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Professional Services Industry Benchmark ReportPSVillage 2014

PSVillage 2014 Professional Services Industry Benchmark Report

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PSVillage 2014 Professional Services Industry Benchmark ReportPublished by PSVillage, Inc. 594 Park Court, Santa Clara CACopyright © 2014 PSVillage, Inc.

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, contact PSVillage at [email protected]

Design by Hinge.Visit our website at www.hingemarketing.com


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Table of Contents

56889991114151718182021232327282830303233353739

AboutReport Summary Key Findings

GrowthSalary, Bonus and Utilization DataExecutive Salary MovementAverage Salary Movement PSA AdoptionPSA vs. Non-PSA DifferencesUtilizationTarget Billable PercentagePS Operating MarginSelling ExpensePS Marketing ExpendituresAverage Total Costs

Large Versus Small Professional Services Organizations Percentage of Indirect Resources Average Target of PS Billable Percentage SG&A Overhead as Percent of Revenue Delivery Model Program Management Office Knowledgebase Target R&D Expense PS Average Cost of Services Sold

Survey BackgroundThe Online Benchmark ToolOther Reports From PSVillage


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Sponsored by:

Mounir Hilal Vice President, Customer Success & Global Services Upland Software

Dear Services Colleague:

As a longstanding PSVillage sponsor, we are very proud to, for the second time, sponsor the second PSVil-lage Professional Services Industry Benchmark study. We are also grateful to PSVillage for publishing such an insightful tool for professional services organizations (PSOs). The data on current and future trends within this report is invaluable for helping with informed decision-making.

While this report is beneficial for PSOs, it’s also very valuable to us, as a PSA solution provider – allowing us to understand the issues and trends that our audience is currently dealing with and helps us with our future prod-uct release planning.

In addition, many of the issues uncovered within this report can be addressed with the use of an advanced PSA solution. Tenrox offers several features and in-depth functionality to truly address these issues as well as the needs of today’s globally dispersed project workforce.

Tenrox is the only true cloud, workflow-driven project and service delivery solution available. Our newest release, Tenrox 2014 R1 drives user adoption and increased productivity. It facilitates the role of professional services executives by providing more visibility and productivity tools, such as powerful resource management capabilities, a new client purchase order tracking system, and convenient, user-friendly mobile time and expense applications.

Furthermore, Tenrox offers a full spectrum of features to automate all processes from bid to billing and offers certified integrations to all major CRM and accounting systems. Our best of breed solution is built on the Mic-rosoft platform and its intuitive user interface and easy-to-configure options simplify deployment and accelerate user adoption.

Organizations worldwide, including Autodesk, TriplePoint Technology, General Electric, SAS and JDA Software, trust Tenrox to meet their requirements for Professional Services Automation (PSA).

We look forward to personally meeting many of you at the next PSVillage Executive Breakfast to discuss the lat-est hot topics and issues faced by today’s professional services executives. Please visit http://www.tenrox.com for information on our PSA solution and http://www.uplandsoftware.com to learn more about our company and family of products for Enterprise Work Management.

Ludwig MelikPresidentUpland Software


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PSVillage is a leading source of Technology Professional Services / Consulting advocacy; information and knowledge sharing; peer-to-peer networking; education; research and more. With a global membership of more than 4,000 professional services leaders—representing over 1,000 companies—PSVillage is the largest, longest- established, and most influential community of Technology Professional Services practitioners in the world. To learn more, visit us at www.psvillage.com. To keep atop the professional services strategies for your firm, follow us on social media: Twitter: @PSVillageBlog: www.psvillage.com/psvblogFacebook: PSVillageNetworkLinkedIn: PSVillageLinkedIn Group: PSVillage Groups

www.psvillage.com

Hinge is a leading branding and marketing firm that specializes in professional services. We conduct regular research into the industries that we serve – with a particular focus on high growth firms – so that we can offer professional services firms the insights and edge they need to break out in a competitive and changing marketplace. With a comprehensive suite of online and offline branding and marketing services, we can help your firm build a competitive advantage. To learn more, visit us at www.hingemarketing.com.

To keep atop the latest branding and marketing strategies for your professional services firm, follow us on social media and subscribe to our blog.

Twitter: @HingeMarketingBlog: www.hingemarketing.com/blogFacebook: HingeMarketingLinkedIn: www.linkedin.com/company/hingeYouTube: HingeMarketing

www.hingemarketing.com

About PSVillage:

About Hinge:


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Thanks for purchasing the PSVillage Professional Services Benchmark report for 2013 – 2014. This report (and its companion online benchmark tool) is the report for leaders of professional services (PS) organizations globally as it is completed by and is intended for PS executives.

This year’s survey was completed by over 237 respondents and is only the second time that PSVillage has conducted this ambitious benchmark study. Our first benchmark was conducted in the 2011-2012 timeframe when the economy was just beginning to show real signs of a recovery.

We believe it is important to benchmark the PS space, especially given the severity of the recession of 2008 and the impact it had on services organizations and their buyers. During the recession, many services buyers:

• Significantly reduced total services spend with some buyers mandating no services spend with third parties.

• Canceled entire projects and programs.• Broke large projects into much smaller efforts with each segment being competitively bid.• Implemented deep layoffs.• Closed offices or retreated to a shadow of their former presence.• Sold off low performing operations.• Hoarded available cash.• Materially delayed payments to all suppliers, including services providers.

As a consequence, services organizations responded with these kinds of actions:

• Headcount freezes or reductions in force.• Cancellation of training expenditures.• Withdrawal of job offers.• Draconian cost/expenditure controls.• Significant reductions in hiring targets.

The actions were necessary for survival, but services organizations assumed some bad habits in those difficult days in their desperation to book revenue, keep the bench staffed, and keep business alive. Some services organizations:

• Chased dangerously low-margin or unprofitable work.

• Spent too much time and capital pursuing the work that was available.

• Continued to pursue opportunities even in the face of numerous, equally desperate, competitors.

Report Summary

This year’s benchmark survey had over 237 respondents – all of which are senior PS executives.


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Today, we are pleased to report that both the economy and services organizations are recovering. PS organizations are unraveling some bad but necessary business practices that they adopted during the recession. Other signs point to positive PS changes as well. One of the clearest signs came from the salary data captured in the benchmark: PS executive pay shot up on average 20% in just two years.

A number of factors may be driving up executive salaries (e.g., retirements of baby boomers) but changing delivery models (e.g., cloud) and continued offshore competition may be keeping developer and entry-level workers’ salaries flat.

Some other human capital challenges remain and others still have yet to surface. On the cautionary side, we believe that employee turnover may start to impact profit margins and trigger higher recruiting and training costs as the economy continues to improve.

We also noted a number of differences between PS organizations based on their adoption of Professional Services Automation (PSA) software. While a greater percentage of large services entities now use PSA products, PSA users also are big users of knowledgebase products. It would appear that the firms using the technologies geared at making people productive, efficient and effective are also helping transfer more knowledge between team members and clients. This trend points to services firms making increasing investments so that their firms run better and deliver better outcomes to clients.

We also saw the effects of shifting delivery models appear in the data. More firms appear to be moving to Cloud/SaaS/hybrid delivery models. These shifts point to additional investments being made in new solutions and capabilities.

There are a number of insights like these throughout this report. However, if you’d like to take a more in-depth and personalized view of the complete survey data, please visit the PSVillage website. There you’ll gain access to all of the survey data as well as the ability to view the data along a number of demographic and other slices.

All in all, the outlook for the services sector appears to be one of continuing improvement.

We hope you enjoy this report, the insights within it, and the impact it should have on your PS organization.

Terry JansenPresident & Founder, PSVillageandLee FrederiksenManaging Partner, Hinge

“PS executive pay shot up on average 20% in just two years.” This is well in excess of inflation and proof that the services space is recovering.

The market is highlighting a shift in delivery models from more on-premises to more cloud-based solutions.


Key Findings

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Growth

Large services groups (those with more than 500 professional services personnel) budget for 0-20% growth year-over-year. Small services entities (those with 25 or fewer professional staff) have more ambitious growth goals with 25% of respondents planning on growth of over 30%. Some of these small services groups are even expecting growth of over 90% annually.

50%

25%

0%

Fig. 1 - Budgeted Growth Year-Over-Year

Large PS Org

Small PS Org33%

16%

47%

22% 20% 19% 17%

11%

4% 5% 1%1%1% 0%3%

<10% 10–15%

16–20%

21–30%

31-40%

41-50%

51-60%

61-70%

71-80%

81-90%

>90%

Operating Income Margin

These numbers, while they differ materially between large and small entities, are not surprising. Larger services entities are building on an already large business base. Smaller entities may not have to add much net-new revenue in absolute terms to register a large percentage growth number.

There may be another explanation for these differences though. Large entities tend to have more discipline in their planning and growth estimates because they have to meet these numbers to satisfy Wall Street, investor and management expectations. Their growth plans have to be realistic and achievable if these executives are to retain their jobs. Smaller services entities may have the luxury of creating optimistic growth targets as they may not be held to as high of a standard for accuracy and/or accountability for them.

Looking ahead, improving economic conditions may cause management executives at many services entities to push for more than sub-10% annual growth. Those modest gains seem paltry given the amount of market loss many entities suffered at the depths of the recession. Sub-10% growth is not the way to rebound to pre-2008 levels or beyond.


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Salary, Bonus and Utilization Data

This year’s benchmark study contains an amazing mix of salary, bonus, utilization and other data across 19 kinds of PS roles/positions. This information is very valuable for PS organizations, and we highly encourage you to visit the PSVillage website, set the filters that most closely match your organization’s demographics and see how your firm compares against its peers.

For many of the positions, authorized users can find data on:

• The number of resources in this role.• Target billable utilization.• Average base salary.• Target bonus as a percent of base.• Billable rate/hour.• Years of experience in this role.• Percent travel.

While some third-party HR information services can provide salary and benefits data, the PSVillage database may be one of the only sources where you can also access data like utilization rates, billing rates, and other key metrics. This data is anchored to a person’s level in the organization and is searchable via filters to get the most meaningful and relevant information for your firm based on its location and size. This salary data could become valuable to readers given the potential issues confronting services firms such as talent retention and recruiting as mentioned in other parts of this report.


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Executive Salary Movement

One particular aspect of the salary data is noteworthy. Salaries for PS executives grew considerably in the time between the two surveys. In just two years, average executive salaries shot up approximately 20%.

$300

$200

$100

$0

Fig. 2 - Management Average Salaries in 000s

2011/2012

2013/2014

GM/SVP- P

SVP-PS

PS Dire

ctor

PS Manager

Engagement Manager

$241

$277

$184

$144$173

$124$143

$111$141

$226

Management salaries results were materially better with all PS executive salaries increasing at rates well in excess of inflation rates. The GM/SVP-PS average salary rose the least at almost 15%. The Engagement Manager position saw the greatest percentage increase (27%) while all other positions averaged an approximate 20% increase.

Average Salary Movement

Overall, PS salaries increased in the two-year span between surveys. However, the changes did not affect all workers equally.

In the 2013-2014 benchmark, all groups saw salary increases. However, the effect on Management and Operations personnel was greater than for Sales Support and Delivery personnel. In fact, Sales Support personnel only saw a 2% change in salary – a virtually unchanged pay situation given cost of living changes in that timeframe. Likewise, Delivery personnel only saw a 5% increase in salary.


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$200

$150

$100

$50

$0

Fig. 3 - Average Salary by Group (000s)

2011/2012

2013/2014

Management

Operations

Sales Support

Delivery

$133

$156

$117 $115 $117

$93 $98

$136

On the other spectrum, Operations personnel saw a 16% average salary increase and Management personnel exceeded that with a 17% average salary increase.

What can be drawn from these salary numbers? The recovering economy is bringing back increased wages, but it is a recovery that is not lifting all levels simultaneously.

Services executives and leaders seem to be on the receiving end of much of this largesse. Talented leaders may be in short supply. Since 2008, a number of talented individuals may have left:

• The space due to retirements of the baby boomer generation.• The workforce altogether.• Services organizations to work directly for clients or chosen other careers.

The lack of training programs since 2008, a condition many services organizations curtailed or halted altogether, may also be part of the cause of these shortages.

On the entry-level and developer front, continued price pressure from offshore services providers may be keeping these salary levels depressed.

PSA Adoption

Professional Services Automation (PSA) software describes a family of software products that automate many service processes. PSA solutions often include modules for resource management, project tracking, scheduling, time and expense tracking, client billing, financials and more.

When looking at the adoption of automated practice management solutions for large and small services organizations, there is a marked difference in uptake in these solutions by smaller firms.

PSA usage increases with the size of the service organization.


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80%

100%

60%

40%

20%

0%

Large PS Org Small PS Org

Fig. 4 - PSA/Practice Mgmt Software In Use?

PSA No

PSA Yes

33%

67%

47%53%

Two thirds of larger services organizations reported using an automated system to manage their PS operations (this number is consistent with the overall report survey group, too). In contrast, only about half (53%) of smaller entities were using such a system.

Why is there less PSA adoption in the smaller entities? Some of these firms may feel PSA products are too costly for an operation of their scale or complexity. Some services firms, particularly partnerships, hate to make capital investments and will defer these investments as long as possible to maximize current earnings. This short-term thinking almost always comes at the cost of future growth or earnings. Some firms may be stubbornly attached to spreadsheets and low-end accounting solutions, neither of which were designed for or optimized for the services industry. Nonetheless, inertia in these low-end, stop-gap and often poorly integrated solutions (instead of a PSA) is not a best practice and may be hurting smaller services entities. At some point, a PSA solution becomes table stakes for a services organization as disorganized delivery and a lack of operational tools may adversely affect margins and the organization’s brand.

The irony in this is rich and tragic. Many of the same services organizations that would advise clients to modernize systems, remove non-value work, improve coordination and maximize resource utilization are doing just the opposite in their own firms. For services organizations that have used the recession as an excuse to defer automating their practices, that excuse no longer holds up.

Failure to use a PSA system may hurt smaller service organizations. The recession is no longer an excuse for not implementing PSA software.


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PSA vs. Non-PSA Differences

When looking at the differences between firms that use a PSA solution and those that do not, a couple of other distinctions stand out.

The first of these is the availability of a Project Management Office (PMO). 56% of PSA users have a PMO while only 38% of non-PSA users do.

60%

80%

40%

20%

0%

PSA Yes PSA No

Fig. 5 - PMO Presence Varies By PSA Adoption

PMO Yes

PMO No44%

56%

38%

62%

Larger PS organizations are more likely to have a PSA solution installed and have a PMO. Why? Larger firms often run larger services projects – precisely the kind of projects or programs that would benefit from and need a program management office. In contrast, smaller firms often run smaller projects that do not need a PMO or they only execute one part of a large program while a larger services entity is providing the PMO capability.

PSA and non-PSA enabled organizations also differed in their use of a knowledgebase.

60%

80%

40%

20%

0%

PSA Yes PSA No

Fig. 6 - Knowledgebase Usage: PSA vs. non-PSA Service Organizations

Knowledgeable Yes

Knowledgebase No29%

71%

48%52%


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A very large number (71%) of PSA-using services organizations possessed a knowledgebase. In contrast, only 48% of non-PSA-enabled services organizations had a knowledgebase. This difference is quite telling as it delineates the services ecosystem into organizations that believe in equipping their practices with tools and those that don’t. These are tools that:

• automate the business; • improve worker productivity in billable and non-billable areas; and, • improve the results delivered to clients.

When seen together, these statistics show some firms are serious about improving the efficiency and effectiveness of their people, and the other firms are not.

Utilization

PS organizations use a number of methods to calculate potential billable hours. This is important to note as the chosen method affects a number of other metrics that PS organizations use to manage their firms. Let’s quickly review a number of common utilization calculation methods employed by PS organizations. These all assume a theoretical base number of 2,080 annual chargeable hours (52 weeks X 40 hours per week). Different entities, however, often reduce that base amount by vacations, holidays, etc. Moreover, different firms often grant different vacation amounts to different people. So, to better understand utilization, here are the common calculations that respondents had to choose from:

• 2,080 hours less 80 hours off for vacation;• 2,080 hours less 160 hours off for vacation;• 2,080 hours less 240 hours off for vacation, holidays & training;• 2,080 hours less 280 hours for vacation, holidays & training;• 75% of a 2,080 hour year;• 70% of a 2,080 hour year; or,• 65% of a 2,080 hour year.

Three very different profiles emerged from the study group.


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Smaller PS organizations tend to manage their operations by starting from a larger base of chargeable time. About ½ of smaller firms expect 1,920-2,000 base hours annually from their employees. Larger firms have somewhat lower targets with about 2/3rd of respondents expecting 1,840-1,920 hours.

What does this imply?

Larger organizations may offer more vacation and training (i.e., non-chargeable time activities) to employees as a perk or recruiting incentive. These perks give them the market power to attract and retain more of the “best and brightest” job seekers in the market. But, this largesse comes at a cost. More non-chargeable time could mean lower earnings in the short-term. Alternatively, this lower chargeability is what permits larger firms to have more people trained in more subject areas. As such, their bench can be more resilient to changing market demands and thus help keep their overall chargeability stable over longer stretches of time.

To capture as much profit per person as smaller firms, larger organizations must, therefore, have wider margins and more efficient operations to lower their cost structure. Larger service entities need this extra margin to offset their lower total number of annual billable hours by employee.

The inverse is also telling. Smaller entities may be working their employees more hours because they can. They may book more hours since they offer less training and vacation time than larger competitors and this could, in turn, be counterproductive to their recruiting and retention efforts.

Larger service entities may have lower chargeability goals but they use the non-chargeable time for training, vacation and other perks. This enhances their ability to win work and attract the best talent.


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Target Billable Percentage

The targeted billable percentage identifies what amount of time must be billed for the organization to meet its financial targets.

< 35%36% - 45%46% - 55%56% - 65%66% - 75%76% - 85%> 85%

Figure 8 - Percentage of Respondents

41%

12%

27%

9%4%

5%

2% Target PS Billable Percent

The largest group of respondents (41%) set a target billable rate between 66-75%. This figure tracks well with historical norms achieved by many services firms. A higher billable percent is often needed for consulting-focused services groups (e.g., Business Process Outsourcers) that have longer-term, lower-margin work. For that reason, it is not surprising to see 27% of respondents targeting a 76-85% billable rate. Higher utilization target rates can be difficult to achieve and can create significant stress on the organization if workers are not given time off for training, holidays, vacation, etc.

On the other end of the extreme, 23% of respondents targeted billable rates equal to or less than 65%. These entities, hopefully, are enjoying high margin work to offset the revenue lost due to low chargeability.

Higher utilization target rates can be difficult to achieve and can create significant stress on the organization if workers are not given time off for training, holidays, vacation, etc.


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PS Operating Income Margin

The operating income margins that were reported were noteworthy on two levels.

20%

25%

30%

15%

10%

5%

0

>30% 26–30%

21–25%

15–20%

14% 13% 12% 11% 10% 7-9% <7%

Fig. 9 - Operating Income Margin

Operating Income Margin

Perc

ent o

f Res

pond

ents

First, many services entities reported healthy margins with 56% of firms indicating operating income margins at 15% or better. In fact, 19% of reporting organizations had operating income margins equal to or higher than 26%. While that might sound good, respondents two years ago actually posted higher margin numbers. In the 2011-2012 study, 64% of firms had operating income margins of 15% or better.

On the low end of the spectrum are the firms booking 9% or lower operating income margins (21% of total respondents). This could be acceptable based on the kind of services provided, for example, for an outsourcer, but not for other services entities.

SaaS business models could be a factor here, too. The recurring nature of software subscription revenues may be tempting some firms to reduce their service margins in order to secure the long-term subscription revenues.

Selling Expense

There is wide variability in how professional services are sold. Some organizations have dedicated sales professionals who are distinct and separate from delivery personnel. Others have executives that both sell and deliver (“they eat what they kill”). Some heavily rely on inside sales professionals, while others have mixes/hybrids of these and other models.

No matter how these sales occur, cost of sales is often a material component of a services entity’s cost structure. Careful management of these costs can have a material impact on the bottom line.

21% of firms reported booking operating income margins of 9%. This may not be acceptable for certain service firms.


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20%

25%

30%

35%

15%

10%

5%

0

>25% 21–25%

16–20%

11–15%

8-10% 7% 6% 5% 4% <4%

Fig. 10 - Selling Expense Target Percentage

Selling Expense Target Percentage

Perc

ent o

f Res

pond

ents

It is important to note that high selling costs as a percent of total revenues may indicate one or more of the following issues:

• The firm is not managing sales costs well.• The firm is chasing too many low value deals.• The firm is continuing to spend on low probability deals

and is not demonstrating an ability to exercise discipline in deal planning/management.

• The mix of work has changed but the company’s sales approach has not.

• The market does not want what this services entity is selling.

Our survey showed that exactly 50% of services entities were spending 8-20% of revenues on sales expenses. Almost 30% of respondents spent between 8-10% of revenues on sales costs. These numbers, which reflect a near bell curve result, seem reasonable.

The figures at the low end of the spectrum warrant some discussion as 25% of respondents reported spending less than 4% on sales costs. By itself, this seems quite low. There are three scenarios where this might be appropriate and one or two where it might not.

Low sales expenditures may be reasonable if:

• Sales efforts are actually borne by another entity. A business partner or related business entity may be selling another entity’s services as part of a bundled solution or offering. The other firm is bearing many or all of the associated sales and marketing costs.

• The service deals are long-term in nature. When sales costs can be spread out over a multi-year period, the effect of sales costs on total revenues can be materially diluted.

• The service provider has an outstanding reputation. Some entities have such a powerful brand or reputation that they expend little energy on sales and marketing. This is often the case with services

Exactly 50% of service entities were spending 8-20% of revenues on sales expenses.


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organizations with considerable thought leadership and great word-of-mouth referrals from prior clients.

From another perspective, low sales expenditures could be a red-flag for future problems. Low selling costs could mean that the services organization:

• Is currently in a ‘feast’ cycle but may soon enter a ‘famine’ cycle as it is not doing enough marketing to build up its services backlog.

• Has plateaued. The organization has chosen to freeze its selling costs and keep the firm stuck at the current or smaller size.

PS Marketing Expenditures

Marketing has evolved significantly in recent years. Marketing automation and changes in how firms buy services are changing the competitive landscape.

The role of the Chief Marketing Officer is growing in many firms and so, too, is their technology budget.

However, the long tail that our survey produced seems contrary to this evolving marketing world. 72% of respondents reported spending less than 3% of revenues on services marketing. This was true for average and small services entities. Interestingly, 78% of larger entities spent less than 3% of revenues on marketing.

40%

50%

60%

70%

30%

20%

10%

0

>25% 21–25%

16–20%

11–15%

6-10% 5% 4% 3% <3%

Fig. 11 - Marketing Expense as % of Revenue

Perc

ent o

f Res

pond

ents

80%

Services buyers today are turning to the Internet to do as much as 60% of the research needed to identify potential services providers, create a long-list and even develop the knockout selection criteria for the short-list. By the time most services firms find out they are being considered for a project, the client is well into the decision-making process.

Moreover, clients these days are relying less on prior ‘relationships’ when choosing services providers. Today’s buyers can access all kinds of information on the Internet to find the best-qualified people and firms for their


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projects. The balance of power has clearly shifted to the services buyer. What are services organizations going to do about it?

The smart firms have refocused their marketing efforts. These organizations have placed new content on their websites, many of them using short videos. These services firms are also becoming savvy in using social media and online communities to their competitive advantage. They have thought leaders, bloggers and market influencers helping promote their brand and solutions.

The power of this new thought-leadership-driven content is that it drives a potential client, with a known desire for a given solution, directly to the services firm. This kind of prospect doesn’t need to be wined, dined and cajoled, years on end, to maybe, just maybe, become a client. No, these buyers have a need, have chosen your services entity as a finalist and want to engage with your organization now.

Expenditures below 3% seem low especially given the improving economic conditions and changes in the selling environment. Some firms, especially those with a captive services group that supports their SaaS implementations, may not spend much regarding marketing. In those entities, marketing is targeted to drive combined product sales and services revenues. In that case, it is still prudent to look at total marketing expenditures for the firm and ensure sales opportunities are not being missed in this evolving marketplace.

Average Total Costs

Not surprisingly, the cost of services sold is the largest single cost category of PS organizations, accounting for 75% of total expenditures. Selling costs come in at a distant second at about 11% of total costs. General and Administrative costs make up about 8% with all other costs rounding out the last few percentage points.

The best way to improve profitability/margins for many services entities will continue to be via focusing on optimizing people-related expenses and/or the mix of people because these expenditures continue to make up the majority of total costs.

The improving economy should give firms some concern. Attrition of the “best

Ave Marketing CostsAve R&D CostsAve PS G&A CostsAve Sales CostAve Cost of Services Sold

Figure 12 - Average Total Costs

75%

11%

3%

8%

3%


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and brightest” personnel is likely to increase as motivated and talented people will look elsewhere for better pay and better career opportunities. Services organizations that have been particularly stingy with raises, promotions and even praise these last few years will be hit the hardest.

Higher attrition will also trigger higher recruiting and on-boarding costs as firms replace lost talent. These higher costs will, of course, adversely impact the bottom line. As Cost of Services Sold is such a large component of total expenditures, even a slight rise in attrition rates could have significant repercussions on the bottom line and client satisfaction.

What should services entities do?

Great employers will get their hands around how well employees are currently engaged with the company. Do they feel appreciated and wanted? Are they being allowed to grow professionally? Are they getting the training, recognition and career advancement (or guidance) they crave? If not, companies should consider starting new recognition, reward and training initiatives now. It is better to start these initiatives now than not at all, especially if it helps retain some of your best people.

But, even with all the pastoral care possible, attrition is likely to increase as the economy improves. So, smart services organizations need to re-invest in their recruiting processes and technology. Radical changes to how recruiting occurs are now available via new technologies like Entelo, Identified and TalentBin to name a few. If your recruiting isn’t social-media fueled, conducted on mobile devices, etc., it’s probably antiquated.

The recovering economy may trigger increased turnover. This turnover will cause salaries, recruiting and training costs to grow and those higher costs will adversely affect profits.


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Large PS groups were defined as those with more than 500 professional services personnel. In contrast, small PS groups had 25 or fewer professional staff. These two subsets of survey participants accounted for approximately 40% of all survey respondents.

Earlier in this report, we discussed how growth plans and PSA utilization varied significantly between large and small PS entities. We found other differences, too.

Not surprisingly, the larger entities that responded are more global with 67% of them having the majority of their resources in the United States. 87% of smaller services entities have their workforce mainly in the U.S.

80%

100%

60%

40%

20%

0%


Fig. 13 - Majority of Resources Located in U.S.?

No

Yes

33%

67%

13%

87%

Percentage of Indirect Resources

In the area of direct versus indirect resource usage, there were several notable differences between large and small services organizations. Let’s start with how these firms use indirect resources. Services organizations can choose to use their own resources (direct employees), or those from offshore firms, partners or third-party subcontractors.

Smaller PS organizations use very few indirect resources. In fact, 70% of these respondents reported using 10% or fewer indirect resources.

Large Vs. Small Professional Services Organizations

70% of small PS entities use 10% or fewer indirect resources.


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51% - 75%26% - 50%11% - 25%< 10%

Figure 14 - Small PS Orgs - Percentage Using Indirect Resources

70%

16%

7%7%

Larger services organizations appear to use more indirect resources. 73% of these entities reported their indirect complement to be between 11%-50% of client-facing work.

51% - 75%26% - 50%11% - 25%< 10%

Figure 15 - Large PS Orgs - Percentage of Indirect Resources

40%

33%

20%

7%

0%

76% - 100%

This poses the question, why is there such a large difference in the utilization of offshore, sub-contractor and/or other external resources between smaller and larger PS organizations? It could be that smaller PS organizations:

• Lack the connections with offshore firms.• Have had poor results teaming with third parties.• Lack the infrastructure to manage such relationships.• Have small or short-term projects that make the economic use of complex third-party contractual

relationships impractical.• Feel great financial pressure to get any underutilized staff out on projects before bringing in outside

resources.

With regard to the use of independent contractors, some small PS organizations have difficulty finding quality independents or meeting the career or income demands of these professionals. Some services firms expect independents to:


25

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26

• Help sell the work without compensation yet receive nothing in terms of shared gain when it closes.

• Contribute their intellectual property to the prime contractor, in perpetuity, without compensation or recourse.

• Share in project losses caused by the prime con-tractor’s people.

Independent contractors operate in a logical, rational way. Smart ones will not accept the terms listed above and many look for long-term assignments from services organizations that can get them multiple future engagements with little or no down time. That often makes small PS organizations appear less desirable to independent consultants.

Assuming there is a need for external resources, the long-term consequences for such a disparity may not be good for smaller PS entities. For those competing in price-sensitive markets, the choice to avoid external resources could put their organization at a disadvantage compared to those with connections to lower-cost personnel. Likewise, small organizations that cannot gain access to great independent subject-matter experts might lose projects to better-qualified firms. In a business where clients buy the team with the best expertise first, and lowest rates second, shouldn’t every firm be creating a funnel of the very best talent regardless of its origin?

Developing better relationships and partnering programs would appear to be a competitive mandate for smaller PS organizations.

Developing better relationships and partnering programs would appear to be a competitive mandate for smaller PS organizations.


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Average Target PS Billable Percent

It is interesting to note that large and small PS organizations take a varied approach to what each expects of its professional staff’s billable hours.

40%

50%

60%

30%

20%

10%

0%

Fig. 16 - Average Target PS Billable Percent

Small PS Org

Large PS Org

6% 7%

13%

7%

53%

41%

24%20% 20%

9%

<35% 46–55%

56–65%

66–75%

76-85%

>85%

93% of large PS organizations set their billable-hours target at 66% of total available hours or greater. Smaller firms show a willingness to set lower billable-hours targets with 26% of reporting firms indicating targets of 65% or less.

What does this imply? First, large firms can often set higher billable-hours targets because they can take advantage of scale. In theory, these firms should possess better systems and more efficient processes that can be leveraged over a larger team. Second, smaller firms may set lower targets as they need to use more of their potential time for selling, administrative, thought leadership, development and other tasks. In smaller firms, it may be necessary to utilize everyone’s time to do some of the necessary but not chargeable work that it takes to sustain and grow an organization. Finally, smaller organizations may not need a higher target rate if they, in fact, possess lower overhead and/or can rely on the support services of a larger parent company or other departments in the firm.

One statistic really jumps off the page with the larger PS organizations: 20% of these entities reported that they have billable targets of more than 85%. This is an exceptionally high figure and would normally make one question whether such a goal is attainable or viable long-term. Some firms may report a high value like this due to the way their firm calculates utilization. For example, if the billable target is determined off of a base number that already excludes vacation, training and possibly some other large time categories, then an 85% or better target is indeed possible. Some service types, like long-term outsourcing arrangements, can also trigger high billable-hours targets simply because the opportunity for down-time is virtually nil for workers for several years.

It is important to raise a caution about this. Billable targets beyond 75% are hard to attain and sustain for any lengthy period of time. Ask your leadership team if its goals are realistic and will these goals trigger or exacerbate staff retention issues.

20% of larger PS entities reported that they have billable targets of more than 85%.


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SG&A/Overhead as a Percent of PS Revenue

Another telling statistic illustrating the difference between large and small PS organizations is in the percentage of revenue that makes up sales, general and administrative (or overhead) costs.

Small PS organizations may be substantially leaner or more efficient than their larger brethren. 70% of smaller PS entities allocate 15% or less of their revenues to these cost areas. In contrast, 87% of larger PS organizations allocate between 10-25% of revenues to these costs.

What does this mean? While smaller entities may be better at controlling these SG&A costs, it doesn’t necessarily mean this is a viable or correct strategy in all cases. For example, if a small PS organization decides to forego a number of marketing costs (e.g., participation in a key trade show), defer website upgrades, not hire an HR resource manager, or invest in professional training for its staff, SG&A costs as a percentage of PS revenue might be smaller but at what long-term cost?

20%

25%

30%

15%

40%

45%

50%

35%

10%

5%

0%

Fig. 17 - SG&A/Overhead as a % of PS Revenue

Large PS Org

Small PS Org

<10% 10 – 15% 16 – 25% 26 –35% >35%

13%

36%40%

34%

47%

18% 24%20% 20%

8%4%

Alternatively, larger firms may want to review their costs. Are they getting the planned efficiencies and effectiveness from their SG&A expenditures? The 47% of large PS organizations reporting that they spend between 16-25% of revenue on SG&A should be closely watched. This is especially true of those entities at the top end of the spectrum.

Delivery Model

Do large and small PS organizations sell the same mix of services? Our sample indicates that the answer to that question might be “No”.

Larger entities are clearly playing in several different markets simultaneously. 40% of them reported involvement in the hosted, on-demand and on-premises combined market segment. Another 20% reported involvement in the hosted and on-premises combined solution space.


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In contrast, a significant number of smaller PS entities reported involvement in single-delivery model spaces. 19% of these smaller organizations sold only on-demand (SaaS/Cloud) solutions. 15% sold only on-premises (Commercial Licensing) solutions. In total, 77% of smaller entities have single business model practices.

What does this mean?

Since many larger firms have been around longer and have large client bases tied to older solutions/delivery models, servicing these customers is still a viable business for these services firms. However, it is clear that many of these services groups have actively migrated parts of their practice to other business models. This is not surprising since changes in technology drive adaptations in the services sector. The challenge for any services entity is to successfully make the transitions. The infrastructure and skills needed for one model (e.g., on-premises work) may be irrelevant in another (e.g., Cloud/SaaS). Larger entities may need to build greater scale (and economies) in declining delivery models to remain competitive. Otherwise, these organizations might need to shed older delivery models and rapidly strive to develop scale, efficiencies and low cost structures in the new delivery models. Larger firms should consider what this lack of focus does in terms of operational overhead, personnel and profit margins.

Smaller firms, on the other hand, are focused. To thrive against bigger, better-capitalized competitors, these smaller players must carefully manage their scarce and expensive market development and R&D expenditures.

To spread their limited capital across different business models could be an expensive and fatal mistake. Smaller firms tend to focus on less capital-intensive delivery models. Notice that nearly 25% of smaller entities are involved in the business management consulting space. This niche rarely requires large capital investments or other resources that other models (e.g., hosting or outsourcing) may dictate. This could also account for the attraction of smaller entities to more Cloud/SaaS-focused solutions. With lower cost of entry, these markets represent easier markets to penetrate for smaller PS organizations.

40%

30%

20%

10%

0%

Fig. 18 - Delivery Model


On-Demand (S

aaS/Cloud)

On-Premises (

Commercial L

icensin

g)

On-Demand + O

n-Premise

Hosted

Hosted + O

n-Premise

Hosted + O

n-Demand + O

n-Premise

Custom A

pplicatio

n Deve

lopement

Pure Service

s (Im

plemetation...

Business

Management C

onsultin

g

19%15% 13%

7%13%

40%

20%25%

13% 13%

4%

14%

1% 3%


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Project Management Office

When asked if they possessed a project management office (PMO), small services organizations had almost the polar oppo-site response as their large competitors.

73% of large PS organizations have a PMO while only 37% of small entities reported having one.

What does this tell us?

80%

60%

40%

20%

0%


Fig. 19 - Have a Project Mgmt O�ce (PMO)?

No

Yes

27%

73%63%

37%

Small services organizations:

May complete many small, less intricate projects that do not possess the complexity of a large, multi-project program.

• May play a role in larger projects or programs but they do not assume the PMO role.• May deliver services (e.g., business management consulting) where a PMO is not required.• May focus on short duration projects or on projects where the client fills the PMO role.• Should consider making PMO skills a priority if they wish to have a role (or a wider role) in future

client work.

Large organizations should, if they haven’t already, exploit their PMO capability in marketing for new work. Additionally, large firms that do not currently have a PMO should consider what positive impacts a PMO might bring them.

Knowledgebase

Having a current, accessible knowledgebase (e.g., a system powered by tools like Microsoft SharePoint) enables professional services entities the opportunity to better leverage the knowledge and skills of their people across the enterprise. A knowledgebase can promote the reuse of best practices, ensure more consistency in project

73% of large PS organizations have a PMO while only 37% of small entities reported having one.


31

work and deliverables, and reduce costs (or increase margins). For many services entities, a great knowledge-base is also a competitive advantage.

80%

60%

40%

20%

0%


Fig. 20 - Knowledgebase

No

Yes

27%

73%

47%53%

Large services entities clearly understand the value of a knowledgebase. Almost 3/4th (73%) of them reported having a knowledgebase. About half (53%) of the smaller firms also have a knowledgebase.

The absence of a knowledgebase for any services firm may be a liability few can afford. With increasingly more savvy services buyers wanting to “see” proof of a services firm’s intellectual property, best practices, standards, etc., the absence of an accessible, focused, information repository imposes a competitive disadvantage on underequipped services organizations.

Prospective clients might look upon services organizations without a knowledgebase as being riskier, and view the firm as possibly deficient in critical knowledge related to the project. While some services providers may believe that a knowledgebase is not needed for the kind of services they sell, they must at least point to other forms of intellectual property such as articles published, blogs and speaking engagements, to remain market-credible.

Prospective clients are looking for more than a “relationship” or close geographic proximity to the project team. They want a team that is comprised of great subject-matter experts and is armed and equipped with great methods, practices and more. The knowledgebase is one of the most important differentiators.

Why is this important?

Given how much the selling methods and the economy have changed in recent years, services organizations must re-invest in their people and operations to have a respectable chance of gaining some market success. The lack of a knowledgebase by any services firm may soon become mere table stakes with ever more sophisticated buyers wanting to probe each potential service providers’ knowledgebase to see:

• What information it actually possesses.• How well the information is organized.

73% of large service entities reported having a knowledgebase.

Taking Services Selling to New HeightsPSVillage Annual Survey of Professional Services Sales Practices

32

• How current this information is.• How many contributions the proposed project team has made to the knowledgebase.• How relevant the information in the knowledgebase is to the project at hand.

Target R&D Expense

Both large and small services organizations had similar spending patterns regarding R&D target costs. However, it should be pointed out that the largest number of firms in both categories spent less than 3% of total revenue on R&D (i.e., 40% of large entities and 56% of small entities).

Let’s examine this more closely. A low R&D expenditure could be reasonable in a large firm for example, a manufacturer that possesses a captive, post-sale services group where the percentage is applied to a large revenue number. In that situation, a very modest investment in R&D is needed for services professionals to keep current with product innovations. Furthermore, R&D costs may actually be captured in a different legal entity’s budget or be part of a larger corporate budget.

Alternatively, this low expenditure may very well be a conscious decision on the part of the services entity to be a follower or fast follower in the industry. Some organizations wait for other service firms to pioneer new offerings and develop the case studies, collateral, sales presentations, thought leadership, etc. Once the leaders have created and educated the market, the services groups that didn’t invest earlier will try to mimic the leaders’ efforts at a later date (and, hopefully at a lower cost).

The follower strategy is not without its issues. First movers often enjoy outsized margins, little or no competition and low sales costs. They often use their market power, brand and economic leverage to make new entrants struggle. It’s not enough for the follower to be efficient; they have to rapidly become the lowest cost provider in a niche where someone is already the leader. How can the new entrant get the scale it needs to be super-efficient when it has few or no credentials in that market niche?

A lack of R&D expenditures may also be a holdover from the sour economic times that resulted from the 2008 recession. R&D was one area that many services groups cut back on or cut off altogether in order to survive the downturn.

Today, services entities need to re-discover how to leverage R&D and make strategic bets that are quite different from what their pre-2008 portfolio contained. R&D investments can take different forms in different firms. For implementers of solutions, R&D investments may take the form

40% of large entities and 56% of small entities spend less than 3% of revenue on R&D.


33

of productized offerings and intellectual property (IP) that can be used to improve delivery. One might consider, for example, the acquisition or development of integration connectors. For management consultants and others that trade more in ideas, a knowledgebase, thought-leadership materials, recruiting technologies, talent retention programs and modern solutions may be appropriate R&D investments. Either way, R&D may lead the list of important and strategic expenditures for today’s services entities.

PS Average Cost of Services Sold

The average cost of services sold is usually inversely related to a firm’s margins. Cost of services usually includes the fully-loaded cost of staff time (i.e., salary/wages plus benefits) and other burdens that may include some allocation of overhead. It is important to note that every organization determines what is and is not included in this cost based on their financial formulas.

80%

60%

40%

20%

0%

Fig. 21 - Average Cost of Services Sold

73%

45%

13% 13%4%7%

45%

<50% 50 – 75% 76 – 90% >90%

Large PS Org

Small PS Org

Large PS organizations were consistently in the 50-75% cost of services sold space with 73% falling into this range. Small organizations had a more distributed experience with 45% of respondents in the 50-75% and 76-90% categories.

The large number of small entities in the 76-90% category is troubling. If the average cost of services is closer to the upper bounds of this range (i.e., 90% of revenue), then that leaves only 10% of revenue to cover all other costs such as liability insurance, utilities, attorney or CPA fees, etc., as well as to provide for any unexpected costs.

Even more amazing is that 13% of large services groups and 7% of small entities reported an average cost of services sold in excess of 90%. The long-term business viability of such a firm would need to be called into question. Any unexpected expense or a problem project could trigger insolvency.

While some services entities faced dire cost of services sold numbers during the depths of the 2008 recession, they should have recovered somewhat by now. Respondents affected by the recession may do well to re-evaluate their business and plot a new strategy to deliver better than subsistence revenues.

13% of large service groups and 7% of small entities reported an average cost of services sold to be in excess of 90%.


34

An alternate scenario is also possible. Some of the survey respondents operate services organizations within larger product firms and, as such, are not expected to deliver or contribute to corporate profits. Some of these services groups may actually and intentionally operate at a loss. The company expects its products, rather than its services, to be the key generator of margin and profits. In future surveys, we will want to segregate financial data from these entities.


35

Built on a Strong Base

In late 2011/early 2012, PSVillage commissioned a study to capture a set of operational and human capital (HC) metrics affecting professional services entities. This study went beyond collecting common salary data. The study looked at how firms measure chargeability, what kinds of targets they set for gross margin and other key measures.

To create the survey’s questions and content, potential survey questions were vetted with a group of senior professional services executives. This process helped bring a measure of clarity, completeness and insight into the report development process.

That initial study was a big success. Continued interest in the survey led to its re-issuance in late 2013.

Scope of the Survey

The survey was organized in three main areas:

• Demographics• Financial and Operations• Human Capital

• Management• Sales Support• PS Operations• Delivery

Demographic data that was captured included information on:

• Where resources are located• Headquarter locations• Vertical industry focus• Solution delivery model (e.g., on-premises)• Total company revenue• Total company headcount• Total PS headcount• Total annual PS Revenue• PS revenue allocated to SG&A/Overhead• Average target PS billable percent• Percent of indirect resources

Financial and Operational data collected included:

• PS gross margin target percentage• PS operating income margin• PS selling expense target percentage• PS marketing expense target percentage

Survey Background


36

• PS G&A expense target percentage• PS practice development (R&D) expense target percentage• PS average cost of services sold• Fixed price projects percentage• Time & materials projects percentage• Direct vs. indirect revenue mix• Average margin on indirect revenue• Year-over-year budgeted growth• Project management office presence• Knowledgebase usage• Practice management/PSA usage

Human Capital data collected included total headcount by role, targeted billable utilization, average base salary, target bonus as a percent of base, billable rate/hour, years of experience in role and percent travel for nineteen (19) positions commonly found in professional services entities. These positions included: Human Capital ManagementGM/SVP-PS

• VP-PS• PS-Director• PS Manager• Engagement Manager

HCM Sales Support

• VP/Director of Service Sales• Service Sales Rep (dedicated)• Presales

HC PS Operations

• VP, PS Operations• Director, PS Operations• Manager, PS Operations• Resource Manager

HC Delivery

• Solution Architect• Business Analyst• Project Manager• Senior Consultant• Consultant• Junior Consultant• Indirect Resource


37

Survey Respondents

PSVillage members completed this survey. These are professional services executives and/or senior managers with staff and P&L responsibility in software/hardware companies or technology consulting firms. Survey respondents were screened to ensure that they met these criteria to ensure valid survey results. The services organizations they represent provide a variety of services for hosted, on-premises, cloud, hybrid and other solutions.

This report covers only a number of the larger and more significant findings. It would not be meaningful to pub-lish a report covering every possible slice of the information nor could we anticipate every query a reader might have. Instead, PSVillage has supplemented this report with an online searchable database for eligible purchasers of the report. The 2013-2014 benchmark study is available online at www.PSVillage.com.

Benchmark results can be filtered against these dimensions:

• Company headquarter location• Company revenue• PS revenue • PS headcount• Delivery model (e.g., hosted, SaaS)

After setting the data filters, users can view their results in one of six dashboards: Demographics, Financials and Operations, Human Capital Management, Human Capital Sales Support, Human Capital PS Operations and Human Capital Delivery. Each dashboard contains detailed statistical data on the subject area. A portion of the Demographics dashboard is seen below.

The Online Benchmark Tool


38

High TechMulti-IndustryFinancial Services/Banking/InsuranceHealth Care/Biotech/PharmaceuticalUtilities/EnergyRetailCommunicationsManufacturing

Figure 22 - Demographics

Company HQ Location Company Industry

North AmericaWestern EuropeAsia Pac

55%

92%

5%3%

25%

2% 1%3%

7%

5%

Pure ServicesHosted + On-Demand + On-PremiseOn-DemandOn-Demand + On-PremiseHosted + On-PremiseOn-PremiseBusiness Management ConsultingCustom Application DevelopmentHosted

Delivery Model Total Company Revenue

<$10M$10M - $100M$100M - $1B$1B - $5B>$5B

3%1%

25%

21%

16%

13%

9%43%

31%

11%

8%7%

9%


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Also available from PSVillage/Hinge:


40

Also available from PSVillage/Hinge:

psvillage 2014 professional services industry benchmark report · organizations worldwide,...

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