IT Services Providers Can't Overlook Performance Metrics

Transcription

1 Research Brief IT Services Providers Can't Overlook Performance Metrics Abstract: Some success factors apply across the IT services industry, while others are critical only for certain types of vendors. Vendors must understand their relative value to correct any weaknesses. By Lewis Clark and Martin Lee Recommendations IT service providers should select a critical metric for their business, such as utilization rate, and consider related factors that affect it, such as demand forecasting and resourcing. Client-satisfaction metrics are so crucial that all employees even people who are not in customer-facing roles should have access to them. To ensure robust results and minimize bias, an independent third party should gather and validate these metrics. Metrics for service-level performance vary widely across types of firms or service lines and often need to be tailored for individual client requirements. Publication Date:November 26, 2002

2 2 IT Services Providers Can't Overlook Performance Metrics Introduction IT services vendors are bringing increasing rigor to bear on assessment of their financial and operational performance. In this Perspective, Gartner Dataquest answers seven fundamental questions about using metrics for performance assessment and benchmarking. Seven Key Business Issues About Performance Metrics How Can an IT Services Company Use Market Metrics and Benchmarking Data to Bolster Performance? IT services organizations need a core set of metrics they can apply consistently to track changes over time. They should be geared to the most critical numbers, such as utilization rate or service-level performance. However, the optimal value or target range may change depending on corporate strategies, client needs or market conditions. A company striving to be the low-cost provider will benchmark differently than one that makes customer intimacy its foremost goal. When the machine is not firing on all cylinders, people throughout the services organization are usually aware of the trouble spot. Whether the problem is in service delivery, marketing, HR or some other function, management usually needs to address that specific issue before attempting improvements in other areas of the business. To instill a sense of urgency, it helps to show how competitors are outperforming in similar functions. Benchmark references can be drawn not only from the known peer group, but also from companies in nearby parts of the market that could be future competitors. For certain common functions, such as payroll or billing, benchmark references can be drawn from any company with that function. What Are the Industry Benchmarks and Major Trends in Operational Performance for IT Service Organizations? In early 2002, based on a vendor survey and supporting data, metrics related to revenue inputs were generally weak. Although average revenue per account was steady overall, this metric was artificially boosted by the disappearance of many smaller clients. Vendors are increasing revenue from new service lines, but possibly not enough to offset normal portfolio attrition together with pricing pressures. Rates for contract renewal and repeat business are lower than in recent years. These survey findings have been confirmed by generally weak vendor revenue results reported for the third quarter. Performance is generally better on cost factors, with many vendors reporting significant year-over-year declines in the cost of service delivery. Utilization rates, though historically low, are showing signs of stabilization for larger vendors and improvement for smaller ones.

3 3 For operational metrics, many companies have room for improvement on performance related to service levels as well as time and budget requirements. Though reported client satisfaction rates are high, vendors often rely on internal estimates for this crucial measure. Ideally, an independent third party should gather and validate client satisfaction metrics to ensure robust results and minimize bias What Are the Most Important Market Metrics and Benchmarks for IT Services Companies or Organizations? Key metrics fall into three categories, with some overlap and interaction among them. Broadly speaking, these are inflows, outflows and effectiveness measures. Financial metrics (revenue inflows and margins) Cost factors (outflows) Operational metrics (organizational effectiveness) While some metrics apply only to one of the three general categories, others may influence all three. Utilization rates, for example, are a key cost factor for most IT services organizations. They also relate to operational effectiveness, specifically the ability to minimize bench time. The amount of time that valuable resources spend on client work contributes to the top line as well. Which Success Factors Are Common Across IT Services, and Which Are Specific to Different Types of Vendors? Different functional areas of the business have their own sets of attributes and related metrics. These may include the executive team, financial or back-office operations, marketing and sales, service delivery and resource management. Not all of these dimensions are equally amenable to measurement. In the management area especially, attributes, such as vision or corporate culture, need to be assessed subjectively. In assessing the organization as a whole, the functional areas will carry different weightings depending on the type of business. As an example, the services arm of a technology product vendor may have a relatively small marketing budget because the main marketing function is carried by the product business. In this case, a metric, such as the percentage of unaided recognition of IT services brand, may be less important than in other firms. A different example is a staff augmentation firm, in which resource management is paramount. Any metric related to the skills base (such as technical certifications), HR performance and employee satisfaction would be heavily weighted. What Competencies in Performance Assessment and Change Management Should an IT Services Organization Apply Internally? Two metrics that vendors consider most important are profitability and the utilization rate. Profitability can be measured in terms of gross

4 4 IT Services Providers Can't Overlook Performance Metrics margins, net margins or other variations depending on the type of business. Utilization generally translates into the percentage of hours billable, though for some service lines it could be capacity utilization of the infrastructure used to deliver services. Client satisfaction and retention also made the top-three list of internal benchmarks. Which User Criteria Bear on the Operational Performance of IT Services Organizations? According to Gartner Dataquest's Customer Buying Trends survey, the top three factors used to select outside IT service providers are technical expertise, application expertise and cost. However, the survey showed a shortfall between user satisfaction with these three factors and user ratings of their importance. From the vendor standpoint, client satisfaction heads the list of user-related measures. Many IT service providers associate this metric with referrals or "referenceability." A close second is performance to service-level agreements (SLAs), along with quality assurance reviews for projects in which an SLA would not apply. Some IT service providers emphasize metrics relating to business value, such as return on investment (ROI) of a project, improved efficiency or cost reduction from process improvement. How Do Financial Performance Measures Apply to the Operation of an IT Services Business? IT services organizations should consider financial metrics in relation to their client base, services mix, follow-on business and head count. The numbers that appear in financial reports reflect not only revenue performance, but also cost of service and operational effectiveness. Some key measures, such as utilization rates, are essential to understanding all three aspects. Although service margins are crucial to the business, metrics vary widely. Most IT service providers express profitability in terms of gross margin, though a few use related metrics such as contribution margin, project profitability, net operating profit, earnings per share (EPS) growth and even earnings before interest, taxes, depreciation and amortization (EBITDA). Gartner Dataquest Perspective: Performance Measurement Is a Core Discipline Even when an IT service provider has strong technical competencies and a loyal client base, it can still trip up on performance issues. Vendors need to understand their relative performance in order to correct any weaknesses and overtake competitors. Although most vendors recognize the importance of metrics and benchmarking, the required effort rarely gets sufficient attention and budget. Even if management intends to apply metrics rigorously, it may

5 5 encounter difficulty in collecting the data internally. With well-honed practices of gathering metrics and applying them, performance measurement and assessment can be a consistent discipline year in and year out.

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