A new day has dawned for those in the professional services industry. Firms have unprecedented opportunities to grow revenue and expand their client base. Yet nothing worth having comes easily, and new opportunities bring new challenges.
I had the chance to speak with Jeanne Urich, managing director at Service Performance Insight (SPI), a global research and consulting organization, about the trends impacting the industry and why a platform-based professional services automation (PSA) tool is worth a close look.
The services sector has been experiencing double-digit growth across the United States, Canada, and Europe, and we’re seeing many firms expanding their business lines, launching new operating models, and employing service-oriented strategies.
Firms used to specialize in one specific area, like technology consulting, management consulting, or strategy. However, business lines are now both expanding and converging. To scale, firms must provide a whole new level of services that transcend technology or engineering know-how.
Business process streamlining has become pervasive across and within functions. In other words, business process knowledge has become a required discipline to optimally run a service-oriented business, whether it is as a pure professional services organization or an embedded service organization within a products/solutions company. Today’s workforce is increasingly project and service-driven, and employees expect to work on high quality, virtual teams that can come together quickly to deliver successful projects.
Talent has been the number one challenge for knowledge, service, and technology-based organizations since the last recession. The services industry has always revolved around talent, but as a consultant, you couldn’t help but feel like a “billable object.” You had work to do for a specific client over a certain amount of time. Talent is now taking the center stage of the economy and it’s all about attracting, grooming, and building the skills of high-potential people.
We’re also seeing a larger representation of millennials in the workforce, and their expectations around the applications they use, social collaboration, work environments (physical and virtual), and development opportunities are shaping the world of work more than we’ve ever seen before.
Although firms do great work for their clients, many of them have been so laser-focused on billable utilization that they are typically 10 years behind in the applications they use to run their own businesses. Even some of the larger organizations with thousands of employees are still running on outdated technology.
Talent is the building block of service-based organizations, so we’re seeing systems like Workday take the lead by combining human capital management with financial management and professional services automation. These components are all part of the same business and operate best with a continuous, integrated lifecycle—it’s important to have the right systems to support that. Resources should be assigned based on the skills required for client projects, and revenue must be recognized in line with different types of contractual agreements, deliverables, and accounting policies.
“PSA goes beyond managing projects and covers the entire project lifecycle, from resource management to billing, forecasting, and revenue recognition.”
There’s now a whole portfolio of different ways for service organizations to engage with their clients—time and materials, fixed fees, recurring revenue, managed services, and staffing—and a proliferation of different types of contracting models. You simply cannot keep track of resources, projects, billing and revenue with an antiquated or standalone system.
In the services world, there are two types of organizations with very different financial needs. Independent organizations, such as architecture firms, legal firms, IT consultancies, or management consultancies, deliver high-value services at a profit and must run a fully-loaded cash flow system. An integrated financial system is of paramount importance to them because they need to ensure their profit and loss is balanced, and they need visibility into their sales pipeline all the way through to project delivery, billing, and revenue recognition.
On the other hand, embedded service organizations, such as those within manufacturing or technology companies, are primarily in the business of implementing the products of the parent company and ensuring customer adoption and satisfaction. They typically use part of an integrated financial application or a standalone professional services automation solution for capturing time and expenses, billing, and resource management. Financially though, their needs are far more complex around revenue recognition and billing because they have to conform to the accounting standards of the companies that they’re part of.
My business partner Dave Hofferberth is credited with coining the term professional services automation in the 1990s, but for a variety of reasons, the term has not fully caught on until now. There used to be a lot of confusion about what professional services automation was and what it encompassed. Also, there were many ancillary applications, such as project management or collaborations tools, that it was confused with. In the new world of work, it is difficult to manage projects, capture time, and generate invoices in separate systems. To truly be able to measure budgets to actuals and services profit and loss and cash flow, you have to have it all bundled together.
“Most companies want more than just a cloud application, and they’re looking at providers with a platform that they can partner with for the long haul.”
At SPI, we define PSA as an integrated suite of applications used to increase operational visibility and improve process efficiency in project and services-driven organizations. PSA goes beyond managing projects and covers the entire project lifecycle, from resource and skills management to billing, forecasting, and revenue recognition. Ultimately, PSA helps executives and team members deliver services more efficiently and track time and costs more accurately.
In our “2017 Professional Services Automation (PSA) End-User Survey,” we interviewed 68 organizations pre- and post-PSA deployment and found that PSA has made a significant impact across the organization.
While there were many improvements, the biggest one was to project staffing. The time it took to assign people to projects decreased, on average, from seven days to five-and-a-half days. There was also a nine percent improvement in the number of projects delivered on time. With a PSA solution, firms had more visibility into the projects and resources in the pipeline and could assemble the right teams much faster.
Employee billable utilization increased by six percent, from 64 percent to 70 percent, and the number of projects delivered on-budget improved by eight percent. It took three less days to generate invoices, and all of that manifested in seven fewer days to collect, referred to as days sales outstanding (DSO).
Project margin, which is comprised of all the things above, improved by 12 percent. With more billable resources and projects delivered on time, firms were ultimately able to generate more revenue and profit.
Metrics are all interrelated, but utilization is the holy grail of the professional services industry. Both time capture and resource management are important because they ensure your most valuable resource—your talent— is assigned to the right projects and equipped with the right skills.
Capturing time allows you to see which employees are available to work, the time spent doing productive work, and the time spent not doing productive work—traveling, in meetings, doing administrative work, or on vacation. If you see a spike in administrative time, then you need to understand why that’s happening to improve productivity. The other key driver of utilization, resource management, requires understanding where your workers are located, the skills they have, and the skills needed to deliver projects.
Another important metric is to compare project budget to actuals. Clients expect to be notified if there’s going to be an overage, why it might occur, and what can be done to mitigate it. The whole idea of accurately estimating, scoping, and keeping a tight eye on project budget to actuals is central to not only delivering on time and on budget, but satisfying clients and making a profit. That’s core to the business.
The cloud is considered old news in our sector, and almost every service organization is already investing in the cloud or planning to. However, we’re seeing an increasing focus on platform solutions. Most companies want more than just a cloud application, and they’re looking at providers with a full platform and ecosystem that they can partner with for the long haul. They want good integration across all aspects of their business so that they don’t create functional or organizational silos.