch./Engr. Other PS 73.8% 72.5% 75.0% 72.1% 77.2% 2013 Service Performance Insight Sponsored by NetSuite 119

133 Annual Hours Always one of the most anticipated metrics from the annual PS Maturity benchmark survey is the breakdown of work hours. Most organizations put a lot of focus on consultant time spent on both billable and non-billable tasks. Table 96 provides a year-over-year comparison of annual work hours by comparing embedded to independent organizations. It shows for the first time in years, employees were able to work fewer hours yet be more productive! Hooray! PS consultants were more productive because they billed more hours but worked fewer hours in 2012 (2,046) compared to 2011 (2,109) a gain of 63 hours of personal/non-work time! The average consultant billed 1,437 hours compared to 1,430 in On the job productivity came at the expense of vacation time (down 7%); education and training time (down 7.2%); fewer administrative hours (down 9%); and fewer non-billable project hours (down 17.9%). 10% more work was delivered off-site this year than last year; the average consultant spent far fewer hours on-site (792 in 2012 compared to 851 in 2011) while billing more off-site hours (645 compared to 579 in 2011). The shift to more and more virtual consulting delivery is paying off handsomely for service providers, consultants and clients alike by allowing burdensome and unproductive travel time to be reinvested into productivity and work-life balance. Table 96: Annual Hour Comparison by Organization Type Annual Hours Survey ESO PSO Change Change Change Vacation/personal/holiday % % % Education/training % % % Administrative % % % Non-billable project hours % % % Total Billable Hours 1,430 1, % 1,321 1, % 1,524 1, % Billable hours on-site % % % Billable hours off-site % % % Total Hours 2,109 2, % 2,130 2, % 2,088 2, % Table 97 shows Americans work more hours than either European or APac consultants. EMEA PS firms work the least primarily due to taking the most vacations although their holiday hours sharply decreased (from 5.5 to 4.0 weeks). In 2012 APac consultants enjoyed more time on the beach than even their vacation-rich colleagues in EMEA (5.3 weeks). APAC firms invest the most in education and training followed by EMEA while Americans spend the least amount of time on training. All geos did a great job of reducing administration time. The Americas and APac significantly reduced non-billable project hours this year. By region, North American firms billed more hours this year while APAC and EMEA firms billed less. EMEA delivers more hours off-site than on-site Service Performance Insight Sponsored by NetSuite 120

134 Table 97: Annual Hour Comparison by Region Annual Hours Americas EMEA APAC Change Change Change Vacation/personal/holiday % % % Education/training % % % Administrative % % % Non-billable project hours % % % Total Billable Hours 1,447 1, % 1,359 1, % 1,422 1, % Billable hours on-site % % % Billable hours off-site % % % Total Hours 2,125 2, % 2,043 1, % 2,089 2, % Table 98 shows firms become more productive as they grow from very small to mid-size. Total work hours decrease while billable hours per year increase as small firms grow. The benefits of growing from a small to mid-size firm show up in more vacation hours and fewer hours spent on administration and non-billable project hours as small firms grow. More work is delivered on-site as small firms grow. Table 98: Annual Hour Comparison by Organization Size (< 100 employees) Annual Hours Under Change Change Change Vacation/personal/holiday % % % Education/training % % % Administrative % % % Non-billable project hours % % % Total Billable Hours 1,292 1, % 1,425 1, % 1,400 1, % Billable hours on-site % % % Billable hours off-site % % % Total Hours 2,077 2, % 2,108 2, % 2,106 2, % Table 99 shows mid-size to large organizations bill over 1,400 hours (70%) per year making them generally more productive than their smaller counterparts. They also can afford to take more vacation days, spend more time on training and less on administration. The largest firms all reported billing fewer hours per consultant in 2012 as compared to This chart is a good reminder of the economies of scale that larger people-based organizations are able to achieve if they are appropriately sized and skilled for the amount of work available Service Performance Insight Sponsored by NetSuite 121

135 Table 99: Annual Hour Comparison by Organization Size (> 100 employees) Annual Hours Over Change Change Change Vacation/personal/holiday % % % Education/training % % % Administrative % % % Non-billable project hours % % % Total Billable Hours 1,513 1, % 1,568 1, % 1,518 1, % Billable hours on-site % % 1, % Billable hours off-site % % % Total Hours 2,132 2, % 2,129 2, % 2,071 2, % For embedded service organizations, software PSOs made the greatest improvement this year with a 3.6% increase in billable hours while also increasing the size of their PS workforces by 10%. SaaS and hardware PSOs saw their billable hours slightly decline due to an increase in administrative hours. SaaS PSOs slowed down hiring as their PS headcount increased by 8.5% as compared to 12% the previous year; billable utilization declined slightly due to an increase in vacation time. Non-billable project hours declined for all embedded organizations but are still significantly higher than independents. SaaS PSOs spend the most hours on non-billable projects (336) followed by software (268) and hardware (236). The high number on non-billable project hours represents a significant productivity drain on these organizations as 11 to 16% of their time is spent helping clients or internal organizations with no direct economic benefit. Table 100: Annual Hour Comparison by Embedded Service Organization Type Annual Hours Software PS SaaS PS Hardware/Network PS Change Change Change Vacation/personal/holiday % % % Education/training % % % Administrative % % % Non-billable project hours % % % Total Billable Hours 1,313 1, % 1,275 1, % 1,410 1, % Billable hours on-site % % % Billable hours off-site % % % Total Hours 2,114 2, % 2,140 2, % 2,195 2, % Table 101 shows IT consultancies are more productive (75% billable utilization) than management consultancies (71%) as they bill almost 100 hours more per year per consultant. Unfortunately their high 2013 Service Performance Insight Sponsored by NetSuite 122

136 levels of productivity are more than offset by their low rate structure. In this year s the average Management Consulting rate is $190/hour while the average IT Consulting rate is only $168/hour. Table 101: Annual Hour Comparison by IT & Management Consultancy Annual Hours IT Consulting Management Consulting Change Change Vacation/personal/holiday % % Education/training % % Administrative % % Non-billable project hours % % Total Billable Hours 1,561 1, % 1,489 1, % Billable hours on-site 1, % % Billable hours off-site % % Total Hours 2,091 2, % 2,101 1, % Table 102 shows architects and engineers and other PS work more hours per year and bill 77% of their time; marketing and communication consultants work the least overtime hours and bill 68% of their time. Architects and engineers doubled the amount of non-billable project hours in Table 102: Annual Hour Comparison by PS Market (Advertising, Arch./Engr., Other PS) Annual Hours Advertising Architecture/Engineering Other PS Change Change Change Vacation/personal/holiday % % % Education/training % % % Administrative % % % Non-billable project hours % % % Total Billable Hours 1,415 1, % 1,621 1, % 1,481 1, % Billable hours on-site 1,341 1, % % 843 1, % Billable hours off-site % 770 1, % % Total Hours 2,065 2, % 2,106 2, % 2,073 2, % Employee Location A fascinating topic is the composition and location of employees in the new world of project-based work. This year we saw an increase in the percentage of the workforce working from home or offshore. The Americas have far more home-based workers; very few employees work from home in EMEA or APAC. EMEA has a larger concentration of employees working from a headquarters office but almost a 2013 Service Performance Insight Sponsored by NetSuite 123

137 third of the workforce works offshore. The percentage of offshore workers in the US declined from 12.1% to 10.9% as the US recession accentuated bringing more work (and workers) onshore. ESOs are more than twice as likely (21.2%) to use offshore workers than independents (8.5%). Table 103: Workforce Location by Organization Type and Geographic Region Employee Location ESO PSO Americas EMEA APAC Headquarters 31.5% 23.1% 14.6% 33.7% 22.7% 22.6% 49.8% Branch offices 36.5% 36.6% 37.2% 36.0% 33.4% 45.0% 48.4% Home based 20.4% 24.7% 27.1% 21.8% 33.0% 2.8% 1.8% Offshore / Nearshore 11.6% 15.5% 21.2% 8.5% 10.9% 29.7% 0.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Table 104 shows the use of offshore workers increases with organization size while the percentage of home-based workers declines. Large organizations are becoming increasingly comfortable with virtual work teams with a very small percentage (10%) co-located at the headquarters location. Table 104: Workforce Location by Organization Size Employee Location Under Over 700 Headquarters 46.6% 49.7% 46.8% 39.5% 16.4% 10.0% Branch offices 8.0% 15.8% 20.6% 35.9% 50.9% 36.3% Home based 43.2% 28.9% 26.4% 13.9% 29.1% 25.4% Offshore / Nearshore 2.3% 5.6% 6.1% 10.7% 3.6% 28.3% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% By vertical market, Software ESOs use the largest percentage of home-based workers. Hardware and Marketing firms use almost no offshore workers. Other PS reported almost 1/3 of their workers are located offshore. Architects and Engineers have the highest concentration of workers at the headquarters location. Table 105: Workforce Location by Service Market Vertical Employee Location Software PS SaaS PS Hardware PS IT Consult Mgmt. Consult. Advertise Arch./ Engr. Other PS Headquarters 13.3% 29.1% 4.0% 42.6% 20.6% 51.1% 55.9% 28.4% Branch offices 29.3% 38.9% 80.3% 31.0% 53.1% 48.2% 23.4% 12.9% Home based 40.5% 18.6% 10.9% 17.2% 14.6% 0.7% 4.3% 26.5% Off /Nearshore 16.9% 13.4% 4.8% 9.1% 11.7% 0.0% 16.4% 32.2% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 2013 Service Performance Insight Sponsored by NetSuite 124

138 Compensation In this section SPI Research provides base salary information for eight core job titles, which include: Vice President / Senior VP Director Delivery Manager Project / Program Manager Business Consultant Senior Technical Consultant or Engineer Technical Consultant or Engineer Solution Architect SPI Research created eight standard job roles to keep the information consistent and comparable across the variety of firms in the study. Three job titles were added this year: VP/SVP; Delivery Manager and Sr. Technical Consultant/Engineer so year over year comparison information is not available for these positions. A word of caution: each year survey respondents change; the reported compensation increases and decreases represent the survey averages for each year. This does not necessarily mean that individual firms increased or reduced their employee compensation but does show the trend across the sector. Rates shown are reported averages. Survey information has been normalized to US dollars based on the currency exchange rates in effect during the fourth quarter of Compensation Trends For the five job titles SPI Research has surveyed for the past five years, Table 106 shows the change in average base and variable compensation. It should be noted that this is an average across all PS organizations in the survey (regardless of size, location or vertical); it shows the overall compensation trend within the PS industry based on 1,059 consultancies representing almost 300,000 individual consultants. Base salaries for all positions have increased each year while variable on-target compensation has fluctuated or increased slightly. The recession caused both employers and consultants to place a greater emphasis on base compensation because it is more predictable and controllable than variable compensation. Table 106: Five Year Total Average Compensation by Job Title (k) Job Title Vice President - Base Salary $137 $142 $136 $148 $156 Vice President - Variable 21.1% 19.0% 19.6% 22.5% 25.6% Project/Program Mgr. - Base $97 $95 $103 $109 $104 Project/Program Mgr. - Variable 14.5% 12.9% 12.5% 14.3% 12.3% Business Consultant - Base $82 $82 $95 $99 $98 Business Consultant - Variable 12.3% 11.3% 11.6% 14.2% 10.8% 2013 Service Performance Insight Sponsored by NetSuite 125

139 Job Title Sr. Technical Consultant/Engr. Base $65 $71 $87 $90 $103 Sr. Technical Consultant/Engr. - Variable 11.7% 11.2% 10.9% 11.8% 11.2% Technical Consultant/Engr. - Base $65 $71 $87 $90 $86 Technical Consultant/Engr.- Variable 11.7% 11.2% 10.9% 11.8% 10.7% Solution Architect - Base $95 $93 $101 $104 $110 Solution Architect - Variable 13.3% 11.6% 12.2% 12.8% 12.8% Base Salary Table 107 provides a year-over-year base salary comparison for embedded and independent organizations. For the two prior years we saw significant salary increases across the board but base salaries leveled off or declined slightly in In the 2010 survey, embedded service organizations made the greatest gain with a 20% base salary increase while independents eked out a miserly 1.8% increase. In 2011 the base salary increase trend was reversed with independents increasing base salaries by 7.9% while ESOs only increased base salaries by 1.7%. In 2012 SPI Research sees greater parity between embedded and independent base salaries; the only position with a significant base salary increase was solution architect; all other positions remained the same or decreased. Table 107: Annual Base Salary by Organization Type (k) Role Survey ESOs PSOs Change Change Change Vice President N/A $156 N/A N/A $164 N/A N/A $151 N/A Director % % % Delivery Manager N/A 117 N/A N/A 113 N/A N/A 119 N/A Project/Program Mgr % % % Business Consultant % % % Sr. Tech. Consult./Engr. N/A 103 N/A N/A 99 N/A N/A 106 N/A Tech. Consultant/Engr % % % Solution Architect % % % For the second year in a row, APAC firms reported the highest salaries by geography by a wide margin. This is due to the fact that most APAC survey respondents are headquartered in either Australia or New Zealand where the standard of living is high and the Aussie and Kiwi dollar are strong. With the addition of more job titles, America s salaries appear to have declined but this is probably because the new job titles provide more granularity for each position. The EMEA salary structure rebounded from a sharp decline in 2011 with growth in base salaries for all job titles in Service Performance Insight Sponsored by NetSuite 126

140 Table 108: Annual Base Salary by Region (k) Role Americas EMEA APAC Change Change Change Vice President N/A $155 N/A N/A $157 N/A N/A $162 N/A Director % % % Delivery Manager N/A 117 N/A N/A 102 N/A N/A 133 N/A Project/Program Mgr % % % Business Consultant % % % Sr. Tech. Consult./Engr. N/A 104 N/A N/A 89 N/A N/A 129 N/A Tech. Consultant/Engr % % % Solution Architect % % % For small and mid-size PSOs, salaries for all positions increase with organization size. The smallest organizations pay far less than mid-size firms so the benefit of being your own boss is somewhat dampened by much lower earning potential. Table 109: Annual Base Salary by Organization Size (< 100 employees) (k) Role Under Change Change Change Vice President N/A $131 N/A N/A $150 N/A N/A $152 N/A Director % % % Delivery Manager N/A 94 N/A N/A 104 N/A N/A 124 N/A Project/Program Mgr % % % Business Consultant % % % Sr. Tech. Consult./Engr. N/A 95 N/A N/A 97 N/A N/A 109 N/A Tech. Consultant/Engr % % % Solution Architect % % % For medium-size to large organizations, senior management salaries increase with size but the highest base pay scale for individual contributors was reported by firms from 300 to 700 employees in size. Only technical positions at firms from 100 to 300 employees in size appear to have increased year over year. All other base salaries declined with the addition of more job titles Service Performance Insight Sponsored by NetSuite 127

141 Table 110: Annual Base Salary by Organization Size (> 100 employees) (k) Role Over Change Change Change Vice President N/A $169 N/A N/A $175 N/A N/A $175 N/A Director % % % Delivery Manager N/A 117 N/A N/A 127 N/A N/A 113 N/A Project/Program Mgr % % % Business Consultant % % % Sr. Tech. Consult./Engr. N/A 106 N/A N/A 103 N/A N/A 87 N/A Tech. Consultant/Engr % % % Solution Architect % % % Interestingly, we see little change in base salaries for ESOs this year. Following a rise of 19.8% in 2010, Software PSOs saw another sizable increase of 5% in 2011 but base salaries flattened out in SaaS PSOs saw a rise of 14.6% in 2010 but experienced a -2.2% decline in 2011 and are now flat in Software and SaaS base salaries are very comparable. On top of a 17.9% rise in 2010, hardware PSOs saw a -5.4% decline in 2011 and a small increase in For similar job titles, Hardware PSO employees are now paid comparably to their Software and SaaS counterparts as both their base and variable have increased substantially over the past three to now bring them to parity with software firms. Table 111: Annual Base Salary by Embedded Service Organization Type (k) Role Software PS SaaS PS Hardware PS Change Change Change Vice President N/A $161 N/A N/A $164 N/A N/A $175 N/A Director % % % Delivery Manager N/A 114 N/A N/A 112 N/A N/A 109 N/A Project/Program Mgr % % % Business Consultant % % % Sr. Tech. Consult./Engr. N/A 99 N/A N/A 102 N/A N/A 101 N/A Tech. Consultant/Engr % % % Solution Architect % % % By vertical, management consultants are paid very similarly to their IT Consulting counterparts. Both groups experienced a year over year decline for all job titles except Solution Architect Service Performance Insight Sponsored by NetSuite 128

142 Table 112: Annual Base Salary by IT & Management Consultancy (k) Role IT Consulting Management Consulting Change Change Vice President N/A $152 N/A N/A $156 N/A Director % % Delivery Manager N/A 123 N/A N/A 116 N/A Project/Program Mgr % % Business Consultant % % Sr. Tech. Consult./Engr. N/A 106 N/A N/A 115 N/A Tech. Consultant/Engr % % Solution Architect % % Architects and Engineers are paid more than their IT counterparts while marketing consultants are paid less. With more marketing and advertising companies participating in this year s survey, base salaries appear to have declined but are probably more indicative of the market due to a larger sample size. Table 113: Annual Base Salary by PS Market (Advertising, Arch/Engineering Other PS) (k) Advertising Architecture/Engineering Other PS Role Change Change Change Vice President N/A $155 N/A N/A $153 N/A N/A $145 N/A Director % % % Delivery Manager N/A 95 N/A N/A 126 N/A N/A 110 N/A Project/Program Mgr % % % Business Consultant % % % Sr. Tech. Consult./Engr. N/A N/A N/A N/A 97 N/A N/A 98 N/A Tech. Consultant/Engr % % % Solution Architect 73 N/A N/A % % Variable Compensation Every year until now SPI Research has seen a shift to higher levels of variable compensation across the entire PS industry but in 2012 the trend appears to have slowed with lower levels of variable compensation for both ESOs and independents. The recession caused employees to become risk adverse favoring a higher base salary and lower variable component of compensation. The trend is continuing with employers and employees now more focused on base compensation. These tables reflect on-target variable compensation but do not show the upside potential for overachievement Service Performance Insight Sponsored by NetSuite 129

143 With the skill shortages and big growth plans reported by this year s survey respondents we believe both base and variable compensation will continue to increase. It is a great time to be in PS! Table 114: Variable Compensation by Organization Type Role Survey ESOs PSOs Change Change Change Vice President N/A 25.6% N/A N/A 27.3% N/A N/A 24.7% N/A Director 22.5% 18.8% -19.7% 21.1% 18.6% -13.4% 23.7% 18.9% -25.4% Delivery Manager N/A 15.2% N/A N/A 15.5% N/A N/A 15.1% N/A Project/Program Mgr. 14.3% 12.3% -16.1% 13.3% 12.8% -4.2% 15.2% 12.0% -26.8% Business Consultant 14.2% 10.8% -32.0% 13.5% 12.5% -8.0% 14.7% 9.8% -50.3% Sr. Tech. Consult./Engr. N/A 11.2% N/A N/A 12.1% N/A N/A 10.5% N/A Tech. Consultant/Engr. 11.8% 10.7% -10.1% 11.6% 12.0% 3.0% 12.1% 9.8% -23.7% Solution Architect 12.8% 12.8% 0.0% 12.3% 12.8% 3.8% 13.5% 12.8% -5.5% By geography, the Americas lead with the highest incentive compensation although EMEA is not far behind. APac pays the highest salaries but the lowest incentive or variable compensation. In general the survey shows VP on target bonuses of 25%; 20% for Directors and 10 to 15% for all other job titles. Table 115: Variable Compensation by Region (k) Role Americas EMEA APAC Change Change Change Vice President N/A 26.0% N/A N/A 23.0% N/A N/A 23.3% N/A Director 23.2% 19.3% -20.3% 18.2% 16.7% -9.2% 24.6% 15.8% -55.4% Delivery Manager N/A 15.7% N/A N/A 13.2% N/A N/A 12.9% N/A Project/Program Mgr. 14.7% 12.3% -19.1% 12.7% 13.8% 8.1% 13.3% 7.5% -77.3% Business Consultant 14.0% 11.1% -26.5% 16.2% 11.8% -37.5% 11.8% 5.6% % Sr. Tech. Consult./Engr. N/A 11.7% N/A N/A 10.0% N/A N/A 5.7% N/A Tech. Consultant/Engr. 12.3% 11.2% -10.1% 10.7% 9.3% -15.2% 9.5% 7.1% -33.0% Solution Architect 13.3% 13.3% -0.1% 11.1% 11.2% 0.5% 12.2% 10.0% -22.0% Small to mid-size firms not only pay lower base salaries but also lower variable compensation than larger firms. The cost of being your own boss and the flexibility of working within a small but growing firm shows up in the paycheck. Many consider the price of freedom and creativity to be well worth it Service Performance Insight Sponsored by NetSuite 130

144 Table 116: Variable Compensation by Organization Size (< 100 employees) Role Under Change Change Change Vice President N/A 27.1% N/A N/A 25.3% N/A N/A 24.3% N/A Director 18.7% 9.2% % 22.4% 16.6% -34.9% 21.8% 19.9% -9.7% Delivery Manager N/A 17.5% N/A N/A 14.1% N/A N/A 16.3% N/A Project/Program Mgr. 14.6% 11.3% -29.8% 15.9% 13.1% -21.5% 13.8% 12.5% -10.4% Business Consultant 14.5% 10.0% -45.0% 16.0% 12.3% -30.2% 12.9% 10.0% -29.0% Sr. Tech. Consult./Engr. N/A 11.7% N/A N/A 11.0% N/A N/A 11.0% N/A Tech. Consultant/Engr. 10.0% 6.7% -50.0% 14.3% 11.4% -25.7% 10.8% 11.0% 1.8% Solution Architect 10.0% 0.0% N/A 13.9% 12.1% -14.5% 11.8% 13.9% 14.8% The largest organizations pay the highest percentage of variable compensation on top of the highest base salaries somewhat ameliorating the problem of being a small fish in a big sea. SPI Research sees far greater variability in incentive compensation as compared to base salaries. Consulting delivery roles favor a higher base and lower variable compensation than SPI Research sees in sales and executive roles where higher risk, higher (variable) reward is the norm. Table 117: Variable Compensation by Organization Size (> 100 employees) Role Over Change Change Change Vice President N/A 24.6% N/A N/A 27.9% N/A N/A 33.3% N/A Director 24.7% 19.8% -24.6% 24.4% 19.2% -26.9% 26.0% 27.0% 3.7% Delivery Manager N/A 13.1% N/A N/A 16.7% N/A N/A 17.5% N/A Project/Program Mgr. 13.0% 10.4% -25.4% 13.6% 12.4% -10.1% 17.5% 16.7% -5.0% Business Consultant 13.8% 9.4% -47.2% 16.3% 10.4% -57.0% 12.5% 17.0% 26.5% Sr. Tech. Consult./Engr. N/A 10.6% N/A N/A 11.9% N/A N/A 13.3% N/A Tech. Consultant/Engr. 10.5% 9.6% -9.0% 13.1% 11.3% -16.4% 15.0% 13.3% -12.5% Solution Architect 13.1% 11.8% -11.0% 14.3% 12.1% -17.8% 15.0% 16.7% 10.0% Interestingly, in 2012 SPI Research sees a decline in Software variable compensation while we see an increase in SaaS and Hardware variable compensation. For Software, SaaS and Hardware consultants in 2012 the average Business Consultant received a $93k - $95k base with a 10 to 15% bonus. The average senior technical consultant received a $100k base with a 10% to 15% bonus. The average Solution Architect received a $110k base with a 12% to 20% bonus Service Performance Insight Sponsored by NetSuite 131

145 Table 118: Variable Compensation by Embedded Service Organization Type Role Software PS SaaS PS Hardware PS Change Change Change Vice President N/A 26.2% N/A N/A 26.2% N/A N/A 34.0% N/A Director 19.9% 16.5% -20.3% 23.8% 21.4% -11.4% 20.0% 17.5% -14.3% Delivery Manager N/A 14.1% N/A N/A 18.8% N/A N/A 18.3% N/A Project/Program Mgr. 13.0% 11.6% -11.9% 15.0% 15.0% 0.0% 10.0% 13.3% 25.0% Business Consultant 13.9% 10.4% -33.2% 11.6% 16.1% 28.0% 15.0% 15.0% 0.0% Sr. Tech. Consult./Engr. N/A 11.4% N/A N/A 13.2% N/A N/A 13.6% N/A Tech. Consultant/Engr. 10.8% 10.4% -4.3% 12.8% 14.6% 12.6% 11.3% 13.6% 16.7% Solution Architect 11.4% 12.4% 8.1% 14.3% 12.2% -17.0% 10.7% 17.0% 37.1% Across both IT and Management Consultancies the percentage of variable compensation declined from 2011 to 2012 for all job titles except Solution Architect. Table 119: Variable Compensation by IT & Management Consultancy Role IT Consulting Management Consulting Change Change Vice President N/A 25.3% N/A N/A 27.4% N/A Director 25.2% 20.8% -21.3% 23.5% 17.9% -31.6% Delivery Manager N/A 15.8% N/A N/A 17.5% N/A Project/Program Mgr. 15.0% 12.6% -18.9% 18.9% 13.8% -37.5% Business Consultant 13.6% 8.8% -54.3% 15.2% 12.9% -17.5% Sr. Tech. Consult./Engr. N/A 10.9% N/A N/A 8.8% N/A Tech. Consultant/Engr. 11.9% 10.6% -12.4% 13.1% 7.5% -74.7% Solution Architect 12.8% 13.9% 8.0% 12.1% 6.4% -88.2% Marketing and communication and other PS firms tend to pay low bonuses while this year the variable compensation for architects and engineers increased dramatically Service Performance Insight Sponsored by NetSuite 132

146 Table 120: Variable Compensation by PS Market (Advertising, Arch./Engr., Other PS) Advertising Architecture/Engineering Other PS Role Change Change Change Vice President N/A 20.0% N/A N/A 30.0% N/A N/A 20.3% N/A Director 18.0% 11.7% -54.3% 12.0% 18.3% 34.5% 26.4% 17.5% -50.9% Delivery Manager N/A 2.5% N/A N/A 17.5% N/A N/A 10.0% N/A Project/Program Mgr. 5.0% 2.5% % 7.0% 11.7% 40.0% 15.9% 9.3% -70.4% Business Consultant 10.0% 2.5% % 15.0% 15.0% 0.0% 19.1% 10.0% -91.0% Sr. Tech. Consult./Engr. N/A N/A N/A N/A 20.0% N/A N/A 8.5% N/A Tech. Consultant/Engr. 5.0% 5.0% 0.0% 3.8% 10.0% 62.0% 17.5% 7.5% % Solution Architect 5.0% N/A N/A 0.0% 11.7% 100.0% 22.5% 11.0% % Utilization Target billable utilization is much higher for independents than embedded service organizations as embedded organizations must contend with more non-billable work to support product sales or to fix product or relationship issues. Target utilization rates by geography are very comparable although the Americas work the most hours and EMEA the least. Table 121: Target Utilization by Organization Type and Geographic Region Role 2012 ESO PSO Americas EMEA APAC Vice President 47.3% 41.3% 49.4% 47.1% 45.8% 56.7% Director 50.6% 45.6% 53.0% 51.0% 50.7% 44.2% Delivery Manager 59.0% 50.3% 63.5% 58.9% 65.8% 55.0% Project/Program Mgr. 70.3% 64.2% 74.6% 69.8% 71.9% 76.4% Business Consultant 76.3% 71.1% 79.2% 77.0% 71.8% 74.4% Sr. Tech. Consult./Engr. 74.2% 67.7% 79.5% 74.4% 71.8% 76.4% Tech. Consultant/Engr. 75.7% 69.4% 80.6% 75.9% 72.9% 77.9% Solution Architect 71.7% 66.1% 76.0% 71.9% 72.1% 68.1% As SPI Research has seen throughout this study, the largest organizations tend to pay their consultants the most but also expect the highest levels of billable utilization. Smaller organizations require even their most senior staff and owners to bill most of the time. Across the board business and technical consultants are expected to deliver the highest levels of productivity for the second year in a row SPI Research has seen the most hours and profit generated by business consultants Service Performance Insight Sponsored by NetSuite 133

147 Table 122: Target Utilization by Organization Size Role Under Over 700 Vice President 64.6% 49.5% 44.4% 42.1% 41.5% 40.0% Director 54.2% 57.3% 45.8% 53.1% 46.3% 47.5% Delivery Manager 72.1% 61.4% 55.4% 61.6% 56.5% 57.5% Project/Program Mgr. 67.2% 67.5% 71.6% 71.5% 69.7% 80.0% Business Consultant 81.7% 71.7% 78.7% 75.2% 75.0% 81.7% Sr. Tech. Consult./Engr. 68.6% 68.6% 76.1% 77.4% 75.6% 82.5% Tech. Consultant/Engr. 65.7% 71.5% 76.9% 79.6% 76.9% 82.5% Solution Architect 85.0% 69.1% 72.0% 72.7% 71.8% 66.3% By role, utilization targets for Software and SaaS PSOs are almost identical. Hardware target utilization is slightly higher than for embedded software organizations. All of the independents drive higher levels of target utilization than the embedded firms. Table 123: Target Utilization by Vertical Service Market Role Software PS SaaS PS Hardware PS IT Consult Mgmt. Consult. Advertise Arch./ Engr. Other PS Vice President 42.2% 40.0% 40.0% 44.7% 53.1% 52.5% 46.3% 55.7% Director 45.5% 46.0% 45.0% 47.8% 60.0% 60.0% 46.3% 60.0% Delivery Manager 49.8% 53.9% 46.0% 56.7% 75.3% 62.5% 50.0% 74.1% Project/Program Mgr. 63.1% 65.0% 67.5% 71.6% 82.8% 70.0% 65.0% 76.4% Business Consultant 71.7% 69.1% 73.0% 77.3% 82.0% 85.0% 75.0% 80.0% Sr. Tech. Con./Engr. 67.3% 66.8% 72.1% 79.2% 84.1% N/A 72.5% 78.6% Tech. Consult./Engr. 69.8% 66.8% 73.6% 80.3% 87.7% 75.0% 61.3% 83.6% Solution Architect 64.8% 65.4% 75.0% 73.7% 87.5% N/A 66.7% 80.7% 2013 Service Performance Insight Sponsored by NetSuite 134

148 9. SERVICE EXECUTION PILLAR The Service Execution pillar measures the quality, efficiency and repeatability of service delivery. It focuses on the core activities for planning, scheduling and delivery of service engagements. Regardless of the maturity of every other area of the PSO it will not succeed unless it can successfully and profitably deliver services, with an emphasis on quality and customer value. In an increasingly competitive consulting marketplace success most often comes down to operational excellence with visibility and management controls in place to ensure effective resource and project management. Done right, gross project margins in excess of 60% are possible. Done wrong, project yields can drop to single digits, or go negative. Table 124 highlights the maturity levels in the Service Execution pillar, as the PSO moves from basic reactive all hands on deck project delivery to greater efficiency, repeatability and higher quality service execution. Table 124: Service Execution Performance Pillar Mapped Against Service Maturity Level 1 Initiated Level 2 Piloted Level 3 Deployed Level 4 Institutionalized Level 5 Optimized Service Execution No scheduling. Reactive. Ad hoc. Heroic. Scheduling by spreadsheet. No consistent project delivery methods. No project quality controls or knowledge management. Skeleton methodology in place. Centralized resource mgmt. Initiating project mgmt. and technical skills. Starting to measure project satisfaction and harvest knowledge. PSA deployed for resource and project management. Collaborative portal. Earned Value Analysis. Project dashboard. Global Project Management Office, project quality reviews and measurements. Effective change management. Integrated project and resource management. Effective scheduling. Using portfolio management. Global PMO. Global project dashboard. Global Knowledge Management. Global resource management. Integrated solutions. Continual checks and balances to assure superior utilization and bill rates. Complete visibility to global project quality. Multi-disciplinary resource management. The service execution pillar is where the rubber meets the road and client value is created. Regardless of strategy, sales, and talent, if services are not executed with high levels of quality, on time and in an orderly manner, the organization will fail. Service Performance Insight s research shows PSOs with high levels of quality execution share common traits, which include: Resource management, with visibility from prospect to project to ensure the right resources with the right skills are available when needed; Structured or standardized service delivery processes, where all employees understand their role and what is expected of them and are provided supporting tools and templates to ensure consistency; Solid project management, that provides visibility into the schedule, resources, deliverables and risks to ensure projects are delivered on time and on budget; 2013 Service Performance Insight Sponsored by NetSuite 135

149 Accurate and timely project accounting, where all financial information, including time and expense capture and billing are accurate and timely to ensure revenues and costs are kept in balance. Service execution has the greatest impact on client satisfaction and references. While SPI Research measures client satisfaction in the client relationships pillar, its main driver in either a positive or negative direction stems from the success or failure of project delivery. Service Execution Trends Which resource management strategy is best? Done right, effective resource management can improve billable utilization by over 5%, giving PSOs another 100 billable hours per consultant annually. The value of sophisticated resource management tools is especially important in increasingly complex and dynamic environments where resources may not be dedicated to long term, multi-year projects. Resource management provides PSOs the ability to assess skills, forecast staffing needs, schedule resources and evaluate profitability by individual, client and project type. This capability enables the organization to target sales and hiring activities to more efficiently balance the supply and demand for key resources and skillsets. By more tightly scheduling work around project deliverables and minimizing downtime, effective resource scheduling can lead to vastly improved resource utilization and improved project delivery. Increasingly sales; consultants and subcontractors are given visibility into the project pipeline so they can sell available resources while consultants express interest in the type of work that most intrigues them. This visibility can have a significant impact on employee satisfaction, thus reducing the attrition that is expected to be a key negative driver of profitability in the years to come. To improve utilization and productivity, executives must improve resource management effectiveness. Service Performance Insight s research shows there may not be "one magic bullet" resourcing strategy that is clearly superior to all others. The five strategies that follow enable PSOs to manage talent and fulfill client demands. Although centralized resource management is the most prevalent strategy, each organization must create a resourcing strategy that works best for their business, with the ultimate goal of increasing utilization and client and employee satisfaction. As the following table shows, there are pluses and minuses to all flavors of resource management strategies. Green shading indicates Best in Class and red shading indicates Worst in class based on responses from 195 firms. The few firms reporting other have not been considered Service Performance Insight Sponsored by NetSuite 136

150 Table 125: Impact of Resource Management Strategies Resource Mgmt. Strategy Survey Percent. Annual Revenue Growth Revenue / Project (k) Annual Billable Hours Per Employee On-time Delivery Revenue / Billable Emp. (k) Annual Rev. Target Achieve. 1. Centrally-managed Most resource management experts favor "centralized" resource management. It provides superior management visibility into the entire project backlog and type of skills required today and in the future. Central control may be best for fast-growing organizations with large projects but may not produce the highest levels of billable utilization because a certain amount of churn and resource and client unhappiness can result from impersonal centralized staffing policies. Centrally managed organizations have much higher profitability than those that locally manage resources. EBITDA Centrally Managed 56.6% 10.7% 161 1, % $ % 18.0% Locally Managed 25.1% 12.5% 165 1, % % 14.9% Center of Excellence 5.0% 17.3% 165 1, % % 18.4% By Account 8.7% 11.9% 266 1, % % 6.6% By Horizontal Skill Set 2.7% 8.3% 177 1, % % 21.5% Other 1.8% 21.9% 279 1, % % 17.1% Total 100.0% 11.7% 174 1, % $ % 16.3% 2. Local resource management Local resource management is the preferred form of resourcing for young organizations where the workforce is small enough to foster real esprit de corps, and employees wear many hats. Smaller organizations can't afford the overhead of a dedicated resource management function, and relationships and roles are fluid, requiring more local control and finesse. 3. By horizontal skill sets Managing resources by horizontal skill sets is useful for developing best practices, repeatable processes and shared knowledge. For example, many firms have project and program managers report directly or indirectly to the PMO. By building affinity around "birds of a feather," project managers or specialized consultants can more easily share best practices and standardize methodologies, templates, etc. As organizations grow, a horizontal or competency-based overlay reporting structure can help firms develop knowledge, best practices and build shared expertise. However as the table shows taking horizontal organization structures and resourcing too far produces the poorest results with the lowest levels of growth; low utilization and poor on-time project delivery Service Performance Insight Sponsored by NetSuite 137

151 4. Account-based Resource management by account may be a good strategy for very large accounts where there is a strong backlog of projects, but account-based resourcing can cause big issues if account revenue dries up. An example was Electronic Data Systems' (EDS) reliance on revenue from General Motors. As the relationship with General Motors soured, and its fortunes began to wane, Electronic Data Systems was left holding the bag. The other issue with account-based staffing strategies is organizations may become too dependent on a handful of accounts. This strategy has caused big problems in the staffing industry when big resource consumers like Cisco or HP moved to low-priced Vendor Service Agreements leaving no margin for suppliers. 5. Centers of excellence - The current trend towards vertical Centers of Excellence (COE) was pioneered by Accenture over the last decade. The advantage of industry or technology-specific "Centers of Excellence" is the development of deep business-domain knowledge. In theory, each Center of Excellence acts as a clearinghouse for specialized knowledge, expertise and solutions. Clients and prospects delight in seeing a "Vision of the Future" for their "oh, so special" unique industry. The downside of COE can be excessive overhead, the creation of an ivory tower mentality and the inability to learn from emerging new horizontal and vertical trends. Further, use of horizontal skills sets and technologies outside the COE can become cumbersome and inefficient. While there were very few organizations using a center of excellence, some of the key performance indicators are noteworthy, particularly on time delivery (85%) and billable utilization (75%). However, utilizing a center of excellence showed some of the lowest project margins, under 30%. It is important to remember professional service organizations are based on the unique knowledge, skills and personalities of a highly motivated and compensated workforce. So, erring too far in making resource management more science than art may not take best advantage of hard-to-find experts. Leading firms understand the skills required and available, and work toward providing additional training to improve employee performance. Investment in people, process and systems allows these organizations to minimize employee attrition and drive utilization to extremely high levels. Our research shows PSOs that create standard job positions clarify the skills their workers must have. And providing additional training helps increase both productivity and morale, both of which improve organizational performance. Survey Results The following section reviews and analyzes 2013 PS Maturity benchmark results from 234 participating professional services organizations. In this section SPI Research analyzes 14 Service Execution KPIs that are critical to attaining superior service delivery performance Service Performance Insight Sponsored by NetSuite 138

152 Resource Management Process SPI Research asked respondents to describe how the resource management process was conducted, either through central management, local management, center of excellence, by account, by horizontal skill sets or some other method. A more organized resource management process generally yields better results in terms of billable utilization. Depending on the size of the firm as well its geographic coverage, varying resource management methods could be applied. Figure 58: Resource Management Process Figure 58 shows over 60% of respondents manage resource management centrally with locally managed resource management coming in second at 20.1%. Both of these techniques lead to the highest project margins and growth rates. Project Staffing Time As PSOs grow in size and the scope of projects increases, project staffing complexity increases exponentially. Now, many PSOs take days and weeks to staff projects, waiting to find the right resources. This key performance indicator is important because it is an early warning sign of too much demand when it takes longer and longer to assemble the right team. It is a leading indicator of tightening resource availability and can be a signal to start recruiting and hiring. Rapid resource deployment can only be Table 126: Project Staffing Time (days) attained with accurate visibility to current and future demand along with the right mix of required resource skills, schedules and ESO PSO 6-Year Avg. Software PS SaaS PS preferences Table 126 shows the average project staffing time (days) (12.5) is 1% lower than in last year's survey (12.6), and 31% higher than the past sixyear s survey average (9.5). Staffing time over the past years has increased Americas EMEA APac Hardware PS IT Consulting Under Mgmt. Cons. Advertising Over 700 Arch./Engr. Other PS Service Performance Insight Sponsored by NetSuite 139

153 significantly, due to significantly higher demand; increased project complexity and higher utilization rates, making staffing difficult because resources are stretched thin. The table shows independent service providers had values 20% higher than embedded services organizations (13.3 vs. 11.1). Organizations from EMEA had the highest (14.9) average project staffing time (days), while those from North America had the lowest (11.9). Organizations with between employees had the highest (15.2) average project staffing time (days), while those with between employees had the lowest (10.1). SPI Research found the IT Consulting market shows the longest average project staffing time (days) (14.9), while those in the Hardware & Networking PS market had the shortest (8.9). Project Staff Size Projects have become more complicated even while project durations have become shorter and team size has declined, significantly narrowing the margin for error. The average project staff size, in terms of people, depicts how large or small project teams are. This KPI has as much to do with client requirements and the type of work, as it does with how the PSO operates. Based on new technologies, agile project management techniques and client demands, projects have become shorter and more iterative. Few projects still rely on a big bang approach as risk is amplified and scope creep is inherent. The agile method focuses on sprints to create the maximum value in the minimum amount of time. Table 127 compares the average project team size to other key performance indicators for the 217 PSOs answering the question. This table highlights a trend toward smaller team sizes. Unfortunately, smaller teams often mean lower billable utilization levels. However, smaller teams show higher annual revenue per billable employee than larger project teams. In general, the size of the team does not appear to have a significant impact on Table 127: Impact Project Team Size (people) Project Team Size (people) Survey Percent Billable Utilization Revenue / Billable Emp. (k) organizational profitability, as long as the organization is able to rapidly redeploy resources. Table 128 shows the average project staff (people) (3.7) is 6% lower than in last year's survey (4.0), and 7% lower than the past six-year s survey average (4.0). While this change does not seem significant, it does further reflect the movement to smaller project teams. The table showed independent service providers had values 13% higher than embedded services organizations (3.9 vs. 3.4). Organizations from EMEA had the highest (4.1) average project staff (people), while those from APac had the lowest (3.0). EBITDA % 67.0% $ % % 71.8% % % 72.0% % % 77.5% % Over % 80.0% % Total/Average 100.0% 70.4% $ % 2013 Service Performance Insight Sponsored by NetSuite 140

154 Organizations with over 700 employees had the highest (4.8) average project staff (people), while those with fewer than 10 employees had the lowest (2.3). SPI Research found the Advertising/Marcom market shows the largest average project staff (people) (4.8), while those in the Hardware & Networking PS market had the smallest (2.9). Table 128: Project Staff Size (people) ESO PSO 6-Year Avg. Software PS SaaS PS Americas EMEA APac Hardware PS IT Consulting Under Mgmt. Cons. Advertising Over 700 Arch./Engr. Other PS Concurrent Projects Managed by Project Manager The number of concurrent projects managed by a project manager is a measurement of project management efficiency and effectiveness. Larger more complex projects require more skilled, dedicated project or program managers while multiple, smaller concurrent projects tax the scheduling and multi-tasking ability of even the most skilled project managers. It is also a good indicator of project complexity and risk. Typically firms use a rule for project management, 20% of the overall cost of the project is allocated to project management and a project manager is usually assigned at least 20% of his/her time to a given project. Project management effort is most intense at the beginning and end of the project. Table 129 compares the average number of concurrent projects managed by a project manager to other key performance indicators for the 220 PSOs answering the question. The table shows that over two thirds of the organizations surveyed generally have project managers managing less than five projects concurrently. Interestingly, the fewer projects they manage, the higher utilization they show, but unfortunately they also show much lower profitability numbers. Table 129: Impact No. of Concurrent Projects Managed by Project Mgr. Concurrent Projects Managed Survey Percent Billable Utilization Ann. Margin Target Achieve. EBITDA % 71.5% 86.5% 12.8% % 72.6% 88.1% 16.1% % 67.8% 89.3% 19.9% % 65.0% 95.0% 25.0% Over % 68.5% 82.7% 17.1% Total/Average 100.0% 70.7% 87.6% 16.4% 2013 Service Performance Insight Sponsored by NetSuite 141

155 Table 130 shows the concurrent projects managed Table 130: Concurrent Projects Managed by Project Manager by a PM (5.3) is 27% higher than in last year's survey (4.2), and 14% higher than the past six-year s survey average (4.6). This increase is significant, as project ESO 6.5 Americas PSO 4.7 EMEA 6-Year Avg. 4.6 APac Software PS 6.1 Hardware PS SaaS PS 6.8 IT Consulting management time is directly correlated with project Under Mgmt. Cons. Advertising quality metrics like budget to actual and on-time project completion. This trend means project managers are being stretched thin they must have better training Over Arch./Engr Other PS 5.3 and tools to enable them to juggle so many projects at the same time. The table showed independent service providers had values 27% lower than embedded services organizations (4.7 vs. 6.5). Organizations from North America had the highest (5.7) concurrent projects managed by pm, while those from APac had the lowest (3.2). Organizations with over 700 employees had the highest (7.2) concurrent projects managed by pm, while those with between employees had the lowest (4.6). SPI Research found the Advertising/ Marcom market shows the largest concurrent projects managed by pm (9.6), while those in the IT Consulting market had the smallest (3.8). Project Duration The average project duration, expressed in months, shows the effectiveness, or lack thereof, of selling longer term projects. The average project duration, like average project staff size, is important in that it shows the average length and scale of today s projects. Longer projects are easier to staff but are not necessarily more profitable because longer and larger projects may involve significantly more risk and complexity. Table 131 shows the average project duration (months) (5.3) is 3% longer than in last year's survey (5.2), and 6% higher than the past six-year s survey average (5.0). With the exception of 2010 this KPI has remained fairly constant throughout the six-years of benchmarking. The table showed independent service providers had values 28% higher than embedded services organizations (5.8 vs. 4.5). Organizations from EMEA had the longest (5.4) average project duration (months), while those from APac had the lowest (2.8) Service Performance Insight Sponsored by NetSuite 142

156 Organizations with over 700 employees had the highest (6.0) average project duration (months), while those with between employees had the lowest (4.4). SPI Research found the Advertising/Marcom market shows the largest average project duration (months) (7.8), while those in the Hardware & Networking PS market had the smallest (3.6). Table 131: Project Duration (months) ESO PSO 6-Year Avg. Software PS SaaS PS Americas EMEA APac Hardware PS IT Consulting Under Mgmt. Cons. Advertising Over 700 Arch./Engr. Other PS Project On-time Delivery The percentage of projects delivered on time is a measurement that divides the number of projects completed on-time by the total number of projects. This KPI is critical for billable service organizations, because when it decreases, both profitability and client satisfaction decline. Unfortunately, on-time project delivery rates tend to be less than 80% on average for PSOs. On-time delivery is an extremely important key performance indicator because it impacts both client satisfaction and the initiation of new projects. When projects are delivered late, client satisfaction suffers. It also causes new projects to be delayed because of the lack of available resources. PS executives strive to keep employees utilized. However, when they cannot start work because prior projects are late, everyone suffers. Table 132: Impact On-time Project Delivery Table 132 compares the average number of concurrent projects managed by a project manager to other key performance indicators for the 217 PSOs answering the question. The results in this table are as expected, but highlight the importance of on-time project delivery. A key factor in delivering projects on time is billable utilization, as shown in this table. Delivering projects on time enables PSOs to raise utilization On-time Project Delivery Survey Percent Billable Utilization Revenue / Billable Emp. (k) Ann. Margin Target Achieve. Under 40% 4.1% 63.3% $ % 40% - 60% 5.5% 64.1% % 60% - 70% 10.1% 68.9% % 70% - 80% 24.4% 69.2% % 80% - 90% 29.0% 69.9% % Over 90% 26.7% 75.4% % Total/Average 100.0% 70.5% $ % 2013 Service Performance Insight Sponsored by NetSuite 143

157 rates and ultimately sell and deliver more services, which are highlighted in the higher revenue per billable employee numbers. They also show how organizations delivering projects on time meet annual target margins more of the time. Table 133 shows the projects delivered on-time (78.6%) is 3% higher than in last year's survey (76.5%), and 2% higher than the past sixyear s survey average (77.4%). The table showed independent service providers had values 8% higher than embedded services organizations (80.6% vs. 74.9%). Organizations from APac had the highest (83.5%) projects delivered on-time, while those from EMEA had the lowest (76.0%). Table 133: Projects Delivered On-time % 79.2% 77.9% 76.5% 78.6% ESO PSO 6-Year Avg. Software PS SaaS PS 74.9% 80.6% 77.4% 72.6% 76.1% Americas EMEA APac Hardware PS IT Consulting 78.8% 76.0% 83.5% 77.8% 78.6% Under Mgmt. Cons. Advertising 81.4% 77.2% 78.6% 84.8% 81.5% Over 700 Arch./Engr. Other PS 75.2% 81.7% 82.8% 82.9% 80.0% Organizations with over 700 employees had the highest (82.8%) projects delivered on-time, while those with between employees had the lowest (75.2%). SPI Research found the Management Consulting market shows the highest number of projects delivered on-time (84.8%), while those in the Software PS market had the lowest (72.6%). Project Cancellation The project cancellation rate represents the number of projects canceled divided by total projects. In billable professional services organizations, the project cancellation rate is typically quite low when compared to internal IT organizations. However, it is important because if projects are canceled the organization must scramble to reallocate resources to keep utilization rates high. In professional services very few projects are canceled when compared to internal project work. Part of this low rate is due to the scrutiny projects undertake before they are officially initiated. Unlike internal projects, contracts are signed and therefore clients are fairly confident their work will be initiated and not canceled. Table 134 shows the projects canceled (3.7%) is 78% higher than in last year's survey (2.1%), and 51% higher than the past six-year s survey average (2.5%). The table shows independent service providers had values 29% lower than embedded services organizations (3.2% vs. 4.5%). Organizations from North America had the highest (4.2%) projects canceled, while those from EMEA had the lowest (1.4%) Service Performance Insight Sponsored by NetSuite 144

158 Organizations with employees had the highest (5.5%) projects canceled, while those with fewer than 10 employees had the lowest (1.6%). SPI Research found the Advertising/Marcom market shows the largest projects canceled (9.6%), while those in the Architecture/Engineering market had the smallest (1.0%). Table 134: Project Cancellation Rate % 2.1% 2.0% 2.1% 3.7% ESO PSO 6-Year Avg. Software PS SaaS PS 4.5% 3.2% 2.5% 1.8% 8.7% Americas EMEA APac Hardware PS IT Consulting 4.2% 1.4% 1.8% 8.4% 3.3% Under Mgmt. Cons. Advertising 1.6% 4.3% 3.1% 1.5% 9.6% Over 700 Arch./Engr. Other PS 5.2% 5.5% 1.9% 1.0% 3.6% Project Overrun Project overrun is the percentage above budgeted cost to actual cost. Project overruns may be expressed in actual time versus plan or actual cost versus plan or both. This KPI is important because anytime a project goes over budget in either time or cost; it cuts directly into the PSO s profitability. Project overruns, like projects not delivered on time, limits future work that can be initiated. In many instances it shows a lack of project governance, which negatively impacts bottom-line results. Table 135 compares the average project overrun to other key performance indicators for the 213 PSOs answering the question. As one might expect the greater the project overrun the fewer projects are completed on time. While this KPI is obvious, the table highlights just how detrimental project overruns are to the organization. This table shows that not only are projects not completed on time, but revenue per billable employee and the annual revenue target achieved are significantly impacted as PSOs failed to deliver work on time, making it a very important KPI. Table 135: Impact Average Project Overrun Average project overrun Survey Percent On-time Completion Revenue / Billable Emp. (k) Annual Rev. Target Achieve. Never 7.0% 89.0% $ % 0% - 5% 35.2% 87.6% % 5% - 10% 27.2% 78.3% % 10% - 20% 18.8% 73.5% % 20% - 30% 8.5% 57.1% % Over 30% 3.3% 42.9% % Total/Average 100.0% 78.5% $ % 2013 Service Performance Insight Sponsored by NetSuite 145

159 Table 136 shows the average project overrun (9.2%) is 10% higher than in last year's survey (8.3%), and 14% lower than the past six-year s survey average (10.6%). Table 136: Project Overrun Rate % 11.9% 12.3% 8.3% 9.2% ESO PSO 6-Year Avg. Software PS SaaS PS 10.4% 8.5% 10.6% 12.5% 8.0% The table shows independent service providers had values 18% lower than embedded services organizations (8.5% vs. 10.4%). Organizations from EMEA had the highest (10.7%) average project overrun, while those from APac had the lowest (7.8%). Americas 8.9% Under % % EMEA 10.7% % % APac 7.8% % Over % Hardware PS 7.5% Mgmt. Cons. 6.6% Arch./Engr. 10.0% IT Consulting 9.3% Advertising 8.8% Other PS 7.9% Organizations with employees had the highest (11.3%) average project overrun, while those with over 700 employees had the lowest (5.9%). SPI Research found the Software PS market shows the largest average project overruns (12.5%), while those in the Management Consulting market had the smallest (6.6%). Standardized Delivery Methodology SPI Research asked PSOs what percentage of the time they used a standard delivery methodology to manage projects. Mature firms invest significant time and attention to methodology development as a means to standardize project processes; define expectations and institutionalize quality. Using a standardized delivery methodology is a critical component of a services productization strategy. It helps improve project forecasting, resource management, cost and profitability. PSOs that can accurately plan and execute services in a structured way, are not only more productive but also more likely to deliver quality results. There is significant effort to be placed in developing, implementing and adhering to standardized delivery methodologies, but the net impact for PSOs is beneficial. Table 137 compares the percentage of time a standardized delivery methodology is used to Table 137: Impact Standardized Delivery Methodology Use Standardized Delivery Methodology Use Survey Percent On-time Completion Revenue / Billable Employee (k) EBITDA Under 20% 11.1% 83.0% $ % 20% - 40% 7.9% 77.4% % 40% - 60% 16.7% 75.3% % 60% - 80% 24.5% 75.6% % Over 80% 39.8% 80.6% % Total/Average 100.0% 78.5% $ % 2013 Service Performance Insight Sponsored by NetSuite 146

160 other key performance indicators for the 216 PSOs answering the question. While the direct correlation between standardized delivery methodology use and some of the more important key performance indicators is not entirely clear, the table shows general improvement as organizations use delivery methodologies which are consistent. Table 138 shows the a standardized delivery methodology is used (63.6%) is 5% lower than in last year's survey (66.6%), and 2% lower than the past six-year s survey average (64.6%). Table 138: Standardized Delivery Methodology Use % 65.2% 57.7% 66.6% 63.6% ESO PSO 6-Year Avg. Software PS SaaS PS 67.4% 61.4% 64.6% 63.6% 76.3% The table showed independent service Americas 63.4% EMEA 65.4% APac 60.0% Hardware PS 62.2% IT Consulting 61.3% providers had values 9% Under Mgmt. Cons. Advertising lower than embedded 55.4% 61.5% 68.1% 54.5% 70.0% services organizations (61.4% vs. 67.4%). Organizations from EMEA had the highest (65.4%) use of a standardized delivery methodology, while % % Over % Arch./Engr. 77.9% Other PS 63.3% those from APac had the lowest (60.0%). Organizations with employees had the highest use of (69.4%) a standardized delivery methodology, while those with fewer than 10 employees had the lowest (55.4%). SPI Research found the Architecture/Engineering market shows the highest use of a standardized delivery methodology (77.9%), while those in the Management Consulting market had the lowest (54.5%). Effectiveness of the Resource Management Process SPI Research asked survey respondents to rate the effectiveness of their resource management process with 1 = poor and 5 = great. Although subjective, this key performance indicator is an important measurement of how effective the organization views its resource management processes. Resource management is critical to project planning and execution. PSOs that effectively and efficiently manage their resources show much higher utilization rates, and ultimately higher project margins and company profitability. Table 139 compares the effectiveness of resource management processes to other key performance indicators for the 218 PSOs answering the question. While this question is subjective in nature, over the six years of surveying, SPI Research has found significant benefits when resource management becomes more of a science than art. Most leading PSOs have implemented professional services automation solutions for just this reason, in an attempt to improve billable utilization, on-time work completion and 2013 Service Performance Insight Sponsored by NetSuite 147

161 client satisfaction. The benefit shows up in higher levels of profitability, as well as revenue per billable consultant and employee. Table 140 shows the effectiveness of resource management process (3.53) is 2% higher than in last year's survey (3.47), and 4% higher than the past six-year s survey average (3.40). Table 139: Impact Resource Management Effectiveness Resource Management Effectiveness Survey Percent Billable Utilization On-time Completion EBITDA 1 - Low 0.9% 52.5% 57.5% N/A % 65.2% 71.2% 15.8% % 68.1% 76.7% 16.0% % 73.3% 81.2% 13.6% 5 - High 13.3% 74.5% 83.2% 26.0% Total/Average 100.0% 70.4% 78.5% 16.3% The table shows independent service providers had values 4% higher than embedded services organizations (3.58 vs. 3.44). Organizations from North America had the highest (3.55) effectiveness of resource management process, while those from APac had the lowest (3.30). Table 140: Effectiveness of Resource Management Process Organizations with fewer than 10 employees had the highest (3.61) effectiveness of resource management 2008 N/A ESO PSO Year Avg Software PS SaaS PS process, while those with over 700 employees had the Americas EMEA APac Hardware PS IT Consulting lowest (3.11). SPI Research found the Other PS market shows the highest effectiveness of resource management processes (3.69), while those in the Architecture/Engineering market had the smallest (3.00) Under Over Mgmt. Cons Arch./Engr Advertising 3.40 Other PS 3.69 Effectiveness of Estimating Processes and Reviews SPI Research asked survey respondent to rate the effectiveness of their estimating processes and reviews, with a rating of 5 being excellent to one being poor. This key performance indicator is important as accurate estimates hold the key to all other service delivery metrics. Inaccurate estimates lead to miss-set client expectations; project overruns and poor client satisfaction. While this subjective KPI might be hard to fathom, its results show how some of the most important KPIs improve as the organization becomes more effective in their estimating processes Service Performance Insight Sponsored by NetSuite 148

162 Table 141 compares the effectiveness of estimating processes to other key performance indicators for the 217 PSOs answering the question. While this is a subjective question, the results show the importance of strong estimating processes. The improvement between organizations with low levels of effectiveness (1 and 2) and high levels of effectiveness (4 and 5) is a significant. Table 141: Impact Effectiveness of estimating processes and reviews Effectiveness of estimating processes & estimate reviews Survey Percent Billable Util. On-time Completion Revenue / Billable Emp. (k) 1 - Low 1.4% 60.0% 40.0% $ % 64.7% 69.8% % 69.6% 75.3% % 72.6% 83.9% High 10.1% 73.4% 85.7% 213 Total/Average 100.0% 70.4% 78.5% $206 Table 142 shows the effectiveness of estimating processes and reviews (3.44) is 4% lower than in last year's survey (3.59), and 1% lower than the past six-year s survey average (3.47). The table shows independent service providers had values 5% higher than embedded services organizations (3.50 vs. 3.33). Organizations from APac had the highest (3.56) effectiveness of estimating processes and reviews, while those from EMEA had the lowest (3.26). Table 142: Effectiveness of Estimating Processes and Reviews Organizations with fewer than 10 employees had the highest (3.54) effectiveness of estimating processes and reviews, while those with between employees had the lowest (3.17). SPI Research found the Management Consulting market shows the highest effectiveness of estimating processes and reviews (3.66), while those in the Software PS market had the smallest (3.28) N/A ESO PSO 6-Year Avg. Software PS SaaS PS Americas EMEA APac Hardware PS IT Consulting Under Mgmt. Cons. Advertising Over 700 Arch./Engr. Other PS Effectiveness of Change Control Processes SPI Research asked executives their opinion of the effectiveness of their change control processes, with a rating of 5 being excellent to one being poor. All projects involve risk and change. The important question is how the organization manages change and risk. Mature PSOs invest in developing change and risk management policies; PM training and PMO oversight and guidance. They must also consider 2013 Service Performance Insight Sponsored by NetSuite 149

163 the impact of the change and how it will impact subsequent projects. A critical component of change control is to ensure project margins do not suffer. Ideally, project changes are clearly outlined; client perception is appropriately managed and change orders are put in place. Too many change orders not only impact the budget and schedule but may be signs of scope creep as well as inadequate executive sponsorship and poor communication. Table 143 compares the effectiveness of change control processes to other key performance indicators for the 218 PSOs answering the question. Again, similar to the organizations with high levels of resource management and estimating effectiveness, those organizations that manage change the best demonstrate significantly higher KPIs in both the service execution and finance and operations pillars. What these past several key Table 143: Impact Effectiveness of change control processes Effectiveness of change control processes Survey Percent On-time Completion Annual Margin Target Achieve. EBITDA 1 - Low 1.8% 76.3% 76.3% 15.3% % 76.4% 83.0% 14.9% % 75.7% 86.2% 16.8% % 81.6% 90.3% 16.2% 5 - High 13.8% 81.4% 94.2% 18.0% Total/Average 100.0% 78.6% 87.9% 16.4% performance indicator analysis has shown is that the devil is in the detail and organizations that focus on basic issues such as resources, estimating and change control drive superior results compared to those organizations that place less emphasis on these critical issues. Table 144 shows the effectiveness of change Table 144: Effectiveness of Change Control Processes control processes (3.39) is the same as last year s survey N/A (3.38), and 3% higher than the past six-year s survey average (3.29). The table showed independent service ESO 3.44 Americas PSO 3.36 EMEA 6-Year Avg APac Software PS 3.44 Hardware PS SaaS PS 3.52 IT Consulting providers had values 2% lower than embedded Under Mgmt. Cons. Advertising services organizations (3.36 vs. 3.44). Organizations from EMEA had the highest (3.53) effectiveness of change control processes, while those from APac had the Over Arch./Engr Other PS 3.40 lowest (3.00). Organizations with over 700 employees had the highest (3.70) effectiveness of change control processes, while those with between employees had the lowest (3.24) Service Performance Insight Sponsored by NetSuite 150

164 SPI Research found the SaaS PS market shows the highest effectiveness of change control processes (3.52), while those in the Hardware & Networking PS market had the smallest (3.11). Effectiveness of Project Quality Processes SPI Research asked executives their opinion of the effectiveness of their project quality processes, with a rating of 5 being excellent down to one being poor. Quality must be built into projects and project management processes. Most leading professional services organizations build in checks and balances to assure the work is done correctly. As more PSOs work to productize their services offerings, incorporate quality processes and procedures, as well as metrics, become both a client satisfaction and sales tool as it helps both current and future clients to better understand the PSOs commitment to quality work. Table 145 shows the effectiveness of project quality processes (3.45) is 1% higher than in last year's survey (3.43), and 3% higher than the past six-year s survey average (3.35). Table 145: Effectiveness of Project Quality Processes N/A ESO PSO 6-Year Avg. Software PS SaaS PS The table showed independent service Americas 3.46 EMEA 3.46 APac 3.40 Hardware PS 3.44 IT Consulting 3.56 providers had values 14% Under Mgmt. Cons. Advertising higher than embedded services organizations (3.61 vs. 3.17). Organizations from EMEA had the highest (3.46) effectiveness of project quality processes, while Over Arch./Engr Other PS 3.85 those from APac had the lowest (3.40). Organizations with over 700 employees had the highest (3.70) effectiveness of project quality processes, while those with between employees had the lowest (3.11). SPI Research found the Other PS market shows the highest effectiveness of project quality processes (3.85), while those in the Software PS market had the smallest (3.05). Effectiveness of Knowledge Management Processes SPI Research asked executives their opinion of the effectiveness of their of knowledge management processes, with a rating of 5 being excellent down to one being poor. Knowledge management has become a critical component of service execution. Best practices and other quality-driven initiatives are built-in into project delivery. Assuring the right information is available to all those who need it is 2013 Service Performance Insight Sponsored by NetSuite 151

165 paramount to success. Over the past five years knowledge management, especially through the use of social media, has moved to the forefront of service execution. Team members now work more collaboratively to achieve project objectives. Table 146 shows the effectiveness of knowledge Table 146: Effectiveness of Knowledge Management Processes management processes (2.95) is 3% lower than in last year's survey (3.04), and 3% higher than the past sixyear s survey average (2.87) ESO PSO Year Avg Software PS SaaS PS 3.04 The table showed Americas EMEA APac Hardware PS IT Consulting independent service providers had values 7% higher than embedded services organizations (3.03 vs. 2.82). Organizations from EMEA had the highest (3.03) effectiveness of knowledge management processes, Under Over Mgmt. Cons Arch./Engr Advertising 3.22 Other PS 3.40 while those from APac had the lowest (2.60). Organizations with fewer than 10 employees had the highest (3.14) effectiveness of knowledge management processes, while those with over 700 employees had the lowest (2.50). SPI Research found the Other PS market shows the highest effectiveness of knowledge management processes (3.40), while those in the Software PS market had the smallest (2.70) Service Performance Insight Sponsored by NetSuite 152

166 10. FINANCE & OPERATIONS PILLAR The Finance and Operations pillar represents the realm of the CFO for large PS organizations, and is an intrinsic part of the role of the chief service executive for all PS organizations, regardless of size. In this service performance pillar SPI Research examines over 40 key performance measurements for revenue, margin and operating expense. SPI Research has added detailed profit and loss statements and expense ratios by organization size and vertical. This year SPI Research has included detailed bill rate analysis representing 50,000 consultants worldwide. We also created a new section on revenue targets and revenue yield (labor multiplier) by role. The leading indicators for growth: annual revenue growth, headcount increases, size of the sale pipeline and percentage of revenue in backlog have all been up for the past two years. So are the indicators for achievement of business plans. Professional Services Organizations (PSOs) reported 91% average revenue target attainment with 23% of the organizations significantly over achieving their annual revenue plans. Profit attainment was more illusive with average margin target attainment of 88%. 54% of the organizations missed their profit targets by 20% or more while 21% exceeded their annual profit targets. Even though most firms missed their profit targets their bottom-line net profit soared this year. For the entire benchmark, net profit increased from 13.5% in 2011 to 18.5% in The Americas headquartered firms are the most profitable at 19.1%; EMEA achieved 16.4% profit and APac s profit declined from 17.2% in 2011 to 10.7% in By vertical market, hardware PSOs skyrocketed to the highest levels of profitability reporting 30.5% net profit. Year-over-year SaaS PSOs trumped their Software brethren by improving net margin from 14.2% in 2011 to 25.9% in Software PSOs moved from 11.6% in 2010 to 18.6% net margin in 2011 to 19.4% in Table 147 highlights attributes of the Finance and Operations pillar as the organization matures. Table 147: Finance and Operations Performance Pillar Maturity Level 1 Initiated Level 2 Piloted Level 3 Deployed Level 4 Institutionalized Level 5 Optimized Finance and Operations The PSO has been created but is not yet profitable. Rudimentary time & expense capture. Limited financial visibility and control. Unpredictable financial performance. Rudimentary contract management. 5 to 20% margin. PS becoming a profit center but still immature finance and operating processes. Investment in ERP and PSA to provide financial visibility. May not have real-time visibility or BI. Standard Library of Contracts and Statements of Work. 20 to 30% margin. PS operates as a tightly managed P&L. Standard methods for resource mgmt., time & expense mgmt., cost control & billing. In depth knowledge of all costs at the employee, sub-contractor & project level. Processes in place for contract management, legal and pricing decisions. PS generates > 20% of overall company revenue & contributes > 30% margin. Well-developed finance and operations processes and controls. Systems have been implemented for CRM, PSA, ERP and BI. IT integration and real-time visibility. Systems have been implemented for contract management, legal and pricing decisions. > 40% margin. Continuous improvement and enhancement. High profit. Integrated systems. Real-time visibility. Global with disciplined process controls and optimization. Completely integrated financial, CRM, resource management, contracts and pricing systems, processes and controls Service Performance Insight Sponsored by NetSuite 153

167 Survey Results The following section reviews and analyzes 2012 PS Maturity benchmark results from 234 participating professional services organizations. In this section SPI Research analyzes 37 Finance & Operations key performance measurements that are critical to attaining superior financial performance. Bill Rates The following bill rate comparisons are based on the 2012 PS Maturity benchmark survey of 234 firms with an average of 209 PS employees compared to the 2011 Global Bill Rate study based on 200 firms. One of the world s largest consulting bill rate studies; this comparison is based on over 65,000 consultants worldwide who supplied detailed bill rate information over the past two years. With the exception of Vice President/Partner and Director, bill rates increased across the board. Both independents and embedded organizations saw a steep increase in rates with embedded organizations commanding a significant premium over independent consultancies. This tremendous surge in bill rates combined with higher consultant productivity and higher billable utilization explains the dramatic jump in net profit shown in this year s survey. All in all 2012 was a banner year for PS across all verticals and geographies with the Americas leading the surge. Table 148: Hourly Bill Rates by Organization Type Role Survey ESOs PSOs Change Change Change Vice President $265 $ % $203 $ % $298 $ % Director % % % Delivery Manager % % % Project/Program Mgr % % % Business Consultant % % % Sr. Tech. Consult./Engr % % % Tech. Consultant/Engr % % % Solution Architect % % % Going into 2013 consulting demand is strong as most organizations reported strong backlog of 45% at the beginning of the first quarter of Table 148 shows the greatest surge in bill rates occurred for business consultants (18.3% increase to $180 per hour); delivery managers (16.8% increase to $194 per hour) and project/program managers (14.3% to $183 per hour). SPI Research has been predicting the shift to more business, management and process consulting for the past several years as cloud technologies are primarily focused on line of business applications. These new cloud business applications have shifted the consulting focus to business process improvements, requiring less customization and a greater concentration on usability and reporting Service Performance Insight Sponsored by NetSuite 154

168 Table 149 shows APac led the surge in bill rates bringing APac bill rates higher than or on par with the Americas. A strong Australian and New Zealand economy and dollar, combined with a focus on knowledge-intensive industries has created a hot bed of consulting in Australia and New Zealand. It should be noted that few Indian consultancies participate in the PS Maturity benchmark these firms are great consumers of data but are extremely reluctant to reciprocate by providing data. Indian consulting salaries and bill rates have increased dramatically, mollifying the Indian rate arbitrage which started the outsourcing craze. Due to the economic crisis, EMEA rates have declined slightly. Table 149: Hourly Bill Rates by Region Role Americas EMEA APAC Change Change Change Vice President $239 $ % $379 $ % $338 $ % Director % % % Delivery Manager % % % Project/Program Mgr % % % Business Consultant % % % Sr. Tech. Consult./Engr % % % Tech. Consultant/Engr % % % Solution Architect % % % Table 150: Hourly Bill Rates by Organization Size Role 1 to 100 PS Employees 101 to >700 PS Employees < >700 Vice President $240 $254 $264 $226 $256 $308 Director Delivery Manager Project/Program Mgr Business Consultant Sr. Tech. Consult./Engr Tech. Consultant/Engr Solution Architect Just as SPI Research has seen with base and variable compensation, the smallest firms also charge the lowest bill rates making them a good choice for organizations who appreciate personal touch at competitive rates. The largest consulting organizations command the highest rates for senior delivery managers, directors and partners but charge lower rates for their technical roles Service Performance Insight Sponsored by NetSuite 155

169 Embedded SaaS PS organizations charge higher rates for their most senior resources than their Software counterparts but very similar rates for project managers, business analysts and technical roles. Hardware rates increased significantly in 2012 as did software rates while SaaS rates (the highest rates in 2011) did not increase as sharply. Across the board, embedded PS rates increased significantly in 2012 making them much higher than independent IT and management consulting rates. Table 151: Hourly Bill Rates by Embedded Service Organization Type (k) Role Software PS SaaS PS Hardware PS Change Change Change Vice President $219 $ % $204 $ % $0 $325 N/A Director % % % Delivery Manager % % % Project/Program Mgr % % % Business Consultant % % % Sr. Tech. Consult./Engr % % % Tech. Consultant/Engr % % % Solution Architect % % % IT Consulting rates increased sharply in 2012 although embedded PSOs are now charging more than independent IT Consultancies for similar roles. Management Consulting rates for the most senior resources declined as did their rates for technical roles; business and project manager rates increased. Table 152: Hourly Bill Rates by IT & Management Consultancy (k) Role IT Consulting Management Consulting Change Change Vice President $213 $ % $361 $ % Director % % Delivery Manager % % Project/Program Mgr % % Business Consultant % % Sr. Tech. Consult./Engr % % Tech. Consultant/Engr % % Solution Architect % % Table 153 shows significant rate improvements for marketing and advertising firms as well as engineers and architects and other PS. These figures show PS has recovered nicely from the recession with higher rates and significant demand. Times are good and will continue to be so in the PS sector! 2013 Service Performance Insight Sponsored by NetSuite 156

170 Table 153: Hourly Bill Rates by PS Market (Advertising, Arch/Engineering Other PS) (k) Advertising Architecture/Engineering Other PS Role Change Change Change Vice President $250 $ % $238 $206 $ % Director % Delivery Manager % % % Project/Program Mgr % % Business Consultant % % Sr. Tech. Consult./Engr % % Tech. Consultant/Engr % % % Solution Architect % % Putting it all together Targets by Role In this section we bring all the employee survey information together to create an income statement by consulting role. This is a very useful analysis exercise as it provides an overview of base and variable compensation along with on target earnings (OTE) compared to target utilization and bill rates to show on target annual revenue. If everything goes according to plan, that is each person achieves his/her utilization targets at the targeted bill rate, then we can calculate the annual revenue target. Yield reflects on target revenue generated above on target earnings. The yield percentage is often called a labor multiplier as it compares annual revenue yield to on target earnings. Table 154 shows the work horses in the Americas are Business and Technical Consultants as they generate 1.5 times more revenue than their on target earnings. Table 154: Americas Targets by Role Role Base (k) Variable OTE (k) Bill Rate Target Util. Rev. Target (k) Yield (k) Yield % Vice President $ % $195 $ % $236 $41 21% Director % % % Delivery Manager % % % Project/Program Mgr % % % Business Consultant % % % Sr. Tech. Consult./Engr % % % Tech. Consultant/Engr % % % Solution Architect % % % 2013 Service Performance Insight Sponsored by NetSuite 157

171 Table 155 shows the big revenue producers in EMEA are technical consultants who generate twice their on target earnings in consulting revenue. All the EMEA individual consulting roles generate more than 1.5 times earnings in revenue a nice labor multiplier! This may be overly optimistic as we assumed a 2,000 hour work year which is probably not the case in most EMEA markets. Table 155: EMEA Targets by Role Role Base (k) Variable OTE (k) Bill Rate Target Util. Rev. Target (k) Yield (k) Yield % Vice President $ % $193 $ % $228 $35 18% Director % % % Delivery Manager % % % Project/Program Mgr % % % Business Consultant % % % Sr. Tech. Consult./Engr % % % Tech. Consultant/Engr % % % Solution Architect % % % Table 156 shows APac produces a much lower consulting yield than the Americas and EMEA. In fact, the APac yields are quite low as base salary and variable is much higher than either the Americas or EMEA but bill rates and utilization targets are comparable. Based on this analysis it appears APac is paying its consultants too much but this may be an anomaly because of currency exchange rates. Table 156: APAC Targets by Role Role Base (k) Variable OTE (k) Bill Rate Target Util. Rev. Target (k) Yield (k) Yield % Vice President $ % $200 $ % $369 $169 85% Director % % % Delivery Manager % % % Project/Program Mgr % % % Business Consultant % % % Sr. Tech. Consult./Engr % % % Tech. Consultant/Engr % % % Solution Architect % % % 2013 Service Performance Insight Sponsored by NetSuite 158

172 Steps Taken to Improve Profitability For the second year in a row SPI Research asked What steps will your organization take to improve profitability? At the highest level most PSOs are focused on improving sales effectiveness, in other words improving the relationship between sales and service delivery, winning more bids and achieving sales targets. As a matter of fact, two of the top four improvement areas are focused on improving sales and marketing effectiveness. The other top two enhancement areas involve increasing utilization and development of better processes, methods and tools to improve Table 157: Steps Taken to Improve Profitability Comparison: quality and on-time project delivery. Key Performance Indicator (KPI) Improve sales effectiveness % Table 157 compares last year's results with this year s. What SPI Improve utilization Improve methods and tools % 4% Research found interesting is that Improve marketing effectiveness % although the order of importance Improve solution portfolio % remained fairly constant, each step increased in importance by three percentage points. Also, improving the solution portfolio showed the highest level of emphasis increase. SPI Research Improve hiring Reduce non-billable time Increases rates % 8% 6% believes this change has to do with an increased emphasis on service productization. The table shows for the second year in a row improving sales effectiveness is the highest improvement priority for PSOs. The survey also shows that every initiative has received a higher priority compared to last year s survey. This change, while subjective, highlights the importance of profitability in professional services. The initiatives to be undertaken in 2013 will focus on estimating, improving client relations and a better understanding of client pain, better business planning and more training. Table 158: Steps Taken to Improve Profitability Organization Type and HQ Region Steps to Improve Profitability ESO PSO Amer. EMEA APac Improve sales effectiveness - higher close ratio, on-target performance, training Improve utilization - increase billable utilization Improve methods and tools for reuse, consistency, quality Improve marketing effectiveness - brand awareness, lead generation, events Service Performance Insight Sponsored by NetSuite 159

173 Steps to Improve Profitability ESO PSO Amer. EMEA APac Improve solution portfolio - service packaging, new offers Improve hiring, ramping, skillbuilding, training Reduce non-billable time - presales, write-offs, admins Rate increases - increase bill rates Table 159 shows the priority of initiatives to improve profitably sorted by the size of the organization. Improving sales and marketing effectiveness is a major improvement focus, regardless of the size of organization. Improving methods and tools for reuse, consistency and quality is the number one improvement focus for organizations from 31 to 100 PS employees (the majority of the benchmark). Table 159: Steps Taken to Improve Profitability Organization Size Steps to Improve Profitability Under Over 700 Improve sales effectiveness - higher close ratio, on-target performance, training Improve utilization - increase billable utilization Improve methods and tools for reuse, consistency, quality Improve marketing effectiveness - brand awareness, lead generation, events Improve solution portfolio - service packaging, new offers Improve hiring, ramping, skill-building, training Reduce non-billable time - presales, write-offs, admins Rate increases - increase bill rates Table 160 shows the priority of steps taken to improve profitability by vertical market. Improving sales and marketing effectiveness is the primary improvement area for independent consultancies while improving methods and tools and the solution portfolio is a primary focus for embedded PSOs Service Performance Insight Sponsored by NetSuite 160

174 Table 160: Steps Taken to Improve Profitability PS Vertical Markets Steps to Improve Profitability Improve sales effectiveness - higher close ratio, ontarget performance, training Improve utilization - increase billable utilization Improve methods and tools for reuse, consistency, quality Improve marketing effectiveness - brand awareness, lead generation, events Improve solution portfolio - service packaging, new offers Improve hiring, ramping, skill-building, training Reduce non-billable time - presales, write-offs, admins Rate increases - increase bill rates Software PS SaaS PS Hdware PS IT Consult Mgmt. Consult Advert. Arch./ Engr. Other PS Annual Revenue per Billable Consultant Annual revenue per billable consultant depicts the service organization s total revenue divided by the number of billable consultants. Alternatively, this metric is derived by multiplying the consultant s average bill rate times billable hours. Revenue per consultant provides an indication of consultant productivity; the likelihood the firm will be profitable is forecast by the labor multiplier. SPI Research considers revenue per billable consultant to be one of the most important KPIs, but it must be viewed in conjunction with labor cost. Revenue per billable consultant should minimally equal one to two times the fully loaded cost of the consultant. Revenue multipliers of three and higher are typical for engineering and architecture firms while a labor multiplier greater than three is standard in management consulting and legal professional services. Table 161 compares the average revenue per billable employee to other key performance indicators for the 207 PSOs that completed the question. While the results show what one might expect, that high revenue per billable employee yields greater financial success, this table highlights just how important this key performance indicator is. It is important to note that this KPI is just for billable employees, showing the success, or lack thereof, in continuing to focus employees on billability. Each one of the key 2013 Service Performance Insight Sponsored by NetSuite 161

175 performance indicators in this table is critical toward building a high-growth professional service organization, and maintaining high levels of productivity and profitability. Table 162 shows the annual revenue per billable consultant ($206k) is 4% higher than in last year's survey ($197k), and 4% higher than the past six-year s survey average ($198k). Table 161: Impact Revenue per Billable Employee Revenue per Billable Employee Survey Percent Pipelineto-Book Ann. Margin Target Achieve. EBITDA Under $100k 6.8% 175% 81.7% 6.7% $100k - $150k 15.5% 168% 83.0% 10.1% $150k - $200k 23.7% 198% 89.2% 16.4% $200k - $250k 29.0% 207% 87.9% 18.9% $250k - $300k 15.0% 202% 87.3% 17.0% Over $300k 10.1% 213% 93.2% 22.2% Total/Average 100.0% 196% 87.5% 16.2% It also shows independent service providers had values 4% lower than embedded services organizations ($203k vs. Table 162: Annual Revenue per Billable Consultant (k) $212k). Organizations from North America had the highest ($214k) annual revenue per billable consultant, while those from EMEA had the lowest ($167k) $190 ESO $212 Americas 2009 $205 PSO $203 EMEA 2010 $184 6-Year Avg. $198 APac 2011 $197 Software PS $210 Hardware PS 2012 $206 SaaS PS $219 IT Consulting $214 $167 $203 $197 $199 Organizations with Under Mgmt. Cons. Advertising employees had the highest $163 $210 $214 $201 $215 ($219k) annual revenue per billable consultant, while those with fewer than 10 employees had the lowest ($163k). SPI Research found $ $219 Over 700 $204 Arch./Engr. $196 Other PS $219 the Other PS market shows the highest annual revenue per billable consultant ($219k), while those in the Architecture/Engineering market had the smallest ($196k). Revenue per Employee Annual revenue per employee is similar to annual revenue per billable consultant; it divides total revenue by the total number of employees so it includes both billable and non-billable employees. Revenue per employee is a powerful indicator of the overall profitability of the firm because if the average cost per employee is known, profit can be estimated representing the difference in cost per 2013 Service Performance Insight Sponsored by NetSuite 162

176 employee and overall revenue per employee. Similar to revenue per consultant, this KPI is highly correlated with profitability, utilization and bill rates. PSOs with a high percentage of non-billable employees have lower annual revenue per employee. Revenue per employee is very important in determining the appropriate size and financial health of the organization. Based on the high cost of talented consulting staff, SPI Research believes this figure should be close to two times the fully loaded cost per person to maintain strong financial viability. If the organization achieves an acceptable revenue yield per billable consultant but is below the benchmark for overall revenue per employee, this is an indication of too much non-billable overhead or lavish discretionary spending. Table 163 compares the average revenue per employee to other key performance indicators for the 196 PSOs answering the question. While the revenue per billable employee has a high level of correlation to revenue per employee, these key performance indicators are not necessarily equal, as revenue per billable employee highlights service execution efficiency, and revenue per employee highlights overall organizational efficiency. Table 163: Impact Annual Revenue per Employee Revenue per Employee Survey Percent Annual Rev. Target Achieved Ann. Margin Target Achieve. EBITDA Under $100k 15.3% 80.2% 79.6% 11.1% $100k - $150k 27.6% 91.1% 85.9% 15.5% $150k - $200k 23.5% 94.3% 86.9% 13.8% $200k - $250k 21.9% 93.3% 91.0% 24.8% $250k - $300k 7.1% 91.4% 91.9% 11.6% Over $300k 4.6% 91.7% 98.9% 17.0% Total/Average 100.0% 90.7% 87.3% 16.3% This table shows that approximately 12% of the organizations averaged greater than $250k per employee. And while they were most successful in meeting margin goals, their revenue and profits were not necessarily as strong as those organizations averaging between $200k and $250k per employee. In some instances PSOs strive for such a low level of non-billable employees that the overall organization suffers financially. A core tenant of the professional services maturity model is to ensure balance across all key elements. Table 164 shows the annual revenue per employee ($168k) is 1% higher than in last year's survey ($167k), and 1% lower than the past six-year s survey average ($170k). It also shows independent service providers had values 1% lower than embedded services organizations ($167k vs. $170k). Organizations from North America had the highest ($176k) annual revenue per employee, while those from EMEA had the lowest ($122k). Organizations with employees had the highest ($190k) annual revenue per employee, while those with between employees had the lowest ($154k). SPI Research found the Other PS market shows the largest annual revenue per employee ($195k), while those in the Architecture/Engineering market had the smallest ($146k) Service Performance Insight Sponsored by NetSuite 163

177 Table 164: Annual Revenue per Employee (k) $189 $177 $156 $167 $168 ESO PSO 6-Year Avg. Software PS SaaS PS $170 $167 $170 $163 $178 Americas EMEA APac Hardware PS IT Consulting $176 $122 $167 $175 $162 Under Mgmt. Cons. Advertising $155 $154 $175 $163 $ Over 700 Arch./Engr. Other PS $170 $190 $189 $146 $195 Revenue per Project Average revenue per project is calculated by dividing the total revenue of the service organization by the total number of projects. This KPI provides insight into the size, number of employees involved, and duration of projects. Many PSOs have lots of small projects along with a few really large projects making resource management a critical component of success. Figure 59: Revenue per Project (k) Figure 59 shows the four-year trend for average revenue per project (this question was not asked in 2008). Almost 50% of the projects averaged between $50k and $250k. While varying greatly over the past four years, this year revenue per project is down, meaning shorter durations and fewer team members per project. This scenario could cause strain on utilization levels, meaning resource management will become more critical than ever. Smaller projects give clients more control to terminate the project if it is not meeting expectations. The trend toward shorter, faster, more iterative projects bodes well for project success and client satisfaction, but adds additional resource scheduling strain to quickly staff projects and dynamically reassign resources Service Performance Insight Sponsored by NetSuite 164

178 Table 165 compares the average revenue per project to other key performance indicators. 206 firms completed this question. The results show as projects become larger in size, PSOs are able to increase billable utilization. The results also show larger projects yield higher revenue per billable employee, and interestingly a higher on-time completion percentage. While the trend is toward less expensive and shorter duration projects, large projects are easier to plan and staff. Table 165: Impact Revenue per Project Comparison Revenue / Project Survey Percent Billable Util. Rev./Bill. Employee On-time Comp. Proj. Cancel. Under $25k 11.2% 56.6% $ % 6.7% $25k - $50k 18.9% 63.9% % 3.5% $50k - $100k 24.3% 73.2% % 3.8% $100k - $250k 23.8% 75.2% % 4.0% $250k - $500k 13.1% 73.7% % 1.6% $500k - $1mm 8.7% 75.6% % 1.3% Total 100.0% 70.3% $ % 3.6% Table 166 shows the average revenue per project ($170k) is 16% lower than in last year's survey ($202k), and 12% lower than the past six-year s survey average ($193k). It also shows independent service providers had values 2% higher than embedded services organizations ($171k vs. $168k). Organizations from North America had the highest ($174k) average revenue per project, while those from APac had the smallest ($135k). Organizations with employees had the highest ($254k) average revenue per project, while those with fewer than 10 employees had the lowest ($69k). SPI Research found the Management Consulting market shows the largest average revenue per project ($199k), while those in the Advertising/Marcom market had the smallest ($100k). Table 166: Revenue per Project (k) N/A $234 $165 $202 $170 ESO PSO 6-Year Avg. Software PS SaaS PS $168 $171 $193 $188 $149 Americas EMEA APac Hardware PS IT Consulting $174 $159 $135 $150 $187 Under Mgmt. Cons. Advertising $69 $123 $203 $199 $ Over 700 Arch./Engr. Other PS $254 $210 $120 $113 $ Service Performance Insight Sponsored by NetSuite 165

179 Project Margin Project margin is the percentage of revenue which remains after paying for the direct costs of delivering a project. Projects can be fixed-price or milestonebased, where the PSO commits to a Not to exceed price, or Time & Expense, where the PSO essentially charges by the hour with additional payment for any materials used during the engagement. The following two sections analyze the margins of both types of engagements. The third section looks at margins for third-party resources, a critical component of delivering professional services. These KPIs are compared in Figure 60. Project margin is critical for overall corporate profitability, as the lower the project margin, less profit is available to pay for overhead, information technology, business development and sales and marketing. Leading professional services organizations strive to achieve project margins over 35% but as the chart shows, less than 20% of organizations consistently achieve project margins greater than 40%. Figure 60: Project Margin Project Margin Fixed Price Projects Table 167 compares the average project margin on fixed price projects to other key performance indicators for the 198 PSOs answering the question. Every organization strives for high project margins, which ultimately help drive organizational profit to higher levels. This table shows organizations with the highest project margins on fixed price projects completed projects on time better than those with low project margins. One would expect Table 167: Impact Project Margin Fixed Price Projects Project Margin Fixed Price Projects Survey Percent On-time Completion Annual Rev. Target Achieve. EBITDA Under 20% 11.9% 75.4% 86.1% 16.0% 20% - 30% 24.7% 77.4% 88.8% 16.2% 30% - 40% 25.8% 79.2% 92.5% 16.6% 40% - 50% 20.6% 80.9% 92.1% 18.6% Over 50% 17.0% 80.5% 93.2% 10.6% Total/Average 100.0% 78.9% 90.9% 15.8% 2013 Service Performance Insight Sponsored by NetSuite 166

180 Projects with low margins have a variety of issues that might include significant scope change, lack of a clear project charter, poor management and poor execution. Organizations with lower project margins also struggled to meet annual revenue targets. Table 168 shows the project margin for fixed price projects (35.9%) is 7% higher than in last year's survey (33.4%), and 5% higher than 34.2% % 37.0% % 36.3% Over % 37.3% Arch./Engr. 38.3% 53.0% Other PS 36.5% the past six-year s survey average (34.3%). It also shows independent service providers had values 3% lower than embedded services organizations (35.5% vs. 36.5%). Organizations from North America had the highest (37.3%) project margin for fixed price projects, while those from EMEA had the lowest (29.2%). Organizations with employees had the highest (38.2%) project margin for fixed price projects, while those with between employees had the lowest (32.6%). SPI Research found the Advertising/Marcom market shows the highest project margin for fixed price projects (53.0%), while those in the SaaS PS market had the lowest (30.5%). Project Margin -- Time & Expense Projects Table 169 compares the average project margin on time and expense projects to other key performance indicators for the 192 PSOs answering the question. SPI Research found similar results when compared to fixed price projects. As expected, most of the key performance indicators improve as project margins rise. However, similar to the table on fixed price projects, those organizations with project margins over 50% surprisingly showed Table 168: Project Margin Fixed Price Projects % 34.2% 33.1% 33.4% 35.9% ESO PSO 6-Year Avg. Software PS SaaS PS 36.5% 35.5% 34.3% 39.2% 30.5% Americas EMEA APac Hardware PS IT Consulting 37.3% 29.2% 35.0% 35.0% 33.7% Under Mgmt. Cons. Advertising Table 169: Impact Project Margin Time & Expense Projects Project Margin Time & Expense Projects Survey Percent Rev./Bill. Employee Ann. Margin Target Achieve. lower profitability levels. This only makes sense if they are not productive enough between projects. EBITDA Under 20% 10.9% $ % 17.2% 20% - 30% 21.4% % 12.5% 30% - 40% 33.9% % 19.0% 40% - 50% 18.2% % 16.7% Over 50% 15.6% % 12.5% Total/Average 100.0% $ % 16.0% 2013 Service Performance Insight Sponsored by NetSuite 167

181 Table 170 shows the project margin for time & expense projects (35.9%) is 7% higher than in last year's survey (33.5%), and 5% higher than the past six-year s survey average (34.2%). It also shows independent service providers had values 1% higher than embedded services organizations (36.0% vs. 35.6%). Organizations from North America had the highest (37.2%) project margin for Time & Expense projects, while those from EMEA had the lowest (29.8%). Table 170: Project Margin Time & Expense Projects % 34.6% 35.2% 33.5% 35.9% ESO PSO 6-Year Avg. Software PS SaaS PS 35.6% 36.0% 34.2% 36.9% 30.5% Americas EMEA APac Hardware PS IT Consulting 37.2% 29.8% 35.0% 38.9% 37.1% Under Mgmt. Cons. Advertising 36.1% 34.0% 37.2% 31.6% 51.7% Over 700 Arch./Engr. Other PS 35.5% 37.1% 35.0% 43.3% 36.0% Organizations with employees had the highest (37.2%) project margin for time & expense projects, while those with between employees had the lowest (34.0%). SPI Research found the Advertising/Marcom market shows the highest project margin for time & expense projects (51.7%), while those in the SaaS PS market had the lowest (30.5%). Project Margin Subcontractors / Offshore The margin derived from subcontractors and offshore resources is an extremely important key performance indicator and should be managed very closely, as it can significantly impact net profit. Table 171: Project Margin Subcontractors / Offshore % 30.2% 29.6% 29.9% 29.7% ESO PSO 6-Year Avg. Software PS SaaS PS 34.8% 27.1% 31.5% 36.1% 40.7% Americas EMEA APac Hardware PS IT Consulting Table 171 shows the average 30.9% 25.0% 25.0% 23.9% 24.2% project margin subs, Under Mgmt. Cons. Advertising offshore (29.7%) is 1% lower 28.4% 32.1% 30.4% 28.5% 43.0% than in last year's survey (29.9%), and 6% lower than the past six-year s survey average (31.5%). It also shows independent service % % Over % Arch./Engr. 27.9% Other PS 28.9% providers had values 22% lower than embedded services organizations (27.1% vs. 34.8%). Organizations 2013 Service Performance Insight Sponsored by NetSuite 168

182 from North America had the highest (30.9%) average margin for subs and offshore, while those from EMEA and APAc had the lowest (25.0%). Organizations with employees had the highest (32.1%) average subcontractor and offshore margin, while those with between employees had the lowest (25.7%). SPI Research found the Advertising/Marcom market shows the highest subcontractor and offshore margin (43.0%), while those in the Hardware & Networking PS market had the lowest (23.9%). Quarterly Revenue Target in Backlog Quarterly revenue target in backlog is the amount of booked revenue in backlog (ready to execute) divided by the forecasted quarterly revenue. It represents fuel in the tank ; it improves an organization s ability to grow and increases the accuracy of financial forecasts. Increasing backlog levels are a clear indication of economic recovery. Backlog is one of the most powerful leading indicators. For smaller firms, keeping a balance between sales and delivery is problematic. Smaller firms also have to contend with more hybrid roles which drive down billable utilization and cause both selling and delivery roles to be sub-optimized. As early as possible, small firms benefit from investments in dedicated sales and delivery personnel to focus on the work at hand while sales sells. The most effective way to grow backlog is to improve sales and marketing effectiveness. Table 172 compares the quarterly revenue target in backlog to other key performance indicators for the 192 PSOs answering the question. As one might expect higher backlog is an indication of future demand and produce better financial metrics. This table shows that once PSOs achieve greater than 50% of their quarterly revenue target in backlog their financial results are very impressive. Table 172: Impact Quarterly Revenue Target in Backlog Quarterly Revenue Target in Backlog Survey Percent Pipeline-to- Book Annual Rev. Target Achieve. EBITDA Under 20% 19.8% 137% 87.8% 9.1% 20% - 40% 25.5% 200% 87.8% 15.1% 40% - 50% 14.1% 221% 91.9% 17.0% 50% - 60% 11.5% 219% 92.5% 22.6% 60% - 70% 15.6% 246% 96.6% 19.6% Over 70% 13.5% 202% 96.9% 18.2% Total/Average 100.0% 200% 91.5% 16.2% Table 173 shows the quarterly revenue target in backlog (43.3%) is 4% lower than in last year's survey (45.1%), and 2% lower than the past six-year s survey average (44.0%). It shows independent service providers had values 12% lower than embedded services organizations (41.2% vs. 47.0%). Organizations from North America had the highest (44.4%) quarterly revenue target in backlog, while those from APac had the lowest (36.1%). Organizations with over 700 employees had the highest (50.0%) quarterly revenue target in backlog, while those with fewer than 10 employees had the lowest (27.7%). SPI Research found the 2013 Service Performance Insight Sponsored by NetSuite 169

183 Hardware & Networking PS market shows the largest quarterly revenue target in backlog (51.7%), while those in the Advertising/Marcom market had the smallest (36.0%). Table 173: Quarterly Revenue Target in Backlog % 42.7% 44.7% 45.1% 43.3% ESO PSO 6-Year Avg. Software PS SaaS PS 47.0% 41.2% 44.0% 44.1% 51.3% Americas EMEA APac Hardware PS IT Consulting 44.4% 39.1% 36.1% 51.7% 40.6% Under Mgmt. Cons. Advertising 27.7% 41.3% 45.7% 38.3% 36.0% Over 700 Arch./Engr. Other PS 47.6% 48.6% 50.0% 49.2% 48.0% Annual Revenue Target Achieved The annual revenue target achieved is the percentage of the annual revenue target that is attained. PSOs create detailed annual business plans; this figure shows how accurate they are in annual revenue planning and execution. If the organization does not meet its annual revenue target it is usually a sure bet that the annual margin or profit target will be missed as well as most organizations plan expenses from their revenue projections. On the other hand if the organization exceeds its revenue projections by a wide margin means quality issues, staff burnout and potentially client satisfaction issues, which could limit long-term growth. There is a direct correlation between achieving revenue targets and revenue growth. PSOs that exceeded their revenue goals also produced higher margins. Of course there is a strong positive correlation between meeting annual revenue targets and profitability, assuming revenue and profit targets are set appropriately. SPI Research also found organizations who achieved their revenue targets had lower attrition rates, reflecting financial stability and the organization s ability to reward performance and reinvest in the business. As one might expect, financial KPIs improve as organizations met their revenue targets. However it is important to note that when PSOs exceed revenue targets by over 10%, profitability begins to suffer, meaning up-front planning is critical to overall financial performance. Table 174 compares the percentage of annual target revenue achieved to other key performance indicators for the 197 PSOs answering the question. For the most part, this table highlights as organizations meet their annual revenue targets, their success across other key performance indicators improves. However, the table also highlights as organizations achieve significantly more revenue than planned, profitability is impacted. Many of these organizations fall into the category of those PSOs that grew so fast, that they lacked the structure and standards to ensure profits and quality were 2013 Service Performance Insight Sponsored by NetSuite 170

184 maintained. It should also be noted that some of these organizations were focused on market share expansion with profitability a secondary issue. Table 174: Impact Percentage of annual target revenue achieved Percentage of annual target revenue achieved Survey Percent On-time Completion Ann. Margin Target Achieve. EBITDA Table 175 shows the percent of annual revenue target achieved (91.2%) is 2% lower than in last year's survey (93.0%), and essentially the same as the past six-year s survey average (91.0%). Under 80% 19.3% 75.7% 77.8% 14.9% 80% - 90% 23.9% 78.8% 83.0% 14.8% 90% - 100% 34.0% 77.7% 90.2% 17.4% 100% - 110% 15.2% 81.0% 95.7% 20.6% Over 110% 7.6% 80.0% 101.0% 7.8% Total/Average 100.0% 78.2% 87.7% 16.0% It also shows independent service providers had values 1% higher than embedded services organizations (91.4% vs. Table 175: Annual Revenue Target Achieved 90.9%). Organizations from APac had the highest (93.9%) percent of annual revenue target achieved, while those from EMEA had the lowest (88.5%). Organizations with % ESO 90.9% Americas 91.6% % PSO 91.4% EMEA 88.5% % 6-Year Avg. 91.0% APac 93.9% % Software PS 92.0% Hardware PS 87.8% % SaaS PS 91.0% IT Consulting 92.2% employees had the highest Under Mgmt. Cons. Advertising (96.4%) percent of annual 88.3% 89.7% 90.3% 88.4% 90.0% revenue target achieved, while those with fewer than 10 employees had the lowest (88.3%). SPI Research found the IT Consulting market % % Over % Arch./Engr. 90.0% Other PS 91.8% shows the highest percent of annual revenue target achieved (92.2%), while those in the Hardware & Networking PS market had the lowest (87.8%). Annual Margin Target Achieved The annual margin target achieved, similar to the annual revenue target achieved, is the percentage of the annual profit target achieved compared to planned annual profit. It is also important from a planning and investment perspective. If the organization does not meet its margin goals it might have to scale back future initiatives, potentially limiting growth Service Performance Insight Sponsored by NetSuite 171

185 Perhaps one of the most important gauges of financial maturity is the ability to consistently achieve annual margin targets. Every year the percentage of firms who are able to achieve their margin targets is fewer than the percentage of firms who are able to achieve their revenue targets. This metric shows how hard it is to keep both revenues and costs in balance. As one might expect, almost all major financial KPIs improve with margin target attainment but interestingly client references and attrition are negatively impacted when margin targets are exceeded. Table 176 compares the percentage of annual target margin achieved to other key performance indicators for the 194 PSOs answering the question. Similar to the question on achieving annual target revenue, this KPI shows organizations improve financially as they meet and exceed margin goals. Over 110% 4.6% % 8.28% Table 177 shows the percent of Total/Average 100.0% $ % 7.24% annual margin target achieved (87.7%) is 2% lower than in last year's survey (89.6%), and 1% higher than the past six-year s survey average (86.8%). It also shows independent service providers had values 2% lower than embedded services organizations (87.2% vs. 88.6%). Organizations from North America had the highest (88.5%) percent of annual margin target achieved, while those from APac had the lowest (84.4%). Organizations with employees had the highest (95.3%) percent of annual margin target achieved, while those with between employees had the lowest (84.2%). SPI Research found the Architecture/Engineering market shows the largest percent of annual margin target achieved (90.8%), while those in the Advertising/Marcom market had the smallest (79.0%). Table 176: Impact Percentage of Annual Target Margin Achieved Percentage of annual target margin achieved Survey Percent Revenue / Billable Employee (k) Annual Rev. Target Achieve. Attrition Under 80% 31.4% $ % 7.86% 80% - 90% 22.2% % 7.44% 90% - 100% 25.8% % 6.02% 100% - 110% 16.0% % 7.32% Table 177: Annual Revenue Margin Target Achieved % 83.7% 85.4% 89.6% 87.7% ESO PSO 6-Year Avg. Software PS SaaS PS 88.6% 87.2% 86.8% 89.7% 87.1% Americas EMEA APac Hardware PS IT Consulting 88.5% 84.7% 84.4% 87.5% 88.0% Under Mgmt. Cons. Advertising 87.7% 84.2% 87.0% 88.6% 79.0% Over 700 Arch./Engr. Other PS 89.4% 95.3% 91.3% 90.8% 84.5% 2013 Service Performance Insight Sponsored by NetSuite 172

186 Revenue Leakage Revenue leakage refers to revenue that has been earned but is lost before it can be realized. Causes of revenue leakage include billing errors, time the firm is unable to bill for product or project delivery issues and incorrect statements of work or misquotes. Revenue leakage is difficult to determine in many cases, making it a silent killer of profitability, as in many instances organizations don t even realize the revenue has not been billed, making it a very difficult figure to calculate. It is also a barometer for overall operational efficiency, as PSOs with higher levels of revenue leakage reported lower utilization, lower EBITDA and poorer on-time project delivery than organizations that better managed contracts, capturing hours and Table 178: Revenue Leakage expenses and billing. Table 178 shows the revenue % % % % % leakage (4.0%) is 2% higher ESO PSO 6-Year Avg. Software PS SaaS PS than in last year's survey 4.8% 3.6% 4.5% 5.3% 4.1% (4.0%), and 9% lower than the past six-year s survey average (4.5%). It shows independent service Americas 4.0% Under 10 EMEA 4.1% APac 4.3% Hardware PS 5.3% Mgmt. Cons. IT Consulting 3.5% Advertising providers had values 26% 3.6% 4.1% 3.8% 2.8% 4.0% lower than embedded Over 700 Arch./Engr. Other PS services organizations (3.6% vs. 4.8%). Organizations from APac had the highest (4.3%) revenue leakage, 5.0% 3.4% 5.3% 4.0% 4.1% while those from North America had the lowest (4.0%). Organizations with over 700 employees had the highest (5.3%) revenue leakage, while those with between employees had the lowest (3.4%). SPI Research found the Software PS market shows the highest revenue leakage (5.3%), while those in the Management Consulting market had the smallest (2.8%). Invoices Redone due to Errors or Client Rejections Some PSOs do not consider invoices that have to be redone due to inaccuracies or client rejections in their DSO calculation they probably should. Still an area for improvement, if expectations are properly set and time and expense accurately reported, ideally no invoice should be rejected. Invoicing problems tend to be systemic and emanate from the inaccurate capture of time and expense information; unclear statements of work; lack of approved change orders; inaccurate billing and exceeding pre-determined spending limits Service Performance Insight Sponsored by NetSuite 173

187 Table 179 shows the percentage of invoices Table 179: Invoices Redone Due to Errors or Client Rejections redone due to error/client rejections (2.2%) is 13% 4.2% 2.8% 1.9% 2.0% 2.2% higher than in last year's ESO PSO 6-Year Avg. Software PS SaaS PS survey (2.0%), and 9% lower than the past six-year s survey average (2.5%). It also shows independent 2.7% Americas 2.2% 2.0% EMEA 2.9% 2.5% APac 1.3% 2.5% Hardware PS 4.3% 2.6% IT Consulting 2.4% service providers had values Under Mgmt. Cons. Advertising 27% lower than embedded 1.1% 2.1% 2.0% 1.6% 1.0% services organizations (2.0% vs. 2.7%). Organizations from EMEA had the highest (2.9%) percentage of invoices redone due to error/client % % Over % Arch./Engr. 1.4% Other PS 1.8% rejections, while those from APac had the lowest (1.3%). Organizations with employees had the highest (3.7%) percentage of invoices redone due to error/client rejections, while those with fewer than 10 employees had the lowest (1.1%). SPI Research found the Hardware & Networking PS market shows the highest percentage of invoices redone due to error/client rejections (4.3%), while those in the Advertising/Marcom market had the smallest (1.0%). Days Sales Outstanding (DSO) Days Sales Outstanding (DSO) is still one of the most important KPIs for financial executives. It reflects the importance of accurately producing invoices and Table 180: Days Sales Outstanding (DSO) efficiently collecting payment. DSO is also a powerful measurement of client satisfaction, strong operating controls and client credit-worthiness ESO PSO Year Avg Software PS SaaS PS 38.8 Table 180 shows the days sales outstanding (DSO) (44.7) is 1% lower than in last year's survey (45.0), and 1% lower than the past six-year s survey average (45.2). It also shows independent service Americas EMEA APac Hardware PS IT Consulting Under Mgmt. Cons. Advertising Over 700 Arch./Engr. Other PS Service Performance Insight Sponsored by NetSuite 174

188 providers had values 3% lower than embedded services organizations (44.1 vs. 45.7). Organizations from North America had the highest (46.0) days sales outstanding (DSO), while those from APac had the lowest (31.7). Organizations with over 700 employees had the highest (61.7) days sales outstanding (DSO), while those with fewer than 10 employees had the lowest (33.1). SPI Research found the Other PS market shows the highest days sales outstanding (DSO) (52.8), while those in the SaaS PS market had the smallest (38.8). Quarterly Non-Billable Expense per Employee Quarterly non-billable expense per employee continues to go down. It is almost one-third of what it was in 2010, as PS executives have begun curtailing much of their discretionary spending. Common causes of high non-billable discretionary spending are high business development and training expenses or employee expense misuse. Table 181 shows the Table 181: Quarterly Non-Billable Expense per Employee quarterly non-billable expense per employee ($1,266) is 22% lower than in last year's survey ($1,613), 2008 $3,071 ESO 2009 $2,931 PSO 2010 $3,098 6-Year Avg $1,613 Software PS 2012 $1,266 SaaS PS and 47% lower than the past $1,418 $1,180 $2,369 $1,695 $977 six-year s survey average Americas EMEA APac Hardware PS IT Consulting ($2,369). It also shows independent service providers had values 17% lower than embedded $1,298 Under 10 $1,240 $1, $1,028 $1, $1,261 $1,063 Mgmt. Cons. $1,344 $1,167 Advertising $750 services organizations Over 700 Arch./Engr. Other PS ($1,180 vs. $1,418). $1,406 $1,736 $1,375 $1,357 $1,150 Organizations from North America had the highest ($1,298) quarterly nonbillable expense per employee, while those from EMEA had the lowest ($1129). Organizations with employees had the highest ($1,736) quarterly non-billable expense per employee, while those with between employees had the lowest ($1,028). SPI Research found the Software PS market shows the largest quarterly non-billable expense per employee ($1,695), while those in the Advertising/Marcom market had the smallest ($750). Percentage of Billable Work Written-Off Inaccurate invoicing, improperly accounting for time, project overruns and other project-related issues force many PSOs to write-off billable work, which naturally hurts profits. The formula is simple. The more work written off, the lower the firm s profit. The differential is significant. Obviously, no PS firm 2013 Service Performance Insight Sponsored by NetSuite 175

189 wants to write-off billable hours as doing so implies clients were not satisfied with some aspect of the work. However, to accomplish this feat requires significant effort to clearly define requirements and deliverables; assure work is scoped correctly; projects are delivered on-time and budget, and invoices are accurate. SPI Research believes this initiative is well worth the effort. Table 182 shows the percentage of billable work written off (3.2%) is 20% higher than in last year's survey (2.7%), and 4% lower than the past six-year s survey average (3.3%). It also shows independent service providers had values 38% lower than embedded services organizations (2.6% vs. 4.2%). Organizations from EMEA had the highest (3.6%) percentage of billable work written off, while those from APac had the lowest (3.0%). Table 182: Percentage of Billable Work Written-Off % 3.5% 3.3% 2.7% 3.2% ESO PSO 6-Year Avg. Software PS SaaS PS 4.2% 2.6% 3.3% 4.1% 4.6% Americas EMEA APac Hardware PS IT Consulting 3.1% 3.6% 3.0% 4.7% 2.6% Under Mgmt. Cons. Advertising 2.6% 4.2% 2.5% 1.5% 4.7% Over 700 Arch./Engr. Other PS 3.5% 3.1% 2.7% 2.2% 3.0% Organizations with employees had the highest (4.2%) percentage of billable work written off, while those with between employees had the lowest (2.5%). SPI Research found the Advertising/Marcom market shows the highest percentage of billable work is written off (4.7%), while those in the Management Consulting market had the smallest (1.5%). Real-Time Visibility Real-time information visibility is one of the most important management control KPIs in this research. SPI Research asked survey respondents whether their executives had real-time visibility into all business activities (sales, service, marketing, finance, etc.). The rewards are significant for organizations who have integrated systems and management dashboards that allow them to pinpoint issues and spot trends in real-time. Executives who have real-time visibility run companies that are much more profitable than those that are not. These results are particularly important during the project delivery phase, as more work is completed on time with higher billable utilization rates and at much higher margins. Extended real-time visibility is only attained through application integration. SPI Research uses the term extended to mean information that flows across departments and functions, so that executives and other employees have a more complete picture of operations, and can make quick, fact-based decisions. Without real-time visibility, decision-making can be subjective and reactive which hurts business 2013 Service Performance Insight Sponsored by NetSuite 176

190 performance. SPI Research believes these results help organizations justify expenditures in IT to provide the systems and tools they need to visualize, monitor and control the business. Table 183: Executive Real-Time Visibility ESO PSO 6-Year Avg. Software PS SaaS PS Table 183 shows executive real-time wide visibility Americas 3.34 EMEA 3.53 APac 3.33 Hardware PS 2.63 IT Consulting 3.53 (3.37) is 5% lower than in last Under Mgmt. Cons. Advertising year's survey (3.56), and 1% higher than the past sixyear s survey average (3.35). It also shows independent service providers had values 9% higher than embedded Over Arch./Engr Other PS 3.38 services organizations (3.47 vs. 3.18). Organizations from EMEA had the highest (3.53) executive realtime wide visibility, while those from APac had the lowest (3.33). Organizations with fewer than 10 employees had the highest (4.04) executive real-time wide visibility, while those with between employees had the lowest (3.06). SPI Research found the IT Consulting market shows the highest executive real-time wide visibility (3.53), while those in the Hardware & Networking PS market had the smallest (2.63). Income Statements In this section SPI Research analyzes income statements by organizational type and size. Inputs were: Revenue Direct gross PS revenue: All PS revenue (not including re-billable travel) Reimbursable travel & expense revenue: (includes re-billable travel and expenses) Indirect gross revenue: (subcontractors, outside resources) Pass-thru revenue: (hardware, software, materials, etc.) Expense Direct Labor expense: (does not include fringe benefits, vacation, sick time or overhead) Fringe benefit expense: as a percentage of Direct Labor (for healthcare, pensions, vacation and sick pay) Subcontractor/outside consultant expense: Billable travel and business expense: 2013 Service Performance Insight Sponsored by NetSuite 177

191 Non-billable travel and business expense: Sales expense: (includes headcount, bonus and non-reimbursable sales expense) Marketing expense: (includes all headcount, bonus and marketing program expense) Education, training and certification expense: PS IT expense: All other G&A: non-billable headcount, general and admin., facilities, headcount & overhead Table 184 shows 2012 was an exceptional year for the 234 participating organizations as average profit for the entire benchmark increased from 6.9% in 2010 to 13.5% in 2011 and now 18.3% in 2012! Both ESOs and PSOS significantly increased their profits - ESOs (13.3% (2010) to 17.0% (2011) to 23% (2012)) outperformed independents (6.0% (2010) to 10.6% (2011) to 15.6% (2012)). Table 184: Income Statement by Organization Type and Embedded Service Type Key performance indicator (KPI) Survey ESO PSO Americas EMEA APAC Surveys REVENUE Direct gross PS revenue 81.3% 82.4% 80.6% 81.5% 83.5% 73.3% Reimbursable Travel & Expense revenue 3.1% 3.7% 2.7% 3.0% 3.4% 2.5% Indirect gross revenue 11.0% 11.2% 10.9% 10.7% 10.3% 18.6% Pass-thru revenue 4.6% 2.7% 5.7% 4.9% 2.8% 5.6% Total Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% EXPENSES Direct Labor 41.6% 40.1% 42.4% 41.1% 42.5% 46.1% Fringe benefit 6.9% 8.4% 6.1% 7.2% 6.9% 3.0% Sub. /outside consultant 9.5% 9.4% 9.5% 9.4% 7.5% 15.5% Billable Travel & Expense 3.2% 3.1% 3.2% 3.2% 2.9% 3.5% Non-billable Travel & Expense 2.0% 2.5% 1.6% 1.7% 3.5% 1.5% Sales 5.2% 3.8% 6.0% 5.2% 5.4% 4.7% Marketing 1.5% 0.8% 1.8% 1.4% 2.0% 1.4% Education, training, certification 1.2% 1.0% 1.3% 1.0% 2.1% 1.3% PS IT 1.7% 1.8% 1.6% 1.6% 1.6% 2.5% All other G&A 9.1% 6.0% 10.9% 9.0% 9.3% 9.8% Total Expenses 81.7% 77.0% 84.4% 80.9% 83.6% 89.3% EBITDA 18.3% 23.0% 15.6% 19.1% 16.4% 10.7% ESOs (embedded service organizations within software and hardware companies) are substantially more profitable than independents. This is not surprising because ESOs do not typically pay for product sales and marketing nor are they charged for corporate overhead. In fact, they may not be charged for corporate IT and may only pay direct IT expense for laptops and smart phones. Overall the PS industry is becoming wildly profitable with net profit for all 216 firms averaging 18.3% up from 13.5% in 2011! Whoever thinks professional services are not profitable does not know the 2013 Service Performance Insight Sponsored by NetSuite 178

192 massive productivity gains the industry has experienced; nor do they know how to effectively sell and market high-value consulting services. By geography, the net profit contribution is similar. The Americas headquartered firms are the most profitable at 19.1%; EMEA achieved 16.4% profit and APac s profit declined from 17.2% in 2011 to 10.7% in As shown in the total compensation analysis APac s base salaries appear to have risen too dramatically which created a drain on profitability. This year the percentage of indirect revenue decreased in EMEA from 17.7% in 2011 to 10.3% a sign of EMEA market contraction as PSOs reduced their dependence on subcontractors. APAC indirect revenue declined slightly from 19.3% in 2011 to 18.6% in Americas indirect revenue declined from 14.1% in 2011 to 10.7% in APAC spends less on sales and marketing (6.1%) than EMEA (7.4%) and the Americas (6.6%). IT spending was 1.6% of total revenue in the Americas and EMEA and 2.5% in APAC. Table 185: Income Statement by Organization Size Key performance indicator (KPI) Under Over 700 Surveys REVENUE Direct gross PS revenue 80.4% 78.8% 81.4% 84.3% 84.9% 74.4% Reimbursable Travel & Expense revenue 3.3% 3.6% 3.6% 1.9% 1.6% 2.8% Indirect gross revenue 13.6% 12.3% 10.4% 7.2% 12.1% 19.2% Pass-thru revenue 2.8% 5.2% 4.5% 6.5% 1.5% 3.6% Total Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% EXPENSES Direct Labor 38.3% 39.7% 44.3% 45.6% 37.8% 27.2% Fringe benefit 3.9% 7.3% 6.7% 7.6% 9.8% 3.9% Sub. /outside consultant 7.1% 9.8% 10.3% 7.7% 10.6% 13.6% Billable Travel & Expense 3.3% 4.4% 3.3% 1.7% 2.0% 3.7% Non-billable Travel & Expense 2.9% 2.0% 1.7% 2.1% 1.4% 2.1% Sales 2.7% 4.9% 5.6% 5.9% 6.6% 3.9% Marketing 1.0% 1.9% 1.6% 1.1% 1.5% 0.6% Education, training, certification 2.0% 1.2% 1.3% 0.7% 1.1% 0.5% PS IT 0.8% 2.1% 1.9% 1.3% 1.6% 0.7% All other G&A 11.7% 7.0% 7.7% 10.4% 10.3% 19.5% Total Expenses 73.7% 80.3% 84.4% 83.9% 82.7% 75.8% EBITDA 26.3% 19.7% 15.6% 16.1% 17.3% 24.2% By organization size, the smallest and largest organizations are the most profitable; they also have the highest percentage of indirect revenue and reported the highest direct labor margins. The smallest firms spend more on non-billable travel than many of the larger firms but less than their larger peers on corporate G&A. Organizations with employees spend the most on sales and marketing (8.1%) Service Performance Insight Sponsored by NetSuite 179

193 By vertical market Table 186 shows hardware PSOs skyrocketed to the highest levels of profitability reporting 30.5% net profit. Year over year SaaS PSOs trumped their Software brethren by improving net margin from 14.2% in 2011 to 25.9% in Software PSOs moved from 11.6% in 2010 to 18.6% net margin in 2011 to 19.4% in Hardware PSOs were the big winners, doubling year over year margin from 11.1% in 2010 to 14.5% in 2011 to 30.5% in This is truly a spectacular gain which was produced by a combination of improved bill rates and higher utilization. Way to go Hardware PSOs! The profitability gains year over year for ESOS are impressive. Table 186: Income Statement by Position by PS Market Key performance indicator (KPI) Softwr. PS SaaS PS Hardwr. PS IT Consult Mgmt. Consult. Advert. Arch./ Engr. Surveys REVENUE Direct gross PS revenue 85.4% 83.5% 58.7% 75.1% 85.7% 84.2% 85.6% 88.1% Reimbursable T&E rev. 3.5% 4.2% 3.5% 2.4% 3.8% 3.3% 1.8% 1.8% Indirect gross revenue 10.7% 10.4% 19.4% 14.9% 9.0% 7.5% 9.3% 2.3% Pass-thru revenue 0.4% 1.9% 18.3% 7.6% 1.5% 5.0% 3.3% 7.8% Total Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% EXPENSES Direct Labor 42.8% 40.7% 28.7% 43.1% 44.4% 31.3% 33.8% 39.4% Fringe benefit 8.7% 9.3% 5.3% 6.2% 5.9% 6.0% 5.5% 5.7% Sub. /outside consultant 10.2% 6.9% 14.5% 11.7% 9.3% 12.6% 9.4% 2.3% Billable T&E 3.3% 2.6% 4.6% 2.2% 4.5% 1.2% 3.3% 4.0% Non-bill. T&E. 2.7% 2.5% 1.9% 1.7% 1.5% 1.8% 3.4% 0.8% Sales 3.3% 3.3% 9.1% 6.5% 5.5% 0.7% 9.6% 4.8% Marketing 0.6% 1.4% 0.3% 1.9% 1.8% 0.3% 2.5% 1.4% Ed., training, certification 1.1% 1.0% 0.5% 1.3% 1.9% 0.2% 1.6% 0.3% PS IT 1.7% 1.8% 2.4% 1.4% 2.0% 0.2% 2.0% 1.7% All other G&A 6.2% 4.7% 2.3% 8.1% 13.2% 33.9% 6.5% 15.8% Total Expenses 80.6% 74.1% 69.5% 84.2% 89.9% 88.2% 77.6% 76.2% EBITDA 19.4% 25.9% 30.5% 15.8% 10.1% 11.8% 22.4% 23.8% Other PS The profit view for our two largest independent segments shows IT consultancies doubling their profits from 4.9% in 2010 to 10.0% in 2011 to 15.8% in Management consultancies went in the opposite direction as net profit for this sector declined from 21.4% in 2010 to 12.7% in 2011 to 10.1% in One possible reason for this decline is more small management consultancies (who are less profitable) are represented in the 2011 and 2012 survey. Independent Marketing and Communication firms; Architects and Engineers and other PS all had a strong year with net profit of 11.8%; 22.4% and 23.8% in 2012 compared to 15.2%; 13.0% and 7.4% respectively in Service Performance Insight Sponsored by NetSuite 180

194 11. THE BEST-OF-THE-BEST PERFORMING PSOS For the past four years, Service Performance Insight has conducted in-depth analysis of the top 5% of PS Maturity benchmark participants to uncover the reasons for their superlative performance. The leading (according to the PS Maturity model) organizations have been named Best-ofthe-Best after a careful audit of their survey responses and an in-depth interview with their lead service executive. In this year's benchmark, SPI Research included the top 13 firms, each scoring 22 or above (out of 25) on the PS Maturity Model. The following sections highlight some of the findings comparing the best preforming organizations to the rest of the survey participants. Demographics Table 187 compares the 13 bestof-the-best performing PSOs to the other 221 in this year's survey. What is immediately noticeable is the size of the best-of-the best organizations is almost double the size of average organizations. The highest performing organizations derive the majority of their revenue from services because 8 of the top 13 are pure play service providers; the other 5 are embedded PS organizations within either Software or SaaS companies. Table 187: Best-of-the-Best Comparison Demographics KPI BoB Rest Organizations Size of PS organization (employees) % Annual company revenue (mm) $72.1 $ % Total professional services revenue (mm) $52.5 $ % Year-over-year change in PS revenue 18.7% 11.1% 68% Year-over-year change in PS headcount 15.4% 8.5% 81% % of employees billable or chargeable 78.8% 74.9% 5% % of PS revenue delivered by 3rd-parties 6.0% 11.4% -48% The highest performing organizations showed significantly higher revenue growth, as well as the percentage of billable employees. They also tend to use a smaller component of subcontractor delivered revenue which means they focus on keeping billability and quality high by using their own employees. Interviews with these firms showed that they have been growing through a combination of acquisitions and organic growth. In fact, the fastest growing firms each reported conducting 4 to 5 PS acquisitions in Now, the challenge in 2013 is assimilating all that growth so many plan to slow the pace of acquisitions in 2013 to concentrate on building infrastructure and improving processes. Regardless of market conditions, leading firms tend to always be in growth mode, and when the time is right, have the ability to grow both organically and through acquisitions Service Performance Insight Sponsored by NetSuite 181

195 A key characteristic of the independent firms is that they are in it to win it in other words the firm was established with the end goal in sight. That end goal is either growth to be the largest and most respected in their space or to be acquired. The executives who lead these firms are seasoned professionals often with a track record of founding and growing multiple prior consulting organizations. They are razor-focused on becoming the best, more reputable supplier in their space meaning this is not a life-style business although they establish a strong culture based on equal parts excellence and personal growth with a measure of fun and team-building thrown in. Pillar Performance Leadership The 2013 benchmark is the first year SPI Research analyzed professional services goals (charter) across four dimensions. Table 188 highlights the best-of-the-best performing organizations were slightly more focused on revenue and margin than their counterparts, with a somewhat lower focus on client satisfaction and market expansion. These results are noteworthy, as the leaders in this year's survey were more focused on profitability as opposed to market expansion. Although they tend to be the fastest growing firms in the benchmark they are not focused on growth for growth sake. Growth is an Table 188: Best-of-the-Best Comparison PS Goals outcome of a strategy to expand into new PS Goal BoB Rest geographical areas or competency areas. Client satisfaction % Interviews with the leading firms showed a very PS revenue % strong emphasis on building and communicating the Service margin % organizational vision and strategy. And while many Market expansion % firms conduct annual business planning, a key difference is that the leaders intently focus on plan execution. In other words they plan their work and then work their plan. Most of the top performing firms hold themselves to quarterly achievement targets; proactively making adjustments to ensure revenue and expense are synchronized. Regardless of the timing, their ability to communicate organizational goals at all levels, keeps employees engaged and motivated. The leading firms are highly specialized. They focus on specific high-growth product segments or vertical industries. Examples include: Salesforce.com or NetSuite specialization; unique focus on the energy and utility market or content and knowledge management software applications. Acquisitions made over the past year highlighted the leaders interest in becoming the market leader in their given areas of focus while accelerating domestic and international expansion. International growth was also a topic many of the leaders discussed. Particularly if they are part of a larger software or SaaS provider, international expansion is an imperative. Many are struggling to bring newly acquired organizations or markets up to the same level of quality as their domestic operations. However they all credit both their ERP and PSA applications as a key success factor for growth and 2013 Service Performance Insight Sponsored by NetSuite 182

196 expansion. In one case, the organization has grown from 100 to 350 consultants in one year without a hiccup in the FinancialForce PSA backbone. In fact, the superiority of their PSA applications has been a major benefit as newly acquired consulting organizations are thrilled with the higher level of support and automation they receive. Leading firms focus intently on building a corporate culture of excellence and teamwork. Most of the Best-of-the-Best invest in an annual all-hands training and team-building event. This investment allows them to clearly communicate the strategy and plan while also providing time for training and collaboration. Several of the firms invite spouses to the annual event to thank them for holding down the fort while their road warrior spouses delivery excellent service. Establishing a culture of excellence is the reason Best-of-the-Best firms are able to attract the top consultants in their field. Table 189 compares the leadership key performance indicators of the Table 189: Best-of-the-Best Comparison Leadership Pillar highest performing organizations KPI BoB Rest with the remainder of the survey. Well understood vision, mission and strategy % While the questions in this table are subjective in nature, the comparison of the scores shows the leading performers are very focused on leadership and Confidence in PS Leadership Ease of getting things done Goals and measurement alignment Employees have confidence in PSO's future % 18% 28% 22% communication. The two highest Effectively communicates w/employees % differential scores are a well Embraces change - nimble and flexible % understood vision, mission and Innovation focused % strategy and goal and measurement alignment. Leading PSOs emphasize the importance of communication within the organization and provide clear expectations for the workforce. Client Relationships Interviews with the best-of-the-best firms revealed they are keenly focused on the top clients in their market-space with an intentional push to expand their footprint and share of wallet with industryleading clients. Several reported they are aggressively trying to grow their deal size by taking on more impactful projects. At the same time they have worked hard to streamline delivery for small projects by offering tele-selling, web-based training and remote service delivery along with annual support contracts. A majority have very high bid-to-win ratios which means much of their work comes from repeat clients and referrals. Their sales and marketing efforts are extremely targeted as opposed to taking a shotgun approach. Many of the top firms have expanded from their original base of technology implementation to offer higher levels of strategy, business and change management to ensure the technologies they implement will be successfully adopted. They tend to be the premium suppliers in their space even though they compete with Accenture, IBM and Deloitte on the high end as well as with local boutiques on the low end. Their reputation for quality allows them to charge premium rates Service Performance Insight Sponsored by NetSuite 183

197 If a new client does not appreciate the level of expertise they bring, they will walk away from the business instead of cutting their rates. One discussion point was on brand building, and its importance for many of these leading providers. They discussed the importance of publishing and the use of social media to further build their brands. They also emphasized quality as a driver, more than profitability or revenue, in terms of helping them establish a sterling reputation. Many of these firms focus intently on aligning sales and service delivery, and have initiated efforts to productize their service portfolio. As stated in earlier chapters in this report, productized services enable the entire organization to more efficiently sell and execute very profitable services at higher levels of quality. A key underpinning of effective sales and delivery alignment are integrated CRM and PSA applications which give them a 360-degree view of clients; ensuring prospects fluidly become projects. They also are focused on providing visibility for both sales and delivery to the pipeline to ensure they are selling what they Table 190: Best-of-the-Best Comparison Client Relationships Pillar can deliver and delivering what KPI BoB Rest was sold. Table 190 compares client relationship information between the best-of-the-best and the other organizations in the survey. Most of the key performance indicators of the leading organizations were at least 10% higher compared to their peers. Some of the more notable differences include leading firms have a much higher percentage of new clients, a much higher win to bid ratio, and greater sales and marketing effectiveness. These organizations also had a much higher percentage of referenceable clients. New clients 33.8% 29.7% 14% Solution importance to client's business % Solution uniqueness % Bid-to-win ratio (per 10 bids) % Deal pipeline relative to qtr. bookings forecast Sales cycle (days: qualified lead to contract signing) 212% 192% 10% % Service sales effectiveness % Service marketing effectiveness % % of "referenceable" clients 83.8% 74.9% 12% Solution development effectiveness % Human Capital Alignment This year's benchmark showed just how critical talent management has become. While no one would argue that employees are the most valuable resource, in years gone by it was somewhat easier to find highly skilled talent. The leading firms use a variety of innovate recruiting strategies from establishing strong partnerships with local universities to attracting more senior consultants from their competitors. Just as in selling, referrals are a key source of new hires because the best and brightest invite their friends to join. Once on board, the best firms offer new hire orientation and on-boarding programs which include shadowing and mentoring. Many of the leaders have excellent knowledge management systems so new hires are given exposure to best practices and guidelines which allow them to quickly 2013 Service Performance Insight Sponsored by NetSuite 184

198 come up to speed. Many of the leading firms have grown through acquisition so establishing a formula for rapidly assimilating acquired organizations includes immediately bringing them onto standardized business applications CRM, PSA and ERP - while providing a transitional year before job levels and titles are standardized. In all cases, the acquiring firm is buying talent so keeping compensation at the same or a higher level is critical along with offering greater career growth potential. Most of the leaders agree on the importance of giving their workers some freedom and flexibility in terms of the type of work they do and the amount of travel they undertake. While no one would say consultants have complete freedom in terms of these two critical areas, most agreed that when possible, allowing their employees some decision-making in terms of their travel schedule was beneficial for all. Several emphasized the importance of promoting their people (and their brand) through thought leadership. Continuing to stay on the leading edge of their area of specialization is very important. So the leaders insist on training and skill growth. Table 191 compares Human Capital Alignment pillar key Table 191: Best-of-the-Best Comparison Human Capital Alignment Pillar performance indicators between KPI BoB Rest the best-of-the-best organizations Recommend company to friends/family % and the remainder. In many respects there are not significant differences between the two except in a few key areas. Because of referrals, the best are Employee annual attrition Management to employee ratio Time to recruit and hire for std. positions Time for a new hire to become productive 6.92% % % 4% 18% -4% able to reduce recruiting time by 8 Guaranteed training per employee per year % days; they also offer a more Well-understood career path for all emp % defined career path but interestingly the number of guaranteed training days is two less than average firms. The most notable difference is billable Frequency of employee satisfaction survey Employee utilization % % -2% 7% utilization, where leading firms average 1,500 billable hours per year compared to the others, which average 1,400 billable hours per year. One-hundred additional billable hours per year definitely improves financial performance. Service Execution Leaders in the Service Execution pillar all discussed the importance of improving and standardizing business processes. A continual focus on best practices, which lead to higher levels of quality and consistency, along with lower costs, help make these organizations perform more efficiently and effectively Service Performance Insight Sponsored by NetSuite 185

199 This pillar was also one where the leaders discussed the importance of tools to improve service delivery. Visibility and scheduling of key resources enable these organizations to achieve higher levels of billable utilization and better on-time project completion. Also, an intense focus on time, schedule and cost allowed these organizations to achieve better financial performance than their peers. In terms of subcontractors to help deliver services, leaders prefer to use partners to support non-core activities, preferring to keep the work done in their specific area of expertise in-house. Table 192 compares service execution key performance Table 192: Best-of-the-Best Comparison Service Execution Pillar indicators between the best-ofthe-best performing organizations and the remainder. Most of these key performance indicators show significant differences between KPI Average project staffing time (days) Average project staff (people) Concurrent projects managed by pm BoB Rest % 16% -29% the top performers and the other Average project duration (months) % organizations in this study. While Projects delivered on-time 83.1% 78.3% 6% on average it took one day longer Projects canceled 1.2% 3.9% 69% to staff projects for the leading firms, they have a larger number of people on projects, and for virtually the same duration, Average project overrun A standardized delivery methodology is used Effectiveness of resource mgmt. process 5.8% 78.8% % 62.6% % 26% 24% meaning the total man months for Effectiveness of estimating processes and the average project are reviews % approximately 15% higher for the Effectiveness of change control processes % leading firms. This metric Effectiveness of project quality processes % highlights the importance of longterm projects, which help maintain Effectiveness of KM processes % high levels of billable utilization, and more certainty in managing cash flow. In terms of project execution, leading firms had more success delivering projects on time, and when they didn t, the overrun was minimal. They also had a much lower project cancellation rate, which certainly improves profitability. SPI Research asked about the effectiveness of estimating, change control, project quality, and knowledge management processes. Each of these key performance indicators is subjective, but shows the leaders pride themselves on their resource management, estimating, change control, project quality processes and knowledge management. They take great pride in service execution excellence. Finance & Operations Interestingly, this year's leaders spoke less about finance and operations than in prior years. While an important aspect of being a leader is demonstrating financial strength, many of the leaders in this year's 2013 Service Performance Insight Sponsored by NetSuite 186

200 survey discussed other areas, such as the importance of communicating strategy, improving client relationships, finding and retaining top qualified employees, and delivering services effectively and at high levels of quality, as the most important areas of focus. Naturally, organizations that are successful in those areas perform quite well financially. However, when discussing finance and operations, a number of executives discussed risk associated with managing their investment in new initiatives, geographic expansion, and mergers and acquisitions. The leaders in this survey continually monitor and measure financial KPIs. Most have the ability to make adjustments as necessary, and don't wait too long before Table 193: Best-of-the-Best Comparison Finance & Operations Pillar implementing changes. The importance of real-time financial information cannot be understated here. KPI Annual revenue per billable consultant (k) Annual revenue per employee (k) BoB $233 $208 Rest $204 $166 14% 26% Executives of leading organizations have a continual pulse on many of the key performance indicators tracked in this survey. And most Average revenue per project (k) Project margin for fixed price projects Project margin for Time & Expense projects Average project margin subs, offshore $ % 46.2% 47.3% $ % 35.1% 28.2% 132% 46% 31% 68% immediately take action when Quarterly revenue target in backlog 67.3% 41.5% 62% undesirable situations occur. Percent of annual revenue target achieved 97.7% 90.8% 8% Table 193 compares Finance & Percent of annual margin target achieved 96.2% 87.1% 10% Operations pillar key performance Revenue leakage 3.3% 4.1% 18% indicators between the best-ofthe-best organizations and the remainder. The results show much better levels of financial performance across virtually every KPI, with the exception of days sales outstanding (DSO) and quarterly non-billable expense. % of inv. redone due to error/client rejections Days sales outstanding (DSO) Quarterly non-billable expense per employee % of billable work is written off Executive real-time wide visibility 1.8% 52.7 $1, % % 44.1 $1, % % -20% -45% 39% 13% These two KPIs are important, but given the success in all other financial metrics, their impact is negligible. Income Statement Table 194 compares the Best-of-the-Best survey participants to the other 95%. As the income statement shows, top performing firms are primarily direct-labor based with a lower component of subcontractor and pass-through revenue. Most of the top performing firms are true consultancies not VARS or resellers whose profitability is comprised by low margin pass through product revenue. Their direct labor margin is 48% compared to less than 40% for average firms. Interestingly, they also at least break-even with re-billable travel and expense whereas average firms are actually losing profit in this area. Leaders spend 4.3% of total revenue on sales and marketing whereas average firms spend 6.9% Service Performance Insight Sponsored by NetSuite 187

201 Almost all of the leaders have invested in powerful cloud-based PSA and CRM applications yet their IT spending is less than half that of average firms. Their G&A costs were actually much higher. The bottom line results show net profit of 26.9% compared to 17.5% for average firms, making them more than 50% more profitable. Best-of-the-Best Conclusions Table 194: Best-of-the-Best Income Statement Comparison REVENUE Best-ofthe-Best All Others Direct gross PS 86.8% 80.8% 7% Reimbursable T&E 4.5% 2.9% 52% Indirect gross 5.9% 11.5% -49% Pass-thru 2.9% 4.8% -40% Total Revenue 100.0% 100.0% As one might expect, the best-of-the-best providers in this year's survey showed superior results in all five service performance pillars. They run lean, EXPENSES Direct Labor Fringe Benefit Subcont./outside consultant 38.3% 5.9% 5.1% 41.9% 7.0% 9.8% -9% -16% -48% specialized but highly effective organizations Billable travel and business 4.2% 3.1% 35% with a focus on excellence. Because of their Travel 1.4% 2.0% -30% reputation for quality, they are able to land Sales 2.9% 5.4% -47% the best clients and recruit the top talent. They place an emphasis on success in all areas of their company, not just in one area, such as sales or operations. They are passionate about being the leaders in their chosen domain. They play to win and know what success looks like. Marketing Education/training PS IT All other G&A Total Expenses 1.4% 0.7% 0.7% 12.6% 73.1% 1.5% 1.2% 1.7% 8.8% 82.5% -6% -41% -57% 43% 11% One leader summed it all up We must EBITDA 26.9% 17.5% 53% maintain thought leadership stay focused on quality be visible, stay focused and the world will come to you. Stay ahead of the curve in whatever space you are in you can see the bullets coming at you two to three years out the trick is to do something about it. Source: Service Performance Insight, February Service Performance Insight Sponsored by NetSuite 188

202 12. THE PS MATURITY MODEL DEVELOPMENT SPI Research has spent six years developing and improving the Professional Services Maturity Model. To date, over 6,000 billable professional services organizations use the model to benchmark and improve organizational performance. With over 1,000 billable services organizations participating over the past six years, SPI Research has further refined the model to improve its accuracy. 234 firms participated in 2012 representing approximately 50,000 consultants worldwide, making this one of the most comprehensive studies of the global PS industry. While a majority of the participating organizations are headquartered in North America, the firms surveyed have employees distributed all over the world, and SPI Research believes it to be an accurate representation of the global PS industry. SPI Research clients continue to use the model to develop, prioritize and implement performance gains. In this chapter SPI Research reveals the analytic basis of the model and gives insight into our survey techniques. For this year s model, SPI Research used the current database of 234 firms surveyed over the last three months of Maturity Levels The maturity rating for each Service Performance Pillar varies based on the performance of the organization. In each of the five performance pillars, every firm operates at one of the five maturity levels (Figure 61): Figure 61: Services Maturity Model Levels Level 1 (Initiated 30% of the respondents): In the initial stages, the focus of the organization is primarily on client acquisition and building a reference base. In order to accomplish this core mission the organization must recruit and hire excellent staff. Therefore, at Maturity Level 1 the priority focus areas are Customer Relationships and Human Capital Management. Level 2 (Piloted 25% of the respondents): The organization is becoming a profit center so focus is still on client relationships but human capital and finance and operations have become more important as the organization moves from a cost center to a profit center. Level 3 (Deployed 25% of the respondents): The organization has now deployed core operating processes in all five service performance pillars. At this point, the organization must 2013 Service Performance Insight Sponsored by NetSuite 189

203 continue to accentuate Human Capital Alignment but the key focus has shifted to Finance and Operations and Service Execution. The organization must start to consider strategy and vision to ensure the focus is on the right clients, markets and competition. At this level, the organization must have deployed standard business processes across all dimensions. Level 4 (Institutionalized 15% of the respondents): At this level, the organization must start optimizing across all dimensions. However, maintaining and growing service revenue and margin is of paramount importance. The organization must start developing a differentiated approach to clients with vertical and horizontal market segments and geographies so a focus on the Client Relationship pillar is critical. Level 5 (Optimized 5% of the respondents): By definition, the organization has achieved black belt status in all functional areas. Processes are fully developed, deployed and institutionalized. The organization is now developing comprehensive measurement, monitoring, and optimization processes across all pillars. While every organization should strive to attain Maturity Level 5 in all five service performance pillars, some areas are more important than others depending on the overall maturity of the company or its market. For instance, early in the life of a professional services organization client relationships are far more important than profitability because without clients there can be no future. Over time, client relationships always remain important, but the organization must equally focus efforts on other Pillars. To be a truly optimized organization, all Pillars must aspire to reach Level 5. Model Improvements Every year SPI Research has made modifications to improve the model based on additional surveys, its own analysis, and feedback received from PSOs that use the model. This year, there are several changes to the model that should improve its accuracy and validity. These changes include: The survey added several questions this year based on comments from past participants. While several were also eliminated, the survey this year had 196 questions, making it the most comprehensive survey to date. Based on client feedback, additional questions regarding business planning, strategy and challenges were added. Detailed bill rate and compensation information was reintroduced for eight (8) different roles. The model used correlated data from six years of benchmarking (versus only this year s 234 participants), to further refine and statistically validate the analysis. Not every question was included in the model. Model Inputs SPI Research conducted correlation analysis between the questions to determine what, if any, impact each of the key performance indicators (KPIs) have on each other. The questions were then rated by 2013 Service Performance Insight Sponsored by NetSuite 190

204 relative importance from 0.0 (unimportant) to 1.0 (very important) for each of the KPIs. Each question was assigned a maximum value based on the answer given and the weight of the question. At the bottom of each of the following tables is the total maximum value possible in each maturity rating. Here is a synopsis of the SPI Research methodology: Factor: Respondent s unique answers to the given question. Some questions are answered within a range to reduce the time to complete the survey. Weight: The relative value of the question as compared to others within the same Pillar. Questions were weighted from 0.0 to 1.0 depending on the overall importance of the question. Questions with a weight of 1.0 are the most important in determining organizational maturity. Pillar Correlation: SPI Research incorporates a correlation coefficient for each question to all pillars, reflecting the inter-relationship that exists between different functions and key performance metrics within PSOs. Correlations range from -1.0 to 1.0 depending on KPI negative or positive impact on performance. Maximum Score: The maximum score for each question is determined by multiplying the normalized value of the question by its weight. Scores are normalized on a scale from and then assigned a Maturity Level based on a score from 1-5. The minimum scores for each Pillar are summarized in Table 195. The maximum value is 100, which means the organization is at the Optimized level. By design, approximately 5% of organizations perform at Level 5 (Optimized) for any given pillar. Moreover, SPI Research assumes 15% perform at Level 4; 25% perform at Level 3; 25% perform at Level 2 and the other 30% perform at Level 1. These scores are slightly different from the 2011 report as SPI Research annually adjusts scores based on economic conditions and the feedback received over the past year. These modifications are important because the economy has gone through volatile swings over the past four years. Table 195: Minimum Normalized Performance Pillar Scores Pillar Level 1 Level 2 Level 3 Level 4 Level 5 Maximum Leadership (LE) Client Relationships (CR) Human Capital (HC) Service Execution (SE) Finance & Operations (FO) Service Performance Insight Sponsored by NetSuite 191

205 Leadership Table 196: Leadership Model Inputs No. Question Weight Client Relation. Human Capital Align. Service Execution Finance & Ops. 45 Well understood vision, mission and strategy Confidence in PS leadership Ease of getting things done Goals and measurement alignment Employees have confidence in PSO's future Effectively communicates w/employees Embraces change - nimble and flexible Innovation focused Client Relationships Table 197: Client Relationships Model Inputs No. Question Weight Leadership Leadership Client Relation. Human Capital Align. Service Execution Finance & Ops. 61 New clients Solution importance to client's business Solution uniqueness (0.040) (0.020) Bid-to-win ratio (per 10 bids) Deal pipeline relative to qtr. bookings forecast Sales cycle 1.00 (0.079) (0.063) (0.082) (0.006) 69 Service sales effectiveness Service marketing effectiveness % of "referenceable" clients Solution development effectiveness Time & Expense % of work sold Fixed time / fixed fee % of work sold 0.20 (0.055) (0.002) (0.025) (0.022) (0.024) 76 Shared risk / performance-based % of work sold (0.025) None of the above % of work sold 0.20 (0.006) (0.010) (0.006) 78 Product sales no. of reps. selling 0.20 (0.017) (0.008) (0.018) (0.042) Product sales ann. PS bookings target Service Performance Insight Sponsored by NetSuite 192

206 No. Question Weight Client Relation. Human Capital Align. Service Execution Finance & Ops. 80 Product sales annual rep. base pay Product sales on-target variable Service sales no. of reps. selling (0.007) Service sales ann. PS bookings target Service sales annual rep. base pay Service sales on-target variable 0.20 (0.018) Service delivery managers no. of reps. selling 0.20 (0.011) Service delivery managers ann. PS bookings target 0.20 (0.042) Service delivery managers annual rep. base pay Service delivery managers on-target variable Firm or practice managers no. of reps. selling Firm or practice managers ann. PS bookings target Firm or practice managers annual rep. base pay Firm or practice managers on-target variable 0.20 (0.020) Human Capital Alignment Table 198: Human Capital Alignment Model Inputs No. Question Weight Leadership Leadership Client Relation. Human Capital Align. Service Execution Finance & Ops. 94 Recommend company to friends/family Employee annual attrition 1.00 (0.177) Management to employee ratio Time to recruit and hire for standard positions 0.80 (0.105) (0.050) (0.109) (0.097) Time for a new hire to become productive 0.80 (0.093) (0.074) (0.152) (0.141) (0.031) 100 Guaranteed training per employee per year (0.006) (0.018) (0.041) 101 Well-understood career path for all emp Employee utilization Vacation / personal / holiday hours 0.50 (0.028) (0.027) (0.049) (0.052) Education / training hours (0.013) (0.022) (0.034) (0.008) 106 Administrative hours 1.00 (0.030) (0.054) (0.113) (0.119) (0.069) 107 Non-billable project hours 1.00 (0.090) (0.061) (0.127) (0.138) (0.064) 108 Billable hours on-site Service Performance Insight Sponsored by NetSuite 193

207 No. Question Weight Leadership Client Relation. Human Capital Align. Service Execution Finance & Ops. 109 Billable hours off-site (0.037) (0.016) (0.018) 114 Senior manager/partner ann. base pay (k) Senior manager/partner bonus/variable % Senior manager/partner hourly bill rate Senior manager/partner target utilization Director ann. base pay (k) Director bonus/variable % Director hourly bill rate Director target utilization Delivery manager ann. base pay (k) Delivery manager bonus/variable % Delivery manager hourly bill rate Delivery manager target utilization Project/program manager ann. base pay (k) Project/program manager bonus/variable % Project/program manager hourly bill rate Project/program manager target utilization Business consultant ann. base pay (k) Business consultant bonus/variable % Business consultant hourly bill rate Business consultant target utilization Senior technical consultant ann. base pay (k) Senior technical consultant bonus/variable % Senior technical consultant hourly bill rate Senior technical consultant target utilization Technical consultant ann. base pay (k) Technical consultant bonus/variable % Technical consultant hourly bill rate Technical consultant target utilization Solution architect ann. base pay (k) Solution architect bonus/variable % Solution architect hourly bill rate Solution architect target utilization Service Performance Insight Sponsored by NetSuite 194

208 Service Execution Table 199: Service Execution Model Inputs No. Question Weight Client Relation. Human Capital Align. Service Execution Finance & Ops. 147 Average project staffing time (days) 0.80 (0.109) (0.002) (0.009) (0.013) 148 Average project staff (people) 1.00 (0.088) (0.017) (0.028) (0.015) 149 Concurrent projects managed by pm (0.019) (0.001) Average project duration (months) 1.00 (0.083) (0.014) (0.020) Projects delivered on-time Projects canceled 1.00 (0.096) (0.056) (0.008) 153 Average project overrun 1.00 (0.165) (0.084) (0.107) (0.141) (0.078) 154 A standardized delivery methodology is used Effectiveness of resource management process Effectiveness of estimating processes and reviews Effectiveness of change control processes Effectiveness of project quality processes Effectiveness of knowledge management processes Finance and Operations Table 200: Finance and Operations Model Inputs No. Question Weight Leadership Leadership Client Relation. Human Capital Align. Service Execution Finance & Ops. 168 Annual revenue per billable consultant (k) Annual revenue per employee (k) Average revenue per project (k) 1.00 (0.064) Project margin for fixed price projects Project margin for Time & Expense projects Average project margin subs, offshore Quarterly revenue target in backlog Percent of annual revenue target achieved Percent of annual margin target achieved Revenue leakage 0.20 (0.131) (0.080) (0.114) (0.163) (0.116) 178 % of inv. redone due to error/client rejections 1.00 (0.143) (0.040) (0.021) (0.016) Service Performance Insight Sponsored by NetSuite 195

209 No. Question Weight Leadership Client Relation. Human Capital Align. Service Execution Finance & Ops. 179 Days sales outstanding (DSO) 0.20 (0.107) Quarterly non-billable expense per employee 0.90 (0.045) (0.014) (0.021) % of billable work is written off 1.00 (0.085) (0.096) (0.099) (0.155) (0.102) 182 Executive real-time wide visibility Earnings before Income Taxes, Depreciation & Amortization (EBITDA) Model Results SPI Research analyzed each of the 234 participating firms to minimize any bias when comparing PSOs of different sizes. Table 201 shows the majority of organizations in each size category have similar averages for each pillar. Table 201: Average Service Maturity by PSO Size (People) Average Maturity Level Organization Size (people) Count LE CR HC SE FO Under Over Total This year's model shows that organizations with between 300 and 700 employees generally displayed the highest average level of maturity, with the exception of the Leadership Pillar, which was slightly lower than organizations with between 100 and 300 employees. These scores are expected, because as organizations grow they tend to implement greater structure and control around their business processes, and are typically more mature. However, the largest firms showed lower than average scores in all five pillars, which could be partially due to the sample size, but also indicates that large, global firms tend to have greater difficulty with structure, standards and communication due to their complexity, diversity and dispersion. The smallest organizations showed the lowest performance levels across the board. While SPI Research expected these results in some pillars, typically smaller organizations have strong leadership performance, given the ease of setting direction and communicating it Service Performance Insight Sponsored by NetSuite 196

210 SPI Research analyzed the maturity of PSOs by type (embedded vs. independent), and the results are summarized in Table 202. The results in this year's survey show while embedded service organizations performed well in how they lead, sell, and manage finances, independents fared better when looking at personnel and how they execute. In general, the survey shows fairly close performance levels between the two. Table 202: Average Service Maturity by PSO Type Average Maturity Level Organization Size (people) Count LE CR HC SE FO Embedded Independent Total Table 203 shows the average level of maturity for each of the performance pillars by select vertical markets. In general, the advertising vertical showed the lowest levels of average maturity. As the table shows, IT consultancies, management consultancies and PS within software companies had fairly high average maturity levels in the various pillars. Table 203: Average Service Maturity by Vertical Market Average Maturity Level Market Count LE CR HC SE FO Advertising (Marcom) Architecture/Engineering IT Consulting Management Consulting PS within HW & Networking PS within SaaS company PS within Software company Other PS Total The Financial Benefits of Moving Up Levels The PS Maturity Model was developed to demonstrate the importance of organizational improvement through the use of benchmarking. SPI Research believes that the importance of the maturity model is to help organizations improve balanced performance across the entire organization, not just in terms of financial performance. However, if the organization is profit-motivated (which most are), increasing maturity levels can show up in significant bottom-line profit. Table 204 highlights some of the key 2013 Service Performance Insight Sponsored by NetSuite 197

211 performance indicators by maturity level, and should alone be an important reason why PS executives should looker deeper into using it to increase profits. Table 204: Key Performance Indicators (KPIs) by Maturity Levels Key performance indicator (KPI) Level 1 Level 2 Level 3 Level 4 Level 5 Year-over-Year change in PS Revenue 9.7% 12.0% 11.8% 12.1% 14.8% Well understood vision, mission and strategy Confidence in PS Leadership Bid-to-Win ratio (per 10 bids) Deal Pipeline Relative to Qtr. Bookings Forecast 152% 193% 203% 230% 219% Employee Annual Attrition 6.14% 8.14% 7.79% 6.74% 7.08% Billable Utilization (based on 2,000 hours) 64.1% 68.0% 71.7% 78.7% 80.0% Projects Delivered On-time 75.0% 77.3% 79.7% 82.3% 83.8% Average Project Overrun 9.9% 9.4% 9.1% 8.5% 7.1% Annual Revenue per Employee (k) $115 $156 $181 $211 $215 Project margin for fixed price projects 26.9% 35.4% 36.3% 41.0% 48.1% Percent of annual revenue target achieved 85.3% 91.0% 91.0% 96.3% 96.5% Percent of annual margin target achieved 79.9% 86.5% 87.3% 94.1% 97.7% EBITDA % 1.3% 9.8% 13.2% 27.1% 37.0% This table shows the benefits of moving up levels. While moving up even one level can be difficult, the model shows the investment is well worth it. The Inter-relationship of Pillars Process improvement can both positively and negatively impact other Key Performance Indicators (KPIs) in the same Service Performance Pillar as well as the other four. Some examples include: Bid-to-Win (Client Relationships) impacts margins and revenue growth (Finance and Operations). Winning bids might improve a PSO s sales effectiveness, but might worsen its Finance and Operations pillar due to lower profit margins if heavy discounting is required to win the bids. Leadership issues (communication, well understood vision, mission and strategy,) can impact the ability to grow (Finance and Operations), staffing levels (Human Capital) and the ability to effectively deliver projects (Service Execution). If a project is delivered late (Service Execution) it can negatively impact relations with the client and future sales effectiveness (Client Relationships), revenue growth and project profitability (Finance and Operations) Service Performance Insight Sponsored by NetSuite 198

212 SPI Research took these interrelationships into account when building the Professional Services Maturity Model (Figure 62). It adds complexity to the model, but SPI Research believes it provides a real-world balanced view that improves PS ability to positively enact change. Figure 62: Key Performance Indicators (KPIs) are Correlated Model Conclusions The model is an aggregate built for PSOs, both embedded and independent, different size organizations, as well as for the different vertical markets surveyed. Therefore, the results will have some type of generic bias. PS executives who wish to have their organization compared directly to their peer group (i.e., IT Consultants with employees) should contact SPI Research. Obviously, as organizations grow in size, they will gain greater efficiency and other advantages, while losing intimacy and ease of communication. And every vertical market has its own constraints, in many cases limiting the ability for high levels of profitability. The key to this maturity model is for executives to hone in on their own vertical market, as well as organization size, to better determine relative performance. Service Performance Insight can further segment this information to help PS executives specifically analyze performance relative to their exact peer group. For more information contact SPI Research Service Performance Insight Sponsored by NetSuite 199

213 13. RECOMMENDATIONS & CONCLUSIONS At the beginning of 2013 the market shows promise. Interest rates remain low, corporate profits look solid, and in the United States the stock market hovers around its pre-crash highs. Thus far, investor sentiment remains high. What this means for the economy, and the professional services market, is that 2013 should be a very positive year. But not everything is rosy in the US, nor abroad. Inaction in creating a US Federal budget, along with raising the debt ceiling limit, could cause organizations worldwide to slow their growth plans. Other governments face an equally (if not more) daunting task. Higher tax rates and medical costs could also inhibit growth, but these issues have been known for well over a year and yet the market continues to rise. SPI Research believes the market is entering a phase where talent will become the most significant inhibitor of growth in the professional services market is just the beginning. The baby boomers are just starting to retire and in the US there are not enough skilled workers to take their place. While this situation bodes well for consultants around the world, it could cause additional economic strains, and is another area where governments must act. The professional services market definitely looks toward the future. In every PS market there are exciting changes, which will impact all aspects of life. For instance, architects and engineers are creating new designs with energy efficiency in mind, and designing and constructing new rural communities that offer the best of urban living (restaurants and shopping), but with lower cost of living and transportation costs. This new demographic as it is called is that of a younger workforce that desires to live, work and play in a small community area, where the main mode of transportation is by foot, and the excessive time and cost of travel is minimized. Unlike previous generations, young workers don t live to work, they work to live. This paradigm is particularly relevant in Professional Services, where some travel is required, so the new workforce will spend more time working from home and then traveling to client sites. Professional Services Lead the Way In technology PS, change is the norm will continue to see the introduction of new cloud and social technologies to improve the communication and collaboration, and performance of the professional services market. Technology professional services have never been a laggard, and never will. Technology PS is the straw that stirs the drink of global growth. Advertising and marketing communication firms now face extreme competition for eye-share, meaning creativity and effectiveness are more important than ever, especially as now there are so many new vehicles for communication. And all change is good for management consultancies, which offer corporations advice on how to ride the waves of change. As technology changes the way individuals live and work, new business models 2013 Service Performance Insight Sponsored by NetSuite 200

214 will be introduced to leverage their introduction. New strategies, policies and procedures will be needed in order for companies to move forward. Management consultancies are well-versed in this area, and are continually looking for new points of leverage for their clients. M&A activity will occur as technology providers (and PS counterparts) look to offer complete solutions, requiring the best and brightest people available. Despite the need for specialization in professional services, consultants will also be asked to understand how their area of expertise plays into a much wider array of products and services. The Cloud and social media will play a role in talent management and helping PSOs perform more efficiently and effectively. These increasingly important technologies will become the foundation for PSOs to find and hire talent, as well as enable them to collaborate and deliver services with higher levels of quality. 15 years ago it appeared as if would keep employees on the grid 24*7. With social media and the cloud, this prediction has become reality. Now is the Time to Act! Five actions to consider moving your PS organization forward: 1. Reevaluate key assets employees, clients, business processes and finances. 2. Move toward service productization. 3. Implement standardized business processes. 4. Implement technologies that enable greater information collection and analysis. 5. Benchmarking is an activity to be conducted continuously, as the insights it delivers enable PSOs to make changes in real time necessary to grow and prosper. SPI Research Will Be There Service Performance Insight is a global research, consulting and training organization dedicated to helping professional service organizations make quantum improvements in productivity and profit. Now with six years of insight garnered from almost 1,100 PS organizations we hope you find the 2013 PS Maturity benchmark to be an invaluable tool to diagnose and improve performance and beyond holds tremendous promise for the Professional Service organizations who focus on providing high value consulting services. Now is the time for evaluation, reflection and action to seize market momentum. This benchmark, like the prior five, is designed to provide PS leaders with the data, analysis and best practices to help them achieve their goals. Superlative execution is based on strategic alignment, sales and marketing effectiveness, talent management, service execution and profit. It provides a foundation for business planning and change management in order to meet the challenges they face in the upcoming year. Service Performance Insight offers a variety of services designed to improve performance of professional services organizations. Contact SPI Research ( for more information Service Performance Insight Sponsored by NetSuite 201

215 14. APPENDICES Appendix A: Acronyms Used in This Report Table 205: Lexicon of Acronyms and Abbreviations Acronym Meaning Acronym Meaning APac Asia-Pacific NPV Net Present Value BI Business Intelligence PA Project Accounting BPM Business Process Management PMI Project Management Institute BPO Business Process Outsourcing PMO Project Management Office CEO Chief Executive Officer PMP Project Management Professional CFO Chief Financial Officer PPM Project Portfolio Management CIO Chief Information Officer PS Professional Services CRM Client Relationship Management PSA Professional Services Automation DSO Days Sales Outstanding PSO Professional Services Organization EMEA Europe, Middle East, Africa ROI Return on Investment ERP Enterprise Resource Planning SaaS Software as a Service ESO Embedded Service Organization SCM Supply Chain Management EVM Earned Value Management SM Social Media HCM Human Capital Management SRP Service Resource Planning HR Human Resources SLA Service Level Agreement ISV Independent Software Vendor SLM Service Lifecycle Management IT Information Technology SVC Service Value Chain KPI Key Performance Indicator VSOE Vendor-Specific Objective Evidence MarCom Marketing Communication / Advertising WBS Work Breakdown Structure 2013 Service Performance Insight Sponsored by NetSuite 202

216 Appendix B: Financial Terminology The following table contains a list of standard key performance measurement terms and definitions used in the benchmark report. The terms and definitions have been compiled from our knowledge and experience and a variety of sources including and Morris, Manning & Martin, LLP. SPI Research is interested in expanding and evolving common key performance measurements, standards and definitions for Professional Service organizations. If you would like to add terms or suggest changes, your comments and suggestions will be appreciated. Table 206: Standard Key Performance Indicator (KPI) Definitions Term Definition 70% utilization ~ 1400 billable hours/year or 350 hours/quarter Allocations Annual Billable Utilization % Attrition % Backlog Bid Win Ratio Billings Bookings Burdened Cost Capitalization Cash Cash flow Cost per person Days Sales Outstanding (DSO) Corporate allocations refer to a company s policy of distributing the cost of shared resources, for example, facilities, healthcare, IT and Sales, General and Administrative (SG&A) costs to specific functions or departments. Annual Billable Hours/(2080 hours vacation and holidays) or Billable days/(260 days 10 vacation 10 holidays ~ 240 days) Attrition % = (Voluntary + involuntary) / Total Beginning Employees Backlog = Bookings - Billings The total value of contract commitments yet to be executed: Total Backlog = Previous fiscal year s contracts not yet billed + Latest fiscal year s sales - Latest fiscal year s revenue The ratio of successful bids (resulting in signed contracts) divided by the total number of bids or proposals issued. Bid Win ratio is a good measure of sales and marketing effectiveness because it demonstrates the organization is pursuing appropriate types of business and is able to beat its competitors. Completed, accepted work that can been billed (T&M, Work in process, Milestone, Deliverables) Signed Contracts (signed PS Agreement + signed SOW + PO) Typically employee burdened costs are the costs per employee for benefits (Healthcare, Pensions, 401K) and an apportioned cost for the employee s facility and IT usage + all discretionary expense. The difference between burdened cost and fully burdened cost is that fully burdened cost includes an allocation for corporate SG&A costs. Expensed computing equipment: expenses (typically less than $100k) vs. capitalized (paid for over a time period). Servers for example, are typically capitalized and depreciated over a 3 year period. Capital expenditures usually refer to expenses a company makes for property, buildings or equipment. Capitalized items typically have a useful life of several years. The value of the most liquid assets within the balance sheet. Cash equivalents are assets such as money market accounts that can be accessed quickly and are not subject to significant change. Does not include the value of accounts receivable. Is the balance of the amounts of cash being received and paid by a business during a defined period of time, sometimes tied to a specific project. The timing of cash flows into and out of projects is used as input to financial models such as internal rate of return, and net present value. Cost Per person = Base + Fringe (~25%) + Bonus A measure of the average number of days that it takes a company to collect revenue after a sale has been made and a bill has been issued. A low DSO means that it takes a company fewer days to collect its accounts receivable. A high DSO means that a company is selling its product to slow-paying customers and it is taking longer to collect money. Days sales outstanding is calculated as: 2013 Service Performance Insight Sponsored by NetSuite 203

217 Term Definition DSO is a key performance measurement of the credit-worthiness of a company s clients; a general indicator for client satisfaction and the effectiveness of the billing and collection process. DSO is reported either quarterly or annually. Depreciation Direct Costs An expense recorded to allocate a tangible asset's cost over its useful life. Because depreciation is a non-cash expense, it increases free cash flow while decreasing reported earnings. Cost incurred as a direct consequence of producing a good or service, as opposed to overhead or indirect costs. Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA EITF FASB Fixed Costs Fringe Benefits Gross Margin Gross Margin Percentage Gross Profit Percentage Income Statement or Profit and Loss Statement EBITDA is essentially net Income with interest, taxes, depreciation, and amortization added back to it. EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. However, this is a non-gaap measure that allows a greater amount of discretion as to what is (and is not) included in the calculation. This also means that companies often change the items included in their EBITDA calculation from one reporting period to the next. An organization formed in 1984 by the Financial Accounting Standards Board (FASB) to provide assistance with timely financial reporting. The EITF holds public meetings in order to identify and resolve accounting issues occurring in the financial world. EITF and EITF are scheduled to go into effect in June, These new rulings provide revenue recognition guidelines around the value of multi-element contracts which include products and services. These new rulings will allow companies to more accurately recognize revenue as services are delivered for complex multi-element contracts. They create a hierarchy of evidence to support revenue recognition including VSOE (Vendor Specific Objective Evidence), TPE (Third Party Evidence) and ESP (Estimated Selling Price). A seven-member independent board consisting of accounting professionals who establish and communicate standards of financial accounting and reporting in the United States. FASB standards, known as generally accepted accounting principles (GAAP), govern the preparation of corporate financial reports and are recognized as authoritative by the Securities and Exchange Commission. Fixed costs are costs that remain the same regardless of changes in the business. For example, facility lease costs remain the same for the life of the lease, regardless of the level of occupancy. If the business is expanding, the percentage of fixed costs may decrease whereas if the business is contracting, the percentage of fixed costs may increase. A collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are met. Fringe benefits commonly include health insurance, group term life coverage, education reimbursement, childcare and assistance reimbursement, cafeteria plans, employee discounts, personal use of a company owned vehicle and other similar benefits. Gross Margin = (Total Services Revenue Expense or Cost to Deliver the Services) The gross profit generated per dollar of services delivered. A company's total sales revenue minus its cost of goods or services sold. This dollar amount represents the gross amount of money the company generated over the cost of producing its goods or services. Gross Margin % = (Total Services Revenue Expense or Cost of Services Delivered) / Total Services Revenue Gross Margin %= Gross Margin / Revenue A company's total sales or service revenue minus cost of goods or services sold, divided by the total sales revenue, expressed as a percentage. Gross profit and gross margin are used interchangeably. A financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time - usually a fiscal quarter or year. The statement of profit and loss follows a general format that begins with an entry for revenue and subtracts from revenue the costs of running the business, including cost of goods sold, operating expenses, tax expense and interest expense. The bottom line is net income (profit) Service Performance Insight Sponsored by NetSuite 204

218 Term Labor Burdened Cost Labor Multiplier Definition Labor Burdened Cost per Productive Hour (or Fully-burdened Cost) (Labor Burdened Cost + gross payroll labor cost) the number of actual work (productive) hours Number of actual productive hours the total additional cost of the employee = Employee labor burden cost per productive hour Labor multiplier = total $ amount of labor hours billed / fully loaded (burdened) labor cost Note: a labor multiplier of 1.0 indicates a breakeven point. Any usability cost-benefit analysis should value people's time based on their fully loaded cost and not simply on their takehome salary. The cost to a company of having a staff member work for an hour is not that person's hourly rate but also includes the cost of benefits, bonuses, vacation time, facility costs (office space, heating and cleaning, computers etc.), and the many other costs associated with having that person employed. The simplest way to derive the average loaded cost of an employee is to add up all corporate or division expenses and divide by the total number of productive hours worked. Commonly, the fully loaded cost of an employee is at least twice his or her salary. This is why consultants charge so much more than regular employees: their billable hours have to cover the many overhead costs that are implicit for full-time employees. In fact, looking at common consulting rates for the kind of staff you are dealing with is a shortcut for estimating the fully loaded value of your employees' time. EXAMPLE: base rate/hour (BR)= dollar per hour pay for the staff category OH multiplier (OHM) = firm's overhead (OH) percentage + 100% Profit multiplier (PM)= profit percentage + 100% "loaded" rate/hour = BR X OHM X PM Lagging Indicators Leading Indicators Loaded Cost per Person Margin % Base rate/hour= $45.00 per hour overhead multiplier = 135% overhead + 100% = 235% = 2.35 Profit multiplier = 10% profit + 100% = 110% = 1.1 "loaded" rate/hour = $45.00 X 2.35 X 1.1 Investopedia explains LAGGING INDICATORS Lagging indicators confirm long-term trends, but they do not predict them. Some examples are unemployment, corporate profits and labor cost per unit of output. Interest rates are another good lagging indicator as interest rates change after severe market changes. In services, billable utilization, revenue per person and net profits are lagging indicators because they reflect changes in market conditions after the change has already occurred. A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy, but are not always accurate. In services, leading indicators are backlog and sales pipeline because they are predictors of future revenue. What Does the COMPOSITE INDEX OF LEADING INDICATORS Mean? An index published monthly by the Conference Board used to predict the direction of the economy's movements in the months to come. The index is made up of 10 economic components, whose changes tend to precede changes in the overall economy. These 10 components include: 1. The average weekly hours worked by manufacturing workers 2. The average number of initial applications for unemployment insurance 3. The amount of manufacturers' new orders for consumer goods and materials 4. The speed of delivery of new merchandise to vendors from suppliers 5. The amount of new orders for capital goods unrelated to defense 6. The amount of new building permits for residential buildings 7. The S&P 500 stock index 8. The inflation-adjusted monetary supply (M2) 9. The spread between long and short interest rates 10.Consumer sentiment Base + Fringe Benefits (~25%) + Target Variable Compensation + % Corporate and Practice Overhead allocation per person. Non-billable time (bench time) must be added to calculate the actual cost per hour of productive time. Margin % = (Revenue - Cost)/Revenue 2013 Service Performance Insight Sponsored by NetSuite 205

219 Term Markup % Measurement Utilization % Measurement Utilization Net Income Non-billable Travel On-Target Earnings (OTE) Operating Income Operating Margin Operating Profit / Margin Overhead Costs Profit Margin = Return on Sales (ROS) Project Margin $ Revenue Estimate Revenue Revenue per person Recurring Revenue Definition Markup % = (Revenue-Cost)/Cost For example, 60% markup = 40% margin Billable Hours + Approved non-billable hours (pre-sales, Customer Satisfaction, Special Projects)/(2080 hours or 260 days - vacation and holidays) Measurement Utilization = (Billable Hours + Approved non-billable hours)/ (2080 hours Vacations Holidays) Approved non-billable hours are usually associated with presales, overtime not billed to clients, customer satisfaction resolution time, internal projects or skills training. A company's total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. This number is found on a company's income statement and is an important measure of how profitable the company is over a period of time. The measure is also used to calculate earnings per share. Often referred to as "the bottom line" since net income is listed at the bottom of the income statement. Net income is calculated by starting with a company's total revenue. From this, the cost of sales, along with any other expenses that the company incurred during the period, is removed to reach earnings before tax. Tax is deducted from this amount to reach the net income number. Non-billable travel expense represents travel expense which cannot be re-billed to a client. Typically consulting non-billable travel is associated with business development or training activities. The typical pay structure for a salesperson is composed of a fairly low basic salary with an additional amount of commission. The package will usually be called OTE or on-target earnings, meaning that if a salesperson hits the specified target, they will be guaranteed that amount of money. A higher commission can be paid if the person performs beyond this target. Operating income would not include items such as investments in other firms, taxes or interest. In addition, nonrecurring items such as cash paid for a lawsuit settlement are often not included. Operating income is required to calculate operating margin, which describes a company's operating efficiency. Operating Income = Gross Income Operating Expenses Depreciation Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of service delivery such as wages and benefits. Operating Margin = Operating Income / Net Sales Operating Profit = (Total Service Revenue Total cost of service delivery Total Operating Expense)/ Total Service Revenue The amount of profit realized from a business's own operations. A ratio used to measure a company's pricing strategy and operating efficiency. Usually, fixed costs - a business cost that is not directly accountable to a particular function or product; a fixed cost such as facilities. Costs incurred that cannot be attributed to the production of any particular unit of output. The general, fixed cost of running a business such as rent, lighting, and heating expenses, which cannot be charged or attributed to a specific product or part of the work operation. The percentage of every dollar of sales that makes it to the bottom line. Profit Margin is Net Income after Tax divided by Net Sales. A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings. Project Revenue Direct Cost of project service delivery Revenue Estimate = Billable headcount X Billable hours X Average Bill rate X Average Utilization Rate Revenue = Billings that can be recognized within the time period + Re-billable travel and expense The amount of money that a company actually bills during a specific period, including sales discounts. Actual Bill Rate * Billable Hours + re-billable travel and expense The best revenues are those that continue year in and year out, they are often referred to as recurring revenue. Examples of recurring revenues are multi-year maintenance contracts and multi-year Software as Service (SaaS) subscription revenues. Temporary revenue increases, such as those that might result from a short-term promotion, are less 2013 Service Performance Insight Sponsored by NetSuite 206

220 Term Run Rate Definition valuable and garner a lower price-to-earnings multiple for a company. How the financial performance of a company would look if you were to extrapolate current results out over a specified period of time. (Selected excerpts from the article) Any business generating revenue from licensing, selling, leasing or otherwise marketing software will experience serious problems from failure to recognize the significance of the New SOP. This section summarizes the importance of revenue recognition. Revenue recognition is a fundamental component of generally accepted accounting principles (GAAP) and is a key consideration in maintaining the integrity of financial statements. The central issue is one of timing and amount : When should revenue generated in a software transaction be recognized in a software company s income statement, and in what amounts? In most cases, companies strive to recognize revenue as quickly as possible, thereby improving their financial performance. Even private software companies generally try to improve financial performance by accelerating revenues whenever possible. Before issuance of SOP 91-1 in December 1991, there was no specific guidance for recognizing revenue in software transactions. The ensuing lack of uniformity among software companies in their revenue recognition policies led to the inability of third parties to make meaningful comparisons among companies. Similarly, the New SOP is designed to provide even greater uniformity by addressing inconsistent applications of SOP 91-1 in software transactions. Revenue Recognition Subcontractor Margin Variable Costs VSOE Basic Revenue Recognition Criteria. SOP 91-1 and the New SOP each define basic criteria that must be satisfied before revenue can be recognized. Under the New SOP if an arrangement to deliver software does not require significant production, modification, or customization of the software, then the New SOP specifies four criteria which must be met prior to recognizing revenue from a single-element arrangement or for individual elements in a multiple-element arrangement.1 These four criteria are: 1. persuasive evidence of an arrangement exists; 2. delivery has occurred; 3. the software vendor s fee is fixed or determinable; and 4. Collectability is probable. Although these basic revenue recognition criteria are substantially the same as those contained in SOP 91-1, the New SOP takes a fundamentally different approach in certain areas such as: (1) providing detailed guidelines for recognition of revenue in "multiple-element arrangements," and (2) eliminating the concept of remaining "significant vendor obligations" under SOP Changing Sales Behavior. A software company s sales force will be critical to implementation of the New SOP. As a general rule, software companies tend to bundle software and services together in order to offer a turn-key software solution to the buyer. Additionally, the description of and the fees for the software and services being offered are typically combined. This bundling makes the sale easier for a sales representative because it makes the offering easier for the buyer to understand and it prevents the buyer from removing elements of the transaction that the buyer might not otherwise pay for if they knew the individual price for the element. However, the result of this bundling could be a deferral of revenue recognition. Therefore, many software companies will have to change the manner in which their sales personnel work in order to achieve their revenue recognition goals. Sales Force Compensation. From an internal perspective, many companies base compensation and bonus arrangements, at least in part, on recognized revenue within a specified time period. If revenue recognition policies are changed, bonus plans may be affected. With the adoption of the New SOP, benefit plans will require further examination to verify the suitability of these plans in achieving a company's objectives and motivating employees to complete all the requirements for revenue recognition as a basis for earning a bonus. Subcontractor Margin = (Total subcontractor generated revenue total subcontractor cost)/ Total subcontractor generated revenue Variable costs are costs that vary based upon usage. Training, travel and business expenses are variable, whereas costs for facilities are treated as a fixed cost because they do not vary based on use. Commonly variable costs may also be termed discretionary because management can make decisions to make or not make the expenditure. VSOE = Vendor-Specific Objective Evidence (accounting/contracting) VSOE is the price established by management having relevant authority. Once a firm has established the VSOE price and officially acknowledged it as such, that price must not be expected to change prior to the introduction of that element into the marketplace. The introduction of that deliverable into the marketplace on a separate basis ought to be within a very 2013 Service Performance Insight Sponsored by NetSuite 207

221 Term Definition short period of time after the VSOE price is set. Accounting firms have differing opinions on how long is too long, so make certain you are aware of your accounting firm s guidelines. Vendor Specific Objective Evidence (VSOE) is an agreed-upon value for goods and services. For service organizations, VSOE is usually established by the company s auditors based on historical bill rates or actual realized revenues from service packages. When VSOE service prices are set the effect can be very painful because the firm s auditors review past engagements to set current VSOE rates. This means if a firm s services were significantly discounted in the past the service organization will be penalized with Past sins when auditors calculate current VSOE rates. With software companies the accepted practice is to amortize each sale across the contract's lifetime and to apply all labor hours whether billable or not. Source: Investopedia, Wikipedia, Morris, Manning & Martin, LLP, and Service Performance Insight, February Service Performance Insight Sponsored by NetSuite 208

222 Professional Services Performance Acceleration Program Objective Business Planning for Breakthrough Results in Just Six Weeks Service Performance Insight s Professional Service Maturity acceleration program will help your company align around a common view of the highest impact areas for the PS business by helping your executive team prioritize and focus on the most critical improvements to drive immediate and sustained productivity and profit growth. The PS Maturity Model is a strategic planning and management framework that is used by over 6,000 service and project-oriented organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communication, and monitor service organization performance against key performance measurements and benchmarks. SPI s outside-in industry-standard assessment helps organizations create a strategic plan to lay the foundation for sustained productivity and profit improvement in the years to come. SPI Research brings more than 100 years of combined experience transforming service, sales and marketing organizations we are confident we can help you accelerate your organization s business success. Our senior consultants will work with your leadership team to provide a quantitative and qualitative assessment of overall service organizational maturity. The performance acceleration program will include recommendations for improvement and an executive workshop to identify your company s highest impact initiatives and establish leadership alignment around how to get started implementing them. SPI uses a proven approach to rapidly and effectively identify significant areas of improvement and help clients prioritize action programs. The result? Alignment and focus on initiatives that improve performance Service Performance Insight Sponsored by NetSuite 209

223 Goals and Benefits of the Performance Acceleration Program Given the importance of developing a high quality growing, profitable service business, your company needs an unbiased industry-recognized Maturity Assessment to give an accurate view of your company s service strengths and weaknesses. Provide a comprehensive assessment of your company s service business, using the objective PS Maturity Model and 2012 benchmark to diagnose areas of strength and weakness Conduct an employee engagement survey to gauge the level of employee engagement and satisfaction while uncovering Talent Management issues and improvement areas Use insights gleaned from confidential leadership and stakeholder interviews to surface hidden issues and disconnects to facilitate alignment around a shared view of PS priorities Provide recommendations for priority improvement initiatives, based on experienced third party insight and analysis o o Quick-Start initiatives to begin immediately Create a short-list of strategic priorities Ensure executive support and alignment around the PS charter and strategic business plan Facilitate executive alignment and commitment to recommended improvements Contact info@spiresearch.com for more information 2013 Service Performance Insight Sponsored by NetSuite 210

224 About Service Performance Insight Jeanne Urich, Service Performance Insight managing director, is a management consultant specializing in improvement and transformation for project- and service-oriented organizations. She has been a corporate officer and leader of the worldwide service organizations of Vignette, Blue Martini and Clarify, responsible for leading the growth of their professional services, education, account management and alliances organizations. She is a worldrenowned thought-leader, speaker and author on all aspects of Professional Services. Contact Urich at jeanne.urich@spiresearch.com or R. David Hofferberth, P.E., Service Performance Insight managing director and licensed professional engineer has served as an industry analyst, market consultant and product director. He is focused on the services economy, especially productivity and technologies that help organizations perform at their highest capacity. His background includes application and analytical tool development to support business decision-making processes. He has more than 30 years of domestic and international experience with firms including the Aberdeen Group and Oracle. Contact Hofferberth at david.hofferberth@spiresearch.com or Carey Bettencourt, Service Performance Insight managing director, is a management consultant who specializes in improvement and transformation for project-driven professional services organizations. She is an experienced change management leader, expert in helping clients develop highperforming teams that deliver increased utilization, profit and customer satisfaction. She has more than 20 years of domestic and international experience in leadership roles with software firms including Oracle, ChannelPoint and J.D. Edwards. Contact Bettencourt at carey.bettencourt@spiresearch.com or Service Performance Insight (SPI Research) is a global research, consulting and training organization dedicated to helping professional service organizations (PSOs) make quantum improvements in productivity and profit. In 2007, SPI developed the PS Maturity Model as a strategic planning and management framework. It is now the industry-leading performance improvement tool used by over 6,000 service and projectoriented organizations to chart their course to service excellence. SPI provides a unique depth of operating experience combined with unsurpassed analytic capability. We not only diagnose areas for improvement but also provide the business value of change. We then work collaboratively with our clients to create new management processes to transform and ignite performance. Visit for more information on Service Performance Insight, LLC Service Performance Insight 211