With the release of Service Performance Insight’s “2016 Professional Services Maturity Benchmark” report last year, it was clear that the professional services industry is at an inflection point, with many key indicators on the decline. According to the report, while there was greater than 10 percent revenue growth and higher net profits, “cracks in the foundation started to appear,” with declines in new client revenue, the size of sales pipelines, backlog, and bid-to-win ratios. At the same time, firms are experiencing significantly higher employee attrition.
Much of this weakening is due to significant changes happening in the professional services industry. Historically firms have focused on bigger and longer-term projects, but today they are taking a more balanced approach to project size, mixing small and large projects. According to a Technology Services Industry Association report, “Achieving Extreme Project Performance,” industry leaders are only getting nine percent of their revenue from large projects. This flux in project size and length can have a major impact on both sales pipeline and backlog.
Firms are hiring a growing number of freelancers and contingent workers versus the traditional consultant, which can impact both attrition and project planning.
Another big change impacting these numbers is the emergence of alternate revenue streams outside of traditional client projects, such as research, reports, and online analytical services. According to a November 2015 report from Forrester Research, “The State Of Digital Business 2016 to 2020,” executives in professional services expect 49 percent of revenue to come through digital channels or products by 2020. In addition, firms are hiring a growing number of freelancers and contingent workers versus the traditional consultant, which can impact both attrition and project planning.
With the industry changing so dramatically, professional services firms need to understand which performance metrics can help them effectively traverse this dynamic environment. Below are five specific key performance indicators that firms need to track to ensure top performance today and position themselves for the future.
Year-Over-Year Revenue Growth: This metric reflects sales effectiveness and the demand for skills offered by a firm. According to the SPI study, there was a massive revenue growth difference between companies based on their maturity models, revealing that firms with more mature business processes and technologies have stronger revenue growth. Technology plays an important role in achieving that maturity: The study reported that companies investing in technologies such as human capital management and professional services automation noted on average, more than a 27 percent improvement in revenue growth. Taking advantage of new technologies can help firms streamline processes, and provide greater visibility into resource availability and skillsets, helping simplify and improve decision-making and planning.
Employee Attrition/Retention: Attrition and retention have traditionally been seen as HR-only metrics, yet they both have a significant financial impact on the entire business. These areas affect the ability to staff customer projects, maintain customer satisfaction, and properly align skills with customer needs. It’s important that firms understand their attrition and retention metrics, measure them against their peers, and look at what is driving those numbers.
Project Profitability: Historically, it’s been challenging for firms to track profitability, especially at a project level. The detailed project level cost information and accurate revenue details needed to understand actual margins is often spread across multiple systems and difficult to pull together. Systems built using today’s innovative technologies allow current project, talent, and financial data to live in one place, enabling firms to analyze profitability in real-time, and giving them deeper insights and context into the numbers.
Utilization: Most professional services firms track utilization, yet the way organizations define this can vary. Utilization metrics should properly blend the needs of organizational revenue, company growth, employee development, and retention. It’s also important to make sure targets are going to meet short- and long-term objectives. Burning employees against too high a utilization target is a recipe for short-term success and potential longer-term attrition problems. At the same time, underperformance can cause serious trouble for a firm in terms of cash flow and investment potential.
Employee Satisfaction Metrics: Every firm needs to invest in their people and set them up for success. This can be measured in two ways: First, create an employee policy that guarantees an annual number of training days per employee and track how employees are doing against that metric. Second, develop a scale that measures how well employees believe they have a well-defined career path. Consultants are always looking for the next project, adventure, and learning opportunity—firms need to embrace these types of employees and measure how well they are supporting these needs.
We look forward to the 2017 SPI Research benchmark study, and seeing how these metrics are tracking for organizations as the industry continues to evolve.