184781689-sap01

February 2013

Service Performance Insight, LLC

6260 Winter Hazel Drive 25 Boroughwood Place

Liberty Township, OH 45044 USA Hillsborough, CA 94010 USA

Telephone: 513.759.5443 Telephone: 650.342.4690

www.SPIresearch.com

For more information on Service Performance Insight,

please visit:

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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.

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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.

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© 2013 Service Performance Insight, Liberty Township, Ohio

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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

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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 www.SPIresearch.com for more information on Service Performance Insight, LLC.

© 2013 Service Performance Insight

© 2013 Service Performance Insight Sponsored by SAP i

Table of Contents

Introduction ........................................................................................................................................ 1

1. Report Sponsored by SAP ............................................................................................... 5

2. Executive Summary ......................................................................................................... 6

3. The Professional Services Maturity™ Model ............................................................... 12

Service Performance Pillars™ ............................................................................................................ 12

Professional Services Maturity™ Model Benchmark Levels ............................................................. 13

Building the Professional Services Maturity™ Model ....................................................................... 15

Why Maturity Matters ...................................................................................................................... 16

Pillar Importance and Organizational Maturity ................................................................................ 17

4. Report Demographics ................................................................................................... 19

5. PS Business Applications ............................................................................................. 34

Primary PS Business Applications ...................................................................................................... 34

Solution Satisfaction .......................................................................................................................... 37

The Professional Service IT Maturity™ Model .................................................................................. 49

6. Leadership (Vision, Strategy & Culture) Pillar ............................................................. 51

Symptoms of Leadership Issues ........................................................................................................ 52

Business Plan Essentials .................................................................................................................... 53

Survey Results ................................................................................................................................... 56

7. Client Relationship Pillar .............................................................................................. 66

Client Relationships Trends ............................................................................................................... 67

Survey Results ................................................................................................................................... 75

8. Human Capital Alignment Pillar ................................................................................... 99

Human Capital Alignment Trends ................................................................................................... 100

Survey Results ................................................................................................................................. 109

9. Service Execution Pillar .............................................................................................. 135

Service Execution Trends ................................................................................................................ 136

Survey Results ................................................................................................................................. 138

10. Finance & Operations Pillar ....................................................................................... 153

Survey Results ................................................................................................................................. 154

Income Statements ......................................................................................................................... 177

© 2013 Service Performance Insight Sponsored by SAP ii

11. The Best-of-the-Best Performing PSOs ...................................................................... 181

Demographics ................................................................................................................................. 181

Pillar Performance ........................................................................................................................... 182

Best-of-the-Best Conclusions .......................................................................................................... 188

12. The PS Maturity™ Model Development ..................................................................... 189

Maturity Levels ................................................................................................................................ 189

Model Improvements...................................................................................................................... 190

Model Inputs ................................................................................................................................... 190

Model Results .................................................................................................................................. 196

The Financial Benefits of Moving Up Levels .................................................................................... 197

Model Conclusions .......................................................................................................................... 199

13. Recommendations & Conclusions ............................................................................. 200

Professional Services Lead the Way ................................................................................................ 200

Now is the Time to Act! ................................................................................................................... 201

SPI Research Will Be There .............................................................................................................. 201

14. Appendices .................................................................................................................. 202

Appendix A: Acronyms Used in This Report ................................................................................... 202

Appendix B: Financial Terminology ................................................................................................ 203

Professional Services Performance Acceleration Program ............................................................. 209

About Service Performance Insight ................................................................................................. 211

Figures

Figure 1: Bid-to-Win Ratio – 2008-2012 ...................................................................................................... 2

Figure 2: Sales Cycle Length ......................................................................................................................... 3

Figure 3: Annual Employee Attrition – 2008-2012 ...................................................................................... 3

Figure 4: Billable Utilization – 2008-2012 .................................................................................................... 4

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™ ...................................................................................................... 12

Figure 9: Services Maturity™ Model Levels ............................................................................................... 13

Figure 10: Service Performance Pillar Maturity™ ...................................................................................... 15

Figure 11: Maturity Progression ................................................................................................................ 17

Figure 12: PS Performance Pillars – Core KPIs ........................................................................................... 18

© 2013 Service Performance Insight Sponsored by SAP iii

Figure 13: 2013 Benchmark Vertical Market Distribution ......................................................................... 22

Figure 14: Independent vs. Embedded Survey Organizations Surveyed (2007 – 2012) ............................ 24

Figure 15: Organization Size ....................................................................................................................... 26

Figure 16: Headquarters Location – Region ............................................................................................... 27

Figure 17: Annual Company Revenue ........................................................................................................ 27

Figure 18: Total Professional Services Revenue ......................................................................................... 28

Figure 19: Year-over-Year Change in PS Revenue ...................................................................................... 29

Figure 20: Year-over-Year Change in PS Headcount .................................................................................. 30

Figure 21: Percentage of Employees Billable/Chargeable ......................................................................... 31

Figure 22: Percentage of PS Revenue Delivered by 3rd-parties ................................................................ 32

Figure 23: Core PS Business Solutions ....................................................................................................... 34

Figure 24: Commercial Solution Adoption ................................................................................................. 35

Figure 25: Financial Management Solution Used ...................................................................................... 38

Figure 26: Client Relationship Management (CRM) Solution Used ........................................................... 39

Figure 27: Professional Services Automation (PSA) Solution Used ........................................................... 41

Figure 28: Human Capital Management (HCM) Solution Used ................................................................. 42

Figure 29: Business Intelligence (BI) Solution Used ................................................................................... 44

Figure 30: Knowledge Management (KM) Solution Used .......................................................................... 45

Figure 31: Remote Service Delivery and Collaboration Tool Used ............................................................ 46

Figure 32: Social Media (SM) Solution Used .............................................................................................. 47

Figure 33: Is CRM Integrated with PSA? .................................................................................................... 48

Figure 34: Professional Service IT Maturity™ Level ................................................................................... 49

Figure 35: SPI Research Business Plan Structure ....................................................................................... 53

Figure 36: Service Planning Pyramid .......................................................................................................... 54

Figure 37: Confronting Reality ................................................................................................................... 55

Figure 38: Use Tools to Organize, Strategize and Prioritize ....................................................................... 55

Figure 39: PS Goals ..................................................................................................................................... 57

Figure 40: SPI Research’s Service Lifecycle-Management Framework – SLM3™ ...................................... 70

Figure 41: Service Lifecycle Management Maturity Model™ .................................................................... 71

Figure 42: Service Lifecycle Management Maturity Matters! ................................................................... 72

Figure 43: Service Productization Creates Value ....................................................................................... 72

Figure 44: Type of Work Sold ..................................................................................................................... 75

Figure 45: Primary Service Sales Measurement ........................................................................................ 78

© 2013 Service Performance Insight Sponsored by SAP iv

Figure 46: Primary Service Target Buyer .................................................................................................... 80

Figure 47: Bid-To-Win Ratio ....................................................................................................................... 84

Figure 48: Deal Pipeline Relative to Quarterly Bookings Forecast............................................................. 85

Figure 49: Primary Responsibility for New Solution Dev. .......................................................................... 90

Figure 50: The Traditional Consulting Pyramid ........................................................................................ 105

Figure 51: The Professional Services Pyramid – All PS Markets (30+ consultants) .................................. 105

Figure 52: Management Consulting PS Pyramid (30+ consultants) ......................................................... 106

Figure 53: IT Consulting PS Pyramid (30+ consultants) ............................................................................ 107

Figure 54: PS within Software Company PS Pyramid (30+ consultants) .................................................. 108

Figure 55: The SaaS PS Pyramid ............................................................................................................... 108

Figure 56: Why Employees Leave ............................................................................................................ 111

Figure 57: Employee Satisfaction Survey Frequency ............................................................................... 117

Figure 58: Resource Management Process .............................................................................................. 139

Figure 59: Revenue per Project (k)........................................................................................................... 164

Figure 60: Project Margin......................................................................................................................... 166

Figure 61: Services Maturity™ Model Levels ........................................................................................... 189

Figure 62: Key Performance Indicators (KPIs) are Correlated ................................................................. 199

Tables

Table 1: 2013 Key Performance Indicator (KPI) comparison ....................................................................... 6

Table 2: Hourly Bill Rate by Organization Type (k) ....................................................................................... 8

Table 3: Maturity Matters! ........................................................................................................................ 10

Table 4: Performance Pillars Mapped Against Service Maturity ............................................................... 15

Table 5: Service Pillar Importance by Organizational Maturity Level ........................................................ 18

Table 6: The Service Market is Huge, and Growing ................................................................................... 19

Table 7: Top 100 Software Company Ratios .............................................................................................. 19

Table 8: Vertical PS Markets — the North American Industry Classification System ................................ 20

Table 9: Number of Participating Firms by Vertical Market (2007 through 2012) .................................... 23

Table 10: Demographics by Organization Type ......................................................................................... 24

Table 11: Demographics by Vertical Market .............................................................................................. 25

Table 12: Average Organization Size (employees) ..................................................................................... 26

Table 13: Annual Company Revenue (mm) ............................................................................................... 28

Table 14: Total Professional Services Revenue (mm) ................................................................................ 29

© 2013 Service Performance Insight Sponsored by SAP v

Table 15: Year-over-Year Change in PS Revenue ....................................................................................... 30

Table 16: Year-over-Year Change in PS Headcount ................................................................................... 31

Table 17: Percentage of Employees Billable/ Chargeable ......................................................................... 32

Table 18: Percentage of PS Revenue Delivered by 3rd-parties ................................................................. 33

Table 19: Commercial Solution Adoption .................................................................................................. 35

Table 20: PSO Departments and Information Needs ................................................................................. 36

Table 21: Solution Satisfaction ................................................................................................................... 37

Table 22: Impact – Client Relationship Management (CRM) Use .............................................................. 39

Table 23: Impact – Commercial CRM Integration ..................................................................................... 40

Table 24: Impact – Professional Services Automation (PSA) Use .............................................................. 41

Table 25: Impact – Human Capital Management (HCM) Use .................................................................... 43

Table 26: Impact – Business Intelligence (BI) Use ...................................................................................... 44

Table 27: Impact – Knowledge Management (KM) Use ............................................................................ 46

Table 28: Integration with Core Financials ................................................................................................ 48

Table 29: The Leadership Maturity Model ................................................................................................. 51

Table 30: Leadership Rating Compared to Core KPIs ................................................................................. 56

Table 31: PS Goals by Organization Type and Geographic Region ............................................................ 58

Table 32: PS Goals by Organization Size .................................................................................................... 58

Table 33: PS Goals by Service Market Vertical ........................................................................................... 58

Table 34: Leadership Impact by Organization Type and Geographic Region ............................................ 59

Table 35: Impact – Well-understood Vision, Mission and Strategy ........................................................... 60

Table 36: Impact – Confidence in Leadership ............................................................................................ 60

Table 37: Impact – Goals and Measurements are in Alignment ................................................................ 61

Table 38: Impact – Confidence in the PSO’s Future ................................................................................... 61

Table 39: Impact – Effective Employee Communication ........................................................................... 62

Table 40: Organizational Challenges by Organization Type and Geographic Region ................................ 63

Table 41: Organizational Challenges by Organization Size ........................................................................ 64

Table 42: Organizational Challenges by Embedded Service Market ......................................................... 64

Table 43: Organizational Challenges by Independent Service Market ...................................................... 65

Table 44: Client Relationship Business Process Maturity .......................................................................... 66

Table 45: Type of Work Sold by Organization Type and Geographic Region ............................................ 76

Table 46: Type of Work Sold by Organization Size .................................................................................... 76

Table 47: Type of Work Sold by Embedded Service Market ...................................................................... 77

© 2013 Service Performance Insight Sponsored by SAP vi

Table 48: Type of Work Sold by Independent Service Market .................................................................. 77

Table 49: New Client Penetration .............................................................................................................. 78

Table 50: Impact - The Effect of Sales Measurements on Performance .................................................... 79

Table 51: Impact - The Effect of Primary Buyer Type on Performance ..................................................... 80

Table 52: Primary Service Target Buyer by Organization Type and Geographic Region ........................... 81

Table 53: Impact of Solution Importance to Client’s Business on Performance ....................................... 81

Table 54: Solution Importance to Client's Business ................................................................................... 82

Table 55: EBITDA by Solution Importance and Organization Type and Geographic Region ..................... 82

Table 56: Impact - Solution Uniqueness Effect on Performance ............................................................... 83

Table 57: Solution Uniqueness ................................................................................................................... 83

Table 58: Bid-To-Win Ratio ........................................................................................................................ 84

Table 59: Deal Pipeline Relative to Quarterly Bookings Forecast .............................................................. 85

Table 60: Sales Cycle (days) ....................................................................................................................... 86

Table 61: Impact - Sales Effectiveness Impact on Performance ................................................................ 87

Table 62: Service Sales Effectiveness ......................................................................................................... 87

Table 63: Service Marketing Effectiveness ................................................................................................ 88

Table 64: Impact - Client References ......................................................................................................... 89

Table 65: Percentage of Referenceable Clients ......................................................................................... 89

Table 66: Impact - The Impact of Solution Development Effectiveness on Performance ......................... 91

Table 67: Solution Development Effectiveness ......................................................................................... 92

Table 68: Fee Structure by Organization Type and Geographic Region .................................................... 92

Table 69: Fee Structure by Organization Size ............................................................................................ 93

Table 70: Fee Structure by Service Market Vertical ................................................................................... 93

Table 71: Professional Services Sales Quotas, Base and Variable by Job Title – Sales Representatives ... 95

Table 72: Professional Services Sales Quotas, Base and Variable by Job Title - Management.................. 95

Table 73: Professional Services Sales KPI’s by Organization Type and Geography ................................... 96

Table 74: Professional Services Sales KPI’s by Organization Size ............................................................... 97

Table 75: Professional Services Sales KPI’s by Position by PS Market ....................................................... 98

Table 76: Performance Pillars Mapped Against Service Maturity ............................................................. 99

Table 77: An Aging Workforce – Marginalized Youth .............................................................................. 100

Table 78: Most Effective Retention Strategies by Generation ................................................................ 101

Table 79: Year-over-year Change in Talent Management Challenges ..................................................... 102

Table 80: The Impact of Attrition ............................................................................................................. 103

© 2013 Service Performance Insight Sponsored by SAP vii

Table 81: Impact of Recommend to Family and Friends (1-No, 5-Yes) .................................................... 109

Table 82: Recommend Company to Friends and Family.......................................................................... 109

Table 83: Impact – Annual Employee Attrition ........................................................................................ 110

Table 84: Annual Employee Attrition ....................................................................................................... 110

Table 85: Impact – Management-to-Employee Ratio .............................................................................. 112

Table 86: Management-to-Employee Ratio ............................................................................................. 113

Table 87: Impact – Time to recruit and hire for standard positions ....................................................... 113

Table 88: Time to Recruit and Hire for Standard Positions (days) ........................................................... 114

Table 89: Time for a New Hire to Become Productive (days) .................................................................. 115

Table 90: Guaranteed Training Days per Employee per Year .................................................................. 116

Table 91: Impact – Well-understood Career Path ................................................................................... 116

Table 92: Well-Understood Career Path for all Employees ..................................................................... 117

Table 93: Frequency of Conducting an Employee Satisfaction Survey (years) ....................................... 118

Table 94: Impact – Billable Utilization...................................................................................................... 119

Table 95: Consultant Billable Utilization .................................................................................................. 119

Table 96: Annual Hour Comparison by Organization Type ...................................................................... 120

Table 97: Annual Hour Comparison by Region ........................................................................................ 121

Table 98: Annual Hour Comparison by Organization Size (< 100 employees) ......................................... 121

Table 99: Annual Hour Comparison by Organization Size (> 100 employees) ......................................... 122

Table 100: Annual Hour Comparison by Embedded Service Organization Type ..................................... 122

Table 101: Annual Hour Comparison by IT & Management Consultancy ............................................... 123

Table 102: Annual Hour Comparison by PS Market (Advertising, Arch./Engr., Other PS) ....................... 123

Table 103: Workforce Location by Organization Type and Geographic Region ...................................... 124

Table 104: Workforce Location by Organization Size .............................................................................. 124

Table 105: Workforce Location by Service Market Vertical .................................................................... 124

Table 106: Five Year Total Average Compensation by Job Title (k) ......................................................... 125

Table 107: Annual Base Salary by Organization Type (k) ......................................................................... 126

Table 108: Annual Base Salary by Region (k) ........................................................................................... 127

Table 109: Annual Base Salary by Organization Size (< 100 employees) (k) ............................................ 127

Table 110: Annual Base Salary by Organization Size (> 100 employees) (k) ............................................ 128

Table 111: Annual Base Salary by Embedded Service Organization Type (k) .......................................... 128

Table 112: Annual Base Salary by IT & Management Consultancy (k) .................................................... 129

Table 113: Annual Base Salary by PS Market (Advertising, Arch/Engineering Other PS) (k) ................... 129

© 2013 Service Performance Insight Sponsored by SAP viii

Table 114: Variable Compensation by Organization Type ....................................................................... 130

Table 115: Variable Compensation by Region (k) .................................................................................... 130

Table 116: Variable Compensation by Organization Size (< 100 employees) .......................................... 131

Table 117: Variable Compensation by Organization Size (> 100 employees) .......................................... 131

Table 118: Variable Compensation by Embedded Service Organization Type ........................................ 132

Table 119: Variable Compensation by IT & Management Consultancy .................................................. 132

Table 120: Variable Compensation by PS Market (Advertising, Arch./Engr., Other PS) .......................... 133

Table 121: Target Utilization by Organization Type and Geographic Region .......................................... 133

Table 122: Target Utilization by Organization Size .................................................................................. 134

Table 123: Target Utilization by Vertical Service Market......................................................................... 134

Table 124: Service Execution Performance Pillar Mapped Against Service Maturity .............................. 135

Table 125: Impact of Resource Management Strategies ......................................................................... 137

Table 126: Project Staffing Time (days) ................................................................................................... 139

Table 127: Impact – Project Team Size (people) ...................................................................................... 140

Table 128: Project Staff Size (people) ...................................................................................................... 141

Table 129: Impact – No. of Concurrent Projects Managed by Project Mgr. ............................................ 141

Table 130: Concurrent Projects Managed by Project Manager ............................................................... 142

Table 131: Project Duration (months) ..................................................................................................... 143

Table 132: Impact – On-time Project Delivery ......................................................................................... 143

Table 133: Projects Delivered On-time .................................................................................................... 144

Table 134: Project Cancellation Rate ....................................................................................................... 145

Table 135: Impact – Average Project Overrun ......................................................................................... 145

Table 136: Project Overrun Rate .............................................................................................................. 146

Table 137: Impact – Standardized Delivery Methodology Use ................................................................ 146

Table 138: Standardized Delivery Methodology Use ............................................................................... 147

Table 139: Impact – Resource Management Effectiveness ..................................................................... 148

Table 140: Effectiveness of Resource Management Process................................................................... 148

Table 141: Impact – Effectiveness of estimating processes and reviews ................................................ 149

Table 142: Effectiveness of Estimating Processes and Reviews .............................................................. 149

Table 143: Impact – Effectiveness of change control processes ............................................................. 150

Table 144: Effectiveness of Change Control Processes............................................................................ 150

Table 145: Effectiveness of Project Quality Processes............................................................................. 151

Table 146: Effectiveness of Knowledge Management Processes ............................................................ 152

© 2013 Service Performance Insight Sponsored by SAP ix

Table 147: Finance and Operations Performance Pillar Maturity ........................................................... 153

Table 148: Hourly Bill Rates by Organization Type .................................................................................. 154

Table 149: Hourly Bill Rates by Region .................................................................................................... 155

Table 150: Hourly Bill Rates by Organization Size .................................................................................... 155

Table 151: Hourly Bill Rates by Embedded Service Organization Type (k) .............................................. 156

Table 152: Hourly Bill Rates by IT & Management Consultancy (k) ......................................................... 156

Table 153: Hourly Bill Rates by PS Market (Advertising, Arch/Engineering Other PS) (k) ....................... 157

Table 154: Americas – Targets by Role .................................................................................................... 157

Table 155: EMEA – Targets by Role.......................................................................................................... 158

Table 156: APAC – Targets by Role .......................................................................................................... 158

Table 157: Steps Taken to Improve Profitability Comparison: 2011-2012 ............................................. 159

Table 158: Steps Taken to Improve Profitability – Organization Type and HQ Region ........................... 159

Table 159: Steps Taken to Improve Profitability – Organization Size ...................................................... 160

Table 160: Steps Taken to Improve Profitability – PS Vertical Markets .................................................. 161

Table 161: Impact – Revenue per Billable Employee ............................................................................... 162

Table 162: Annual Revenue per Billable Consultant (k) ........................................................................... 162

Table 163: Impact – Annual Revenue per Employee ............................................................................... 163

Table 164: Annual Revenue per Employee (k) ......................................................................................... 164

Table 165: Impact – Revenue per Project Comparison............................................................................ 165

Table 166: Revenue per Project (k) .......................................................................................................... 165

Table 167: Impact – Project Margin – Fixed Price Projects ...................................................................... 166

Table 168: Project Margin – Fixed Price Projects..................................................................................... 167

Table 169: Impact – Project Margin – Time & Expense Projects ............................................................. 167

Table 170: Project Margin – Time & Expense Projects ............................................................................ 168

Table 171: Project Margin – Subcontractors / Offshore .......................................................................... 168

Table 172: Impact – Quarterly Revenue Target in Backlog ...................................................................... 169

Table 173: Quarterly Revenue Target in Backlog ..................................................................................... 170

Table 174: Impact – Percentage of annual target revenue achieved ...................................................... 171

Table 175: Annual Revenue Target Achieved .......................................................................................... 171

Table 176: Impact – Percentage of Annual Target Margin Achieved ...................................................... 172

Table 177: Annual Revenue Margin Target Achieved .............................................................................. 172

Table 178: Revenue Leakage .................................................................................................................... 173

Table 179: Invoices Redone Due to Errors or Client Rejections............................................................... 174

© 2013 Service Performance Insight Sponsored by SAP x

Table 180: Days Sales Outstanding (DSO) ................................................................................................ 174

Table 181: Quarterly Non-Billable Expense per Employee ...................................................................... 175

Table 182: Percentage of Billable Work Written-Off ............................................................................... 176

Table 183: Executive Real-Time Visibility ................................................................................................. 177

Table 184: Income Statement by Organization Type and Embedded Service Type ................................ 178

Table 185: Income Statement by Organization Size ................................................................................ 179

Table 186: Income Statement by Position by PS Market ......................................................................... 180

Table 187: Best-of-the-Best Comparison – Demographics ...................................................................... 181

Table 188: Best-of-the-Best Comparison – PS Goals ............................................................................... 182

Table 189: Best-of-the-Best Comparison – Leadership Pillar .................................................................. 183

Table 190: Best-of-the-Best Comparison – Client Relationships Pillar .................................................... 184

Table 191: Best-of-the-Best Comparison – Human Capital Alignment Pillar ........................................... 185

Table 192: Best-of-the-Best Comparison – Service Execution Pillar ........................................................ 186

Table 193: Best-of-the-Best Comparison – Finance & Operations Pillar ................................................. 187

Table 194: Best-of-the-Best – Income Statement Comparison ............................................................... 188

Table 195: Minimum Normalized Performance Pillar Scores .................................................................. 191

Table 196: Leadership Model Inputs ........................................................................................................ 192

Table 197: Client Relationships Model Inputs ......................................................................................... 192

Table 198: Human Capital Alignment Model Inputs ................................................................................ 193

Table 199: Service Execution Model Inputs ............................................................................................. 195

Table 200: Finance and Operations Model Inputs ................................................................................... 195

Table 201: Average Service Maturity by PSO Size (People) ..................................................................... 196

Table 202: Average Service Maturity by PSO Type .................................................................................. 197

Table 203: Average Service Maturity by Vertical Market ........................................................................ 197

Table 204: Key Performance Indicators (KPIs) by Maturity Levels .......................................................... 198

Table 205: Lexicon of Acronyms and Abbreviations ................................................................................ 202

Table 206: Standard Key Performance Indicator (KPI) Definitions .......................................................... 203

SPI Research 2013 Professional Services Maturity Benchmark

© 2013 Service Performance Insight Sponsored by SAP 1

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, 2008. 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

2012. 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 2007.

154 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.

2013 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



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 cloud-

based 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 five-

year trend analysis which gives

readers a birds-eye view of the

trends that will shape the next five

years.

Figure 1 shows the average bid-to-

win 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

Figure 1: Bid-to-Win Ratio – 2008-2012

Source: Service Performance Insight, February 2013

http://www.financialforce.com/

http://www.intacct.com/

http://www.projectorpsa.com/

http://www.netsuite.com/

http://www.sap.com/

http://www.deltek.com/

http://www.microsoft.com/



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.

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 2012.

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 year-

over-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

2018. 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 2018. 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.

Figure 2: Sales Cycle Length


Figure 3: Annual Employee Attrition – 2008-2012




Figure 4 shows employee billable

utilization has continued to rise over

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.

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)].

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.

Figure 4: Billable Utilization – 2008-2012




1. REPORT SPONSORED BY SAP

Driving professional service excellence

The best global professional service firms have adopted practices that yield high returns. SAP has a

wealth of experience with the services industry, but there is no substitute for consistently taking the

pulse from external organizations on trends and needs. SPI’s 2013 comprehensive benchmark survey

provides great insight into the best practices that make professional services industry firms successful.

Many of the findings relate to systems needs, some relate to management and values. We hope that

you find the benchmark to be of interest and that it provides you with some ideas that you can adopt.

We know that systems are just one element of a company’s success, but having the right system can be

like having the wind behind your sails, if you have system needs please reach out to SAP, we have

solutions, in the cloud and on-premise, to help professional services firms of all sizes.

Some of the trends you will see in this study include:

Cloud technology is enabling the professional services firms to drive meaningful analytics and

mobile employee support

Managing repeatable projects drive profitability. From estimate through resourcing to delivery,

consistency and measurement help to get it right every time

Accurate information combined with insight and workflow helps seize opportunities for growth

and reputation enhancement and avoid expensive cost overruns and mistakes.

We hope that you will gain value from this report, and find a nugget or two that will help your business

squeeze more from its potential.

We appreciate the great work that Service Performance Insight has done in providing meaningful data

that can help firms achieve even higher goals this year.

David Sweetman

Sr. Director, Product Marketing

SAP



2. EXECUTIVE SUMMARY

Service Performance Insight is proud

to introduce the sixth annual

Professional Services Maturity™

benchmark with cumulative results

from 1,059 PS organizations. 234 PS

organizations representing 50,000

consultants worldwide completed the

2013 PS Maturity™ benchmark survey

in the 4th quarter of 2012. The

benchmark shows the professional

service market is in good shape, with

high levels of growth across all market

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.

2009 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.

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,

Table 1: 2013 Key Performance Indicator (KPI) comparison

Key Performance Indicator (KPI) 2010 2011 2012

Annual PS revenue growth 7.6% 13.7% 11.5%

Percentage of billable personnel 70.8% 74.2% 75.2%

Attrition 6.8% 7.4% 7.2%

Annual revenue per consultant $184 $197 $206

Profit (EBITDA) 6.9% 13.5% 18.0%

Quarterly Non-billable expense $3,098 $1,613 $1,266


Figure 5: Year-over-year Change in PS Revenue




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 21st

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

has continued to improve every year

is the percentage of employees who

are billable as compared to non-

billable 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

Figure 6: Percentage of Billable Employees




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

2011 2012 Change 2011 2012 Change 2011 2012 Change

Vice President $265 $253 -4.5% $203 $243 19.5% $298 $256 -14.1%

Director 217 213 -1.9% 188 223 19.0% 244 208 -14.9%

Delivery Manager 166 194 16.8% 168 216 28.4% 164 184 12.1%

Project/Program Mgr. 160 183 14.3% 171 202 18.4% 144 171 19.0%

Business Consultant 152 180 18.3% 162 195 20.7% 140 172 22.7%

Sr. Tech. Consult./Engr. 166 182 9.9% 175 202 15.4% 149 168 12.6%

Tech. Consultant/Engr. 151 161 6.7% 162 183 12.5% 130 145 11.5%

Solution Architect 185 190 3.1% 194 213 10.0% 169 173 2.4%


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.



Many PSOs have taken the necessary steps to improve profitability. For instance, quarterly non-billable

expense went down from $1,600 per

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 2011. 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?

Figure 7: Annual Revenue per Billable Consultant




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.

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.

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




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 2012. 2013 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. 2013 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.



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):

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,

Figure 8: Service Performance Pillars™




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




∆ 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



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.

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

Lea

de

rsh

ip

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.

Figure 10: Service Performance Pillar Maturity™




Level 1 Initiated

Level 2 Piloted

Level 3 Deployed


Level 5 Optimized

Cli

ent

Re

lati

on

ship

s

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.

Hu

man

Cap

ita

l

Ali

gn

men

t

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.

Se

rvic

e E

xec

uti

on

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.

Fin

ance

an

d O

pe

rati

on

s

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



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.



By Level 2, although primary

focus is still on creating

reference customers, more

emphasis is placed on human

capital alignment for

recruiting and ramping

skilled employees, partners

and contractors. Service

execution focus is on

developing repeatable

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.

Table 5: Service Pillar Importance by Organizational Maturity Level

Pillar Initiated Piloted Deploy. Inst. Opt.

Leadership 1 2 3 4 4

Client Relationships 4 3 3 3 4

Human Capital Align. 1 2 3 4 4

Service Execution 1 3 3 4 4

Finance & Operations 1 1 3 4 4


Figure 12: PS Performance Pillars – Core KPIs




4. REPORT DEMOGRAPHICS

SPI Research surveyed 234 billable Professional Services Organizations (PSOs) from October through

December, 2012. 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 (2008-2009).

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 404 7.4% 420 3.4% 448 6.6%

Software 269 9.8% 281 4.3% 301 6.9%

IT Services 845 7.7% 864 2.3% 905 4.8%

Telecom Equipment 340 17.5% 377 10.8% 408 8.3%

Telecom Services 1663 6% 1686 1.4% 1725 2.3%

All IT 3523 7.9% 3628 3% 3786 4.4%

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: www.asponline.com



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 2010. Revenues from the US PS industry have grown 22% in the past

five years. http://www.census.gov/services/index.html

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

http://www.census.gov/services/index.html



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%;



∆ 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.



Table 9: Number of Participating Firms by Vertical Market (2007 through 2012)

Market Type 2007 2008 2009 2010 2011 2012 Total

PS within Software company ESO 34 66 89 57 56 45 347

IT Consulting PSO 13 24 50 67 61 69 284

Management Consulting PSO 2 12 22 22 31 34 123

Other PS PSO 2 13 30 22 13 31 111

PS within SaaS company ESO 0 0 18 19 26 23 86

PS within Hardware/Networking ESO 1 3 12 9 10 9 44

Architecture / Engineering PSO 0 0 4 6 7 8 25

Advertising (Marcom) PSO 0 0 0 6 10 11 27

Accounting PSO 0 0 0 6 2 4 12

Total 52 118 225 214 216 234 1,059


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



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 (2007 – 2012)


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 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

Table 10: Demographics by Organization Type

KPI Survey

Avg. ESOs PSOs

Size of PS organization (employees) 209 252 186

Annual company revenue (mm) $132.0 $261.4 $63.0

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%




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 2012. 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. 2012 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 45 23 9 69 34 11 8

Average Size of PS organization (employees)

230 81 514 231 152 259 59

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

13.0% 11.6% 13.3% 13.9% 6.6% 15.8% 8.2%

Year-over-year change in PS headcount

10.0% 8.5% 5.6% 10.5% 8.2% 10.6% 3.9%

% of employees billable or chargeable

70.8% 67.6% 80.6% 76.2% 79.7% 81.0% 73.1%

% of PS revenue delivered by 3rd-parties

11.2% 10.2% 12.8% 12.1% 13.8% 9.5% 10.7%




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.

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

market. The average number

of employees per

organization has gone down

slightly over the past four

years, but still is fairly large

compared to the industry

norm. As one might expect,

embedded software firms

and hardware firms are

larger than SaaS PS

organizations. Also,

marketing communication

/advertising organizations

have fairly high numbers of

employees.

Figure 15: Organization Size


Table 12: Average Organization Size (employees)

2008 2009 2010 2011 2012

380 385 228 222 209

ESO PSO 6-Year Avg. Software PS SaaS PS

252 186 282 230 81

Americas EMEA APac Hardware PS IT Consulting

204 280 63 514 231

Under 10 10 - 30 31 - 100 Mgmt. Cons. Advertising

4 18 59 152 259

101 - 300 301 - 700 Over 700 Arch./Engr. Other PS

152 388 2,023 59 241




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.

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.

Table 13 shows the annual company revenue

($132mm) is 6% higher than in last year's survey

($125mm), and 8% lower than the past five-

year'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).

Figure 16: Headquarters Location – Region


Figure 17: Annual Company Revenue




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.

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.

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)

Table 13: Annual Company Revenue (mm)

2008 2009 2010 2011 2012

$235 $143 $107 $125 $132


$261 $63 $143 $287 $103


$143 $91 $83 $452 $59


$7 $28 $61 $46 $99


$145 $463 $1,028 $74 $132


Figure 18: Total Professional Services Revenue




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

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 2010. 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

Table 14: Total Professional Services Revenue (mm)

2008 2009 2010 2011 2012

$74 $68 $30 $30 $43


$63 $32 $47 $60 $13


$41 $60.0 $13 $59 $40


$3 $5 $17 $23 $31


$32 $87 $541 $24 $76


Figure 19: Year-over-Year Change in PS Revenue




past five-year's survey

average (10.1%).

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-over-

year growth in PS revenue,

while those from APac had

the lowest (6.8%).

Organizations with 301 - 700

employees had the highest

(14.7%) year-over-year

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

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.

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 five-

year's survey average (8.4%).

The table shows parity between independent and

embedded services organizations in terms of

Table 15: Year-over-Year Change in PS Revenue

2008 2009 2010 2011 2012

14.8% 3.6% 7.6% 13.7% 11.5%


12.6% 11.0% 10.1% 13.0% 11.6%


11.9% 11.0% 6.8% 13.3% 13.9%


8.1% 10.5% 11.6% 6.6% 15.8%

101 – 300 301 - 700 Over 700 Arch./Engr. Other PS

14.6% 14.7% 10.0% 8.2% 8.4%


Figure 20: Year-over-Year Change in PS Headcount




headcount growth (8.9%).

Organizations based in EMEA

had the highest (9.3%) year-

over-year change in PS

headcount, while those from

APac had the lowest (5.8%).



(12.9%) year-over-year

change in PS headcount,

while those with between 10

- 30 employees had the

lowest (5.5%). SPI Research

found the Advertising/

Marcom market reported the

largest year-over-year gain in

PS headcount (10.6%), while those in the Architecture/Engineering market had the smallest (3.9%).

% of Employees Billable or Chargeable

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%).

Table 16: Year-over-Year Change in PS Headcount

2008 2009 2010 2011 2012

13.6% 2.8% 6.9% 10.1% 8.9%


8.9% 8.9% 8.4% 10.0% 8.5%


9.3% 5.8% 3.8% 5.6% 10.5%


8.3% 5.5% 9.8% 8.2% 10.6%


11.9% 12.9% 8.0% 3.9% 6.7%


Figure 21: Percentage of Employees Billable/Chargeable






10% higher than embedded




highest (75.7%) percentage

of billable employees, while

those from EMEA had the

lowest (72.6%).



(80.3%) percentage of

billable employees, while

those with less than 10

employees had the lowest

(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.

Table 17: Percentage of Employees Billable/ Chargeable

2008 2009 2010 2011 2012

68.1% 69.6% 70.8% 74.2% 75.2%


70.6% 77.7% 71.8% 70.8% 67.6%


75.7% 72.6% 73.6% 80.6% 76.2%


71.3% 72.3% 75.5% 79.7% 81.0%


80.3% 78.3% 78.3% 73.1% 75.4%


Figure 22: Percentage of PS Revenue Delivered by 3rd-parties









from APac had the highest

(12.0%) percentage of PS

revenue delivered by 3rd-

parties, while those from

EMEA had the lowest

(10.6%).

Organizations with over 700


(15.3%) percentage of PS

revenue delivered by 3rd-

parties, 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%).

Table 18: Percentage of PS Revenue Delivered by 3rd-parties

2008 2009 2010 2011 2012

13.6% 12.2% 11.5% 13.1% 11.1%


10.8% 11.3% 12.2% 11.2% 10.2%


11.1% 10.6% 12.0% 12.8% 12.1%


9.3% 11.6% 10.8% 13.8% 9.5%


11.3% 10.8% 15.3% 10.7% 6.4%




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




In this year's benchmark SPI Research added Social Media (SM) applications to those studied. 2012 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

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

don’t face the technology paranoia that

grips many organizations in growth mode.

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.

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


Table 19: Commercial Solution Adoption

Solution 2011 2012

Enterprise Resource Planning (ERP) 89.1% 86.3%

Client Relationship Management (CRM) 86.3% 85.7%

Remote Service Delivery (RSD) 83.4% 82.7%

Social Media (SM) N/A 80.1%

Professional Services Automation (PSA) 76.4% 73.5%

Knowledge Management (KM) 59.5% 54.4%

Human Capital Management (HCM) 49.5% 48.2%

Business Intelligence (BI) 42.9% 30.0%




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

Strategic planning, budgeting, management reporting, decision support Business Intelligence, Budgeting & Planning

Human Resources

Payroll, Benefits, Recruiting, Hiring, Training, Compensation, Performance and Career Management

Human Capital Management

Legal Patents, law suits, contract management and approvals Case Management

Finance & Accounting

Financial management, operations, planning, forecasting, budgeting. Time & expense capture, billing, collections.

Financials, Budgeting & Planning, BI

Marketing & Sales

Marketing automation, sales force automation, account, contact and territory management, pricing & proposals.

Client Relationship Management

Purchasing Material, equipment and external service procurement. Procurement

Service Delivery

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 Management, Resource Management, Knowledge Management, Collaboration Remote Service Delivery

Information Technology

Project scheduling, technology evaluation, systems development and implementation

Application Lifecycle Mgmt., Project Portfolio Management

Research & Development

New service development; knowledge sharing; template, tool and methodology development

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:

http://www.spiresearch.com/spi-research/reports/2010psba.html

http://www.spiresearch.com/spi-research/reports/2010psba.html



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.

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 transaction-

intensive 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.

Table 21: Solution Satisfaction

Solution 2010 2011 2012

Remote Service Delivery and Collaboration 4.14 4.21 4.50

Social Media N/A N/A 4.02

Client Relationship Management (CRM) 3.96 4.09 3.92

Professional Services Automation (PSA) 3.81 3.86 3.84

Enterprise Resource Planning (ERP) 3.70 3.80 3.67

Knowledge Management (KM) 3.62 3.65 3.67

Business Intelligence (BI) 3.56 3.80 3.66

Human Capital Management (HCM) 3.55 3.65 3.66


http://quickbooks.intuit.com/product/accounting-software/professional-services-industry/business-software/

http://www.microsoft.com/dynamics/en/gulf/products/ax-professional-services.aspx

http://www54.sap.com/solutions/tech/cloud/software/business-management-bydesign/overview/index.html



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.

http://www.microsoft.com/en-us/dynamics/crm.aspx?WT.srch=1&WT.mc_ID=SEARCH_CRM&EP=200083526

http://www.salesforce.com/

http://www.financialforce.com/



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.

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.

Table 22: Impact – Client Relationship Management (CRM) Use

KPI CRM Used

CRM Not Used

▲

Survey responses 192 32 N/A

PSO size (employees) 227 147 55%

EBITDA (mm) $16.0 $7.2 122%

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%




Table 23 further breaks down CRM

impact, comparing those

organizations not using CRM to

those organizations using non-

integrated 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.

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.

Table 23: Impact – Commercial CRM Integration

KPI CRM Not

Used Used, Not Integrated

Used, Integrated

Survey responses 32 109 28

Year-over-year change in PS revenue

4.7% 12.8% 11.5%

Satisfaction with CRM solution 3.58 3.87 4.29


148% 193% 214%

Concurrent projects managed by project manager

4.61 4.89 6.02

Annual revenue per billable consultant (k)

$199 $200 $214


http://www.projector.com/

http://www.netsuite.com/portal/industries/services.shtml?gclid=CK6ytInslbUCFUdxQgodQgkAMw



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.

There are also other benefits from

using PSA. Both annual revenue

per billable consultant and billable

employee is approximately 14%

higher for those organizations

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

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.

Table 24: Impact – Professional Services Automation (PSA) Use

KPI PSA Used

PSA Not Used

▲

Survey responses 169 61


EBITDA (mm) $18.5 $4.3 326%

Deal pipeline relative to qtr. book. forecast 198% 184% 8%

Employee utilization 70.8% 68.5% 3%

Annual revenue per billable consultant (k) $214 $188 14%

Annual revenue per employee (k) $174 $153 14%





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.

http://www.sap.com/

http://www.taleo.com/

http://www.rightnow.com/

http://www.successfactors.com/

http://www.workday.com/




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

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.

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.

Table 25: Impact – Human Capital Management (HCM) Use

KPI HCM Used

HCM Not Used

▲



EBITDA (mm) $26.4 $1.6 1524%

Deal pipeline relative to qtr. book. forecast 203% 187% 8%

Time to recruit and hire for standard positions (days)

59.7 66.5 10%

Well-understood career path for all emp. 3.24 2.94 10%







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.


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.

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.

Table 26: Impact – Business Intelligence (BI) Use

KPI BI Used BI Not Used

▲



EBITDA (mm) $43.5 $1.8 2272%

Management to employee ratio 10.24 8.89 15%

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%




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.

http://sharepoint.microsoft.com/en-us/Pages/default.aspx



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


Table 27: Impact – Knowledge Management (KM) Use

KPI KM

Used KM Not Used

▲



Deal pipeline relative to qtr. bookings forecast 217% 167% 30%

Billable Utilization 79.4% 77.4% 3%







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 non-

business related application, many organizations are starting to use it given its flexibility, ease-of-use,

and cost.

Figure 32: Social Media (SM) Solution Used


http://www.webex.com/

http://www.citix.com/

http://www.microsoft.com/



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.

Traditionally, SPI Research has been most

concerned with integration of the various

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.

Table 28: Integration with Core Financials

Solution 2010 2011 2012

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%


Figure 33: Is CRM Integrated with PSA?




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.

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.

Figure 34: Professional Service IT Maturity™ Level




∆ 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.



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

Lea

de

rsh

ip

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.

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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



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.



∆ 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 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.

Figure 35: SPI Research Business Plan Structure




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.



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 www.spiresearch.com for help with your business planning process.

Figure 38: Use Tools to Organize, Strategize and Prioritize





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

8 - 25 20.8% 4.8% 4.50 203% 3.37 $171 $136 86.3% 82.9%

26 - 30 27.8% 12.2% 5.29 200% 4.17 195 164 95.2% 91.5%

31 - 35 34.7% 16.7% 5.38 211% 4.43 197 167 93.9% 89.0%

36 - 40 16.7% 19.2% 5.56 188% 4.77 237 211 96.4% 96.3%

Total/Avg. 100.0% 13.5% 5.21 203% 4.20 $197 $167 93.0% 89.6%




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:

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.

Figure 39: PS Goals




Table 31: PS Goals by Organization Type and Geographic Region

PS Goals Survey ESO PSO Americas EMEA APAC

Client satisfaction 4.83 4.84 4.82 4.86 4.65 4.92

PS revenue 4.36 4.25 4.42 4.40 4.22 4.33

Service margin 4.16 3.95 4.28 4.15 4.14 4.50

Market expansion 3.79 3.81 3.78 3.79 3.78 3.82


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 10 10 – 30 31 – 100 101 – 300 301 - 700 Over 700

Client satisfaction 4.79 4.89 4.90 4.70 4.72 4.60

PS revenue 3.96 4.35 4.53 4.33 4.33 4.40

Service margin 3.64 4.10 4.24 4.27 4.33 4.80

Market expansion 3.50 3.76 3.87 3.70 4.22 3.70


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 Software

PS SaaS PS

Hardware PS

IT Consult

Mgmt. Consult.

Advertise Arch./ Engr.

Other PS

Client satisfaction

4.89 4.78 4.78 4.81 4.74 4.91 5.00 4.85

PS revenue 4.38 3.87 4.56 4.26 4.59 4.45 4.75 4.48

Service margin 4.18 3.43 4.22 4.26 4.41 4.45 4.38 4.03

Market expansion

3.98 3.74 3.67 3.67 4.03 4.00 3.75 3.55




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 4.03 4.16 3.93 4.02 4.03 4.07

Ease of getting things done 3.83 3.84 3.83 3.84 3.74 3.93

Confidence in PS leadership 3.81 3.84 3.79 3.77 3.86 4.14

Goal and measurement alignment 3.79 3.8 3.78 3.81 3.62 3.93

Well understood vision, mission and strategy 3.72 3.67 3.75 3.72 3.69 3.79

Effectively communicates w/employees 3.65 3.6 3.69 3.69 3.41 3.71

Embraces change - nimble and flexible 3.6 3.67 3.54 3.56 3.69 3.86

Innovation focused 3.58 3.53 3.61 3.59 3.51 3.64


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.



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.

SPI Research continues to discover

every critical key performance

measurement improves as

confidence in leadership increases.

According to survey results, few

other factors have the same

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.

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% 3.90 77.0%

2 6.9% 5.7% 4.40 85.4%

3 22.2% 12.1% 5.03 89.9%

4 42.6% 14.6% 5.50 88.9%

5 – Very well 25.5% 16.1% 5.22 93.1%

Total/Average 100.0% 13.7% 5.21 89.6%


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% 2.50 10.3%

2 2.8% 17.1% 4.17 14.6%

3 17.6% 8.0% 4.96 9.7%

4 50.0% 14.0% 5.33 6.9%

5 – Very well 28.7% 17.1% 5.34 5.9%

Total/Average 100.0% 13.7% 5.21 7.4%




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.

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

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

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%

2 10.2% 87.6% 90.8% 3.8%

3 25.9% 91.5% 85.0% 5.5%

4 41.2% 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%


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% 3.39 75.9% 7.8%

3 17.1% 4.00 71.9% 7.9%

4 42.5% 4.25 78.9% 7.5%

5 – Very well 35.5% 4.56 81.9% 6.5%

Total/Average 100.0% 4.28 78.6% 7.2%




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.

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.

2011 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

Table 39: Impact – Effective Employee Communication

Effective Communication

Survey Percent

Revenue Growth

Bid-to-win ratio

Employee Attrition

1 – Not very well 2.3% 12.5% 4.70 18.5%

2 8.8% 7.9% 4.41 8.8%

3 32.9% 12.9% 5.05 7.3%

4 40.7% 15.0% 5.36 7.3%

5 – Very well 15.3% 15.5% 5.63 5.4%

Total/Average 100.0% 13.7% 5.21 7.4%


http://twitter.com/aaronkinnari



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 25th

in math, 17th

in science and 14th

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 2018”.

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 4.28 4.18 4.34 4.30 4.17 4.36

Improve quality and consistency 4.20 4.31 4.14 4.26 3.97 4.00

Improve sales and marketing 4.18 4.03 4.26 4.20 3.95 4.55

Achieve revenue and margin targets 4.18 4.15 4.19 4.15 4.22 4.45

Support rapid growth and expansion 4.09 4.09 4.09 4.05 4.32 3.91

Improve / expand portfolio and markets 3.82 3.75 3.85 3.84 3.73 3.73

Alignment between functions or groups 3.72 3.79 3.68 3.76 3.43 4.00

Improve knowledge management 3.63 3.41 3.75 3.66 3.41 4.00


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

http://www.msnbc.msn.com/id/40544897/ns/us_news-life/t/wake-up-call-us-students-trail-global-leaders/#.UMakBIVTPbo

http://www.renewoureconomy.org/index.php?q=not-coming



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 10 10 – 30 31 – 100 101 - 300 301 – 700 Over 700

Talent management 3.64 4.25 4.47 4.45 4.44 3.89

Improve quality and consistency 3.43 4.36 4.32 4.12 4.44 4.22

Improve sales and marketing 4.07 4.21 4.31 4.06 4.06 3.78

Achieve revenue and margin targets 3.61 4.15 4.21 4.30 4.61 4.56

Support rapid growth and expansion 3.57 4.16 4.15 4.24 4.06 4.11

Improve / expand portfolio and markets 3.75 3.85 3.92 3.61 3.78 3.67

Alignment between functions or groups 3.04 3.79 3.85 3.67 4.00 3.89

Improve knowledge management 3.43 3.66 3.71 3.67 3.61 3.33


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 4.44 4.09 4.56

Talent management 4.38 4.00 4.11

Achieve revenue and margin targets 4.22 3.83 4.78

Support rapid growth and expansion 4.07 4.13 4.33

Improve sales and marketing 4.07 3.87 4.33

Improve / expand portfolio and markets 3.80 3.57 4.33

Alignment between functions or groups 3.73 3.74 4.22

Improve knowledge management 3.62 3.04 3.67




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 4.57 4.24 4.20 4.50 3.81

Improve sales and marketing 4.28 4.32 4.40 4.25 4.03

Improve quality and consistency 4.21 4.03 4.20 4.00 4.03

Support rapid growth and expansion 4.13 4.24 3.90 4.38 3.75

Achieve revenue and margin targets 4.10 4.44 4.00 4.38 4.06

Improve / expand portfolio and markets 3.84 3.82 4.10 3.88 3.71

Alignment between functions or groups 3.76 3.47 4.00 3.88 3.58

Improve knowledge management 3.60 3.88 4.00 3.75 3.71




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

Cli

ent

Re

lati

on

ship

s

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.




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 pre-

defined 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



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.



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 object-

oriented 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).



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

http://www.spiresearch.com/service-lifecycle-management-maturity-model™

http://www.spiresearch.com/service-lifecycle-management-maturity-model™/



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



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




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 2015.

Outcome-based engagements may not be broadly applicable. But given the right conditions, outcome-

based 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.



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 outcome-

based 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.



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


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.

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

Figure 44: Type of Work Sold




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 10 10 – 30 31 – 100 101 - 300 301 - 700 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.



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.



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


vs. 34.2%).

Organizations from EMEA

had the highest percentage

(30.4%) of new client

revenue, while those from

APac had the lowest (26.8%). Organizations with 10 - 30 employees had the highest (34.3%) new client

revenue, while those with between 301 - 700 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

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.

Table 49: New Client Penetration

2008 2009 2010 2011 2012

N/A 39.0% 37.0% 38.6% 30.0%


34.2% 27.7% 36.0% 34.7% 37.7%


30.1% 30.4% 26.8% 28.9% 27.9%


30.9% 34.3% 31.3% 29.1% 26.7%


26.9% 17.4% 20.6% 22.1% 27.3%


Figure 45: Primary Service Sales Measurement




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% 5.31 189% 76.8% 70.3% 81.2% $207 35.6%

Service Bookings 21.0% 15.2% 5.27 230% 68.2% 70.0% 75.7% $223 34.0%

Service Margin 11.4% 12.1% 4.78 194% 76.4% 75.8% 79.2% $226 38.2%

Client Satisfaction 7.3% 8.8% 5.22 147% 70.9% 64.3% 66.0% $158 26.3%

All of the Above 20.1% 11.6% 5.26 184% 81.1% 72.3% 80.9% $195 40.8%

Survey Average 100% 11.5% 5.19 193% 75.4% 70.3% 78.6% $206 35.9%


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.



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.

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% 4.63 132% 72.8% 65.0% 77.4% $164 29.3%

COO 5.8% 8.5% 4.33 212% 83.1% 73.5% 81.9% $233 31.5%

CIO 25.2% 12.2% 5.13 226% 79.3% 70.4% 80.3% $208 35.9%

Line of Business

42.5% 13.0% 5.54 193% 72.5% 70.8% 77.0% $214 36.6%

Purchase. 0.4% -5.0% 3.50 50% 75.0% 65.0% 95.0% $125 35.0%

Other 18.6% 11.1% 4.94 167% 76.8% 70.1% 79.1% $192 39.2%

Average 100% 11.5% 5.19 193% 75.4% 70.3% 78.6% $206 35.9%


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-to-

bid 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

Figure 46: Primary Service Target Buyer




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

Reference. 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% 3.83 192% 72.9% 65.0% 73.8% $181 31.8%

3 19.6% 11.1% 5.17 181% 73.1% 67.4% 76.3% $198 34.9%

4 43.6% 11.4% 5.19 197% 77.0% 70.8% 79.1% $211 36.1%

5 - High 31.6% 12.7% 5.43 193% 75.9% 72.5% 80.1% $207 36.8%

Avg. 100.0% 11.5% 5.19 193% 75.4% 70.3% 78.6% $206 35.9%


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



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



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).

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

3 19.4% 30.3% 11.6% 19.0% 30.0% 7.7%

4 12.0% 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%


Table 54: Solution Importance to Client's Business

2008 2009 2010 2011 2012

N/A N/A N/A 4.00 4.01


4.05 3.99 4.00 4.24 3.70


4.06 3.83 3.91 4.22 4.03


3.57 3.93 4.16 3.88 3.80


3.97 4.11 4.60 4.17 4.04




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


1 - Low 2.7% 10.4% 5.17 158% 65.8% 68.3% 78.3% $154 23.3%

2 9.8% 7.7% 4.26 200% 65.7% 59.1% 80.0% $198 35.3%

3 38.2% 11.9% 5.03 196% 78.1% 72.1% 79.6% $199 37.9%

4 40.9% 12.0% 5.40 196% 75.2% 71.6% 77.4% $218 35.2%

5 - High 8.4% 13.9% 5.76 176% 80.0% 70.0% 78.2% $211 36.1%

Avg. 100.0% 11.5% 5.19 193% 75.4% 70.3% 78.6% $206 35.9%


Table 57 shows solution

uniqueness (3.43) is 3%

lower than in last year's

survey (3.52). The table



lower than embedded



EMEA had the highest (3.63)

solution uniqueness, while

those from APac had the

lowest (3.18).

Organizations with between

301 - 700 employees had the

highest (3.56) solution

Table 57: Solution Uniqueness

2008 2009 2010 2011 2012

N/A N/A N/A 3.52 3.43


3.45 3.41 3.47 3.42 3.57


3.40 3.63 3.18 3.11 3.32


3.39 3.44 3.45 3.76 3.20


3.28 3.56 3.50 3.33 3.59




uniqueness, while those with between 101 - 300 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

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 well-

positioned 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

(5.21), and 1% lower than the

past six-year’s survey average

(5.24). The table shows

independent service


higher than embedded



APac had the highest (5.50)

bid-to-win ratio, while those

from EMEA had the lowest

(4.66).

Organizations with between

Figure 47: Bid-To-Win Ratio


Table 58: Bid-To-Win Ratio

2008 2009 2010 2011 2012

5.23 5.30 5.19 5.21 5.19


5.06 5.26 5.24 5.56 4.43


5.27 4.66 5.50 5.00 5.12


5.05 5.13 5.23 5.55 4.90


4.98 5.58 5.50 6.17 4.74




301 - 700 employees had the highest (5.58) bid-to-win ratio, while those with between 101 - 300

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.

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%).


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%).

Figure 48: Deal Pipeline Relative to Quarterly Bookings Forecast


Table 59: Deal Pipeline Relative to Quarterly Bookings Forecast

2008 2009 2010 2011 2012

192% 182% 196% 203% 193%


201% 189% 196% 205% 191%


193% 181% 227% 233% 214%


144% 189% 204% 153% 156%

101 - 300 301 – 700 Over 700 Arch./Engr. Other PS

203% 215% 206% 200% 176%




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 six-

year’s survey average (97).

While not significantly

shorter, the sales cycle was

reduced by four days, which

means improved sales

effectiveness.


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

Table 60: Sales Cycle (days)

2008 2009 2010 2011 2012

98 90 98 100 96


104 91 97 108 107


93 113 81 78 96


80 92 101 93 76


105 89 107 81 85




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


1 3.6% 2.8% 4.00 169% 65.0% 58.8% 70.0% $191 25.0%

2 11.3% 8.0% 4.38 176% 63.5% 65.4% 67.2% $207 33.5%

3 50.7% 12.6% 5.20 209% 75.3% 70.1% 80.4% $201 35.5%

4 29.9% 11.9% 5.56 182% 79.2% 73.3% 80.8% $224 39.2%

5 4.5% 19.4% 6.39 167% 85.0% 73.5% 82.5% $192 36.4%

Avg. 100% 11.5% 5.19 193% 75.4% 70.3% 78.6% $206 35.9%


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).






North America had the

highest (3.23) service sales

effectiveness, while those

Table 62: Service Sales Effectiveness

2008 2009 2010 2011 2012

N/A 3.02 3.09 3.25 3.20


3.00 3.31 3.14 3.07 2.74


3.23 3.11 3.09 3.22 3.19


3.37 2.97 3.28 3.45 3.50


3.16 3.39 3.44 3.43 3.35




from APac had the lowest (3.09).

Organizations with over 700 employees had the highest (3.44) service sales effectiveness, while those

with between 10 - 30 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 six-

year’s survey average (2.41).

The table showed

independent service






service marketing effectiveness, while those from EMEA had the lowest (2.46).

Table 63: Service Marketing Effectiveness

2008 2009 2010 2011 2012

N/A 2.29 2.32 2.39 2.61


2.23 2.81 2.41 2.14 2.36


2.63 2.46 2.82 2.44 2.72


2.61 2.33 2.76 2.68 3.60


2.77 2.56 2.78 2.71 2.84




Organizations with over 700 employees had the highest (2.78) service marketing effectiveness, while

those with between 10 - 30 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

ratios and lower sales costs.

Any maturity improvement

plan must address measuring

and improving client

satisfaction and building

references.

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% 4.83 183

60% - 70% 10.3% 8.9% 4.85 194

70% - 80% 20.6% 12.6% 4.96 203

80% - 90% 16.6% 14.4% 5.85 206

Over 90% 30.0% 10.9% 5.55 223

Total 100.0% 11.5% 5.19 $206


Table 65: Percentage of Referenceable Clients

2008 2009 2010 2011 2012

71.0% 74.1% 72.5% 71.4% 75.4%


67.3% 80.0% 73.1% 66.9% 68.3%


76.1% 73.1% 72.0% 63.9% 79.2%


74.8% 77.5% 76.0% 83.1% 80.6%


75.8% 70.6% 67.8% 80.0% 77.4%




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 10 - 30 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

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 hand-

crafting 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

Figure 49: Primary Responsibility for New Solution Dev.




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% 339 8.3% 3.55 74.5% 90.9% 75.8%

2 22.1% 204 11.9% 4.08 71.0% 90.4% 76.5%

3 41.5% 181 12.1% 4.24 74.9% 91.0% 78.3%

4 26.3% 122 10.4% 4.49 77.5% 92.0% 79.6%

5 - High 4.6% 107 18.1% 4.80 85.0% 96.9% 85.0%

Avg. 100.0% 209 11.5% 4.29 75.4% 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 101 - 300 employees had the highest (3.19) solution development

effectiveness, while those with over 700 employees had the lowest (2.63). SPI Research found the




market shows the highest

solution development

effectiveness (3.13), while

those in the Hardware &

Networking PS market had

the lowest (2.78).

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

Table 67: Solution Development Effectiveness

2008 2009 2010 2011 2012

N/A 3.03 2.98 3.07 3.02


2.99 3.04 3.03 3.02 3.05


3.05 2.94 2.91 2.78 2.99


2.89 2.87 3.19 3.13 3.00


3.19 2.94 2.63 2.86 3.12




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 2009. 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 10 10 - 30 31 – 100 101 - 300 301 - 700 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.


Other PS

Time & Expense 55.2% 50.6% 49.0% 63.4% 49.0% 37.8% 52.0% 51.2%

Fixed Time / Fixed Fee

43.3% 47.6% 51.0% 32.7% 48.0% 61.1% 48.0% 46.3%

Shared Risk / Perform.-based

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 on-

target 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



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 “hunter-

skinner” 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.



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% $90.6 25.9% 8% $80.8 15.3%

$1mm - $1.5mm 15% 99.3 24.3% 11% 100.6 20.9%

$1.5mm - $2.0mm 5% 95.0 14.0% 11% 107.3 23.1%

$2.0mm - $2.5mm 2% 76.7 15.0% 6% 107.2 25.9%

$2.5mm - $3.0mm 5% 97.5 27.1% 5% 117.5 27.9%

Over $3mm 18% 103.2 28.0% 21% 111.0 30.8%

N/A 33% 98.3 31.0% 37% 110.0 40.0%

Average Target $1.78mm $97.2 25.6% $2.23mm $105.2 25.4%


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% $104.8 14.8% 18.8% $109.6 22.6%

$1mm - $1.5mm 7.4% $127.5 20.0% 7.6% $129.1 14.1%

$1.5mm - $2.0mm 5.2% $120.7 11.4% 6.9% $130.0 17.8%

$2.0mm - $2.5mm 5.9% $133.8 13.8% 3.5% $151.0 26.3%

$2.5mm - $3.0mm 3.0% $122.5 18.3% 5.6% $175.0 18.6%

Over $3mm 6.7% $130.8 11.0% 12.5% $145.0 20.0%

N/A 46.7% $117.7 21.4% 45.1% $140.0 26.9%

Average Target $1.42mm $117.8 16.3% $1.78mm $133.9 21%



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) 209 252 186 204 280 63

Product Sales number of reps selling 17.4 32.4 6.1 19.6 10.0 3.8

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 4.8 5.0 4.6 4.5 6.6 4.4

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 5.1 5.5 4.9 5.1 6.7 1.8

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 4.2 4.8 3.8 4.6 2.5 2.7

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%




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 10 10 - 30 31 - 100 101 - 300 301 - 700 Over 700

Organization Size (people) 4 18 59 152 388 2,023

Product Sales number of reps selling 8.1 7.3 14.7 17.1 46.8 60.0

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 5.2 2.0 3.1 5.4 8.9 25.7

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 2.6 2.1 3.6 6.9 16.8 15.0

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 4.4 1.8 2.8 3.4 6.6 28.9

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%




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) 230 81 514 231 152 259 59 216

Product Sales number of reps selling

34.8 23.6 44.5 6.0 2.3 3.8 18.0 8.9

Prod. Sales Ann. PS Bookings Target (mm)

$1.64 $2.16 $1.50 $1.76 $1.50 N/A $2.00 $2.13

Product Sales Annual Rep. Base Pay (k)

$108.7 $88.6 $102.0 $90.9 $108.1 N/A $72.5 $87.7

Product Sales On-target Variable

29.9% 29.6% 37.0% 20.0% 21.4% N/A 25.0% 15.0%

Service Sales number of reps selling

4.6 2.0 4.1 4.2 4.8 5.3 2.8 9.9

Service Sales Ann. PS Book. Target (mm)

$2.10 $2.94 $2.50 $2.24 $2.06 $2.38 $1.92 $2.33

Service Sales Annual Rep. Base Pay (k)

$124.2 $107.0 $87.5 $100.9 $114.2 $60.0 $93.3 $101.1

Service Sales On-target Variable

28.5% 17.5% 36.3% 27.6% 20.6% 25.0% 21.3% 16.4%

Service Mgr. number of reps selling

6.3 5.8 2.8 4.1 7.9 7.1 4.2 3.0

Service Mgr. Ann. PS Bookings Target (mm)

$1.58 $1.20 $1.06 $1.47 $1.05 $0.92 $2.00 $1.78

Service Managers Annual Base Pay (k)

$110.5 $118.5 $103.8 $122.3 $123.0 $93.3 $115.0 $125.5

Service Managers On-target Variable

17.0% 15.3% 21.3% 16.9% 15.6% 7.5% 15.0% 12.0%

Partner Annual number of reps selling

4.4 2.2 16.8 4.0 3.3 2.3 2.4 4.2

Partner Annual PS Booking Target (mm)

$2.63 $2.31 $1.75 $1.62 $1.53 $2.25 $0.50 $1.91

Partner Annual Base Pay (k)

$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%




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, project-

based 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 5 Optimized

Hu

man

Cap

ita

l A

lig

nm

ent

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.



Human Capital Alignment Trends

In 2000, approximately 605

million people were 60 years

or older. By 2050, that

number is expected to be

close to 2 billion. At that

time, seniors will outnumber

children 14 and under for the

first time in history. Every

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.

Table 77: An Aging Workforce – Marginalized Youth

Age Group 1990 2000 2005 2010

Persons 15-24 employed 59.8% 59.7% 53.9% 45.0%



Source: OECD Factbook 2011-2012



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%)


2 Flexible Work Arrangements (20%)

Additional compensation (19%)


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 2015 4.4 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



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 2011. 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 2011 2012 Change

Talent management 4.13 4.28 3.7%

Improve quality and consistency 4.00 4.20 5.1%

Improve sales and marketing 3.99 4.18 4.8%

Achieve revenue and margin targets 4.06 4.18 2.8%

Support rapid growth and expansion 4.15 4.09 -1.5%

Improve / expand portfolio and markets 3.71 3.82 2.7%

Alignment between functions or groups 3.60 3.72 3.2%

Improve knowledge management 3.51 3.63 3.3%

Average 3.89 4.01 3.0%




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 on-

time project delivery decreases while

average project overruns increase.

Remaining employees have to pick up

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,

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%




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 out-

of-college or graduate school), deliver the majority of project billable hours and profit.



Figure 50: The Traditional Consulting Pyramid


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

•Sell PS

•Manage Multiple Accounts

•Manage Multiple Projects

•Manage Consultants

•Manage 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

•Executive client relationships

•Leadership skills

•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

CEO

PS VP

Consultant

Business

Reporting

Technical

•Set strategy, vision, goals

•Lead & Manage PS

•Establish/maintain executive relationships

•Grow PS

Skills RequiredResponsibilities



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



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.



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




Survey Results


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 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

easier to recruit and ramp

new employees while

ensuring employees stay

with the firm. Utilization and

recommendation are not

strongly correlated.

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

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% 75.0 75.0 75.0%

2 1.8% 2.0% 45.0 60.0 70.0%

3 14.5% 7.2% 71.8 75.5 68.3%

4 35.2% 8.4% 62.7 66.8 70.0%

5 48.0% 6.4% 59.7 58.0 71.2%

Avg. 100.0% 7.2% 63 days 64 days 70.3%


Table 82: Recommend Company to Friends and Family

2008 2009 2010 2011 2012

4.23 4.30 4.37 4.20 4.29


4.12 4.38 4.28 4.16 4.22


4.29 4.23 4.36 3.89 4.41


4.18 4.11 4.41 4.39 4.50


4.38 4.31 4.36 4.50 4.10






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 31 - 100

employees had the highest (4.41) recommend company to friends/family, while those with between 10 -

30 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

2008 2009 2010 2011 2012

7.3% 6.1% 6.8% 7.4% 7.2%


6.4% 7.7% 6.9% 5.7% 6.3%


7.9% 4.7% 4.1% 9.2% 8.5%


1.5% 5.7% 7.8% 5.8% 13.5%


10.0% 11.3% 12.5% 6.9% 6.6%




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.


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 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.

Figure 56: Why Employees Leave




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.

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.

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% $205 86.8% 14.7%

1:10 39.5% 203 87.5% 17.0%

1:15 13.9% 213 90.2% 18.8%

1:20 4.0% 228 88.6% 13.5%

Over 1:20 1.3% 250 87.5% 28.1%

Total/Average 100.0% $207 87.6% 16.3%










management to employee

ratio, while those from APac

had the lowest (7.7).



(12.2) management to

employee ratio, while those

with fewer than 10


(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 86: Management-to-Employee Ratio

2008 2009 2010 2011 2012

11.3 10.0 8.9 9.8 9.2


9.9 8.9 9.8 10.2 9.1


9.1 10.4 7.7 11.1 10.2


6.4 8.4 9.2 7.3 7.5


10.8 11.9 12.2 8.1 8.3


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%

30 - 60 days 29.6% 70.1% 78.6% 15.8%

60 - 90 days 18.4% 67.5% 77.4% 17.7%

90 - 120 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%




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

positions (62.8) is 4% higher


(60.1), and 4% higher than

the past six-year’s survey

average (60.7). This key

performance indicator shows

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

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 101 - 300 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.

Table 88: Time to Recruit and Hire for Standard Positions (days)

2008 2009 2010 2011 2012

60 58 61 60 63


71 58 61 71 76


62 69 53 65 56


75 64 60 61 57


59 59 62 77 58




The table showed

independent service


lower than embedded

services organizations (56 vs.

79). Organizations from

EMEA had the highest (70)

time for a new hire to

become productive, while


lowest (53). Organizations

with over 700 employees had

the longest (93) time for a

new hire to become

productive, while those with

between 31 - 100 employees

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 skill-

building, 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.

Table 89: Time for a New Hire to Become Productive (days)

2008 2009 2010 2011 2012

71 66 72 67 64


79 56 67 81 72


64 70 53 85 56


67 66 59 63 33


67 63 93 77 58







services organizations (7.1 vs.

8.8). Organizations from


guaranteed training per

employee per year, while


lowest (7.3).



(10.0) guaranteed training

per employee per year, while

those with 10 - 30 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,

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

Table 90: Guaranteed Training Days per Employee per Year

2008 2009 2010 2011 2012

4.4 3.8 4.5 8.1 7.7


8.8 7.1 5.8 9.0 8.6


7.7 7.3 8.0 8.6 7.2


8.8 6.9 7.4 6.8 3.8


7.3 9.0 10.0 6.8 7.8


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% $196

2 17.2% 65.0% 76.3% 209

3 43.9% 70.8% 78.8% 202

4 22.2% 72.7% 79.9% 213

5 – Very well 9.5% 76.5% 88.6% 213

Total/Average 100.0% 70.2% 79.0% $206




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


(2.93). This KPI dipped

slightly in 2012 from its five-

year 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.

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 101 - 300 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).

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.

Table 92: Well-Understood Career Path for all Employees

2008 2009 2010 2011 2012

2.33 2.67 3.11 3.28 3.10


2.97 3.16 2.93 3.09 2.70


3.11 3.09 2.82 3.00 3.25


2.78 2.97 3.06 3.09 3.00


3.59 3.39 2.75 2.88 3.15


Figure 57: Employee Satisfaction Survey Frequency




Table 93 shows the

frequency of conducting an

annual employee satisfaction

survey (1.77) is 5% higher


(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

organizations that do in fact

conduct employee

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.

Table 93: Frequency of Conducting an Employee Satisfaction Survey (years)

2008 2009 2010 2011 2012

N/A N/A 1.84 1.68 1.77


1.75 1.78 1.76 1.92 1.44


1.80 1.65 1.67 1.75 1.57


2.06 1.98 1.68 1.68 2.20


1.75 1.29 1.75 2.20 2.10




Although PS firms would like to

abandon the billable utilization

metric (and all the accompanying

time tracking it entails),

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%). 2012 is the first year the average billable

utilization rose over 70%, which is the minimum recommended by SPI Research.


organizations (73.2% vs.

65.1%). Organizations from

APac had the highest (73.2%)

employee utilization, while


lowest (68.5%).



(75.0%) employee utilization,



(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

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%


Table 95: Consultant Billable Utilization

2008 2009 2010 2011 2012

65.3% 67.6% 67.5% 69.6% 70.3%


65.1% 73.2% 68.3% 65.3% 61.3%


70.5% 68.5% 73.2% 68.9% 72.5%


63.9% 68.2% 71.6% 71.7% 76.1%


73.8% 72.5% 75.0% 72.1% 77.2%




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 2011. 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


Vacation/personal/holiday 180 168 -7.0% 189 169 -11.7% 171 168 -1.9%

Education/training 70 65 -7.2% 80 77 -4.5% 60 58 -3.1%

Administrative 164 150 -9.0% 206 189 -9.2% 127 126 -0.4%

Non-billable project hours 265 225 -17.9% 334 300 -11.5% 206 178 -15.9%

Total Billable Hours 1,430 1,437 0.5% 1,321 1,317 -0.3% 1,524 1,512 -0.8%

Billable hours on-site 851 792 -7.5% 724 558 -29.7% 960 938 -2.4%

Billable hours off-site 579 645 10.3% 597 759 21.3% 564 574 1.8%

Total Hours 2,109 2,046 -3.1% 2,130 2,051 -3.9% 2,088 2,042 -2.2%


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.



Table 97: Annual Hour Comparison by Region

Annual Hours

Americas EMEA APAC


Vacation/personal/holiday 171 165 -3.9% 218 175 -24.7% 192 214 10.2%


Administrative 170 155 -9.9% 144 133 -8.7% 136 131 -4.1%

Non-billable project hours 271 218 -24.4% 241 268 10.0% 252 215 -17.3%


Billable hours on-site 830 820 -1.2% 903 627 -44.1% 998 788 -26.6%


Total Hours 2,125 2,068 -2.7% 2,043 1,922 -6.3% 2,089 2,027 -3.0%


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 10 10 - 30 31 - 100


Vacation/personal/holiday 140 144 2.5% 175 174 -0.4% 197 162 -21.3%

Education/training 60 84 28.9% 66 54 -22.2% 73 59 -24.0%

Administrative 219 178 -23.1% 168 169 0.8% 149 142 -4.6%


Total Billable Hours 1,292 1,325 2.5% 1,425 1,371 -3.9% 1,400 1,484 5.6%

Billable hours on-site 652 502 -29.9% 884 768 -15.1% 783 789 0.7%


Total Hours 2,077 2,071 -0.3% 2,108 2,010 -4.9% 2,106 2,060 -2.2%


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 2011. 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.



Table 99: Annual Hour Comparison by Organization Size (> 100 employees)

Annual Hours

101 - 300 301 – 700 Over 700


Vacation/personal/holiday 185 192 3.7% 157 156 -0.5% 192 200 4.2%

Education/training 80 68 -18.1% 59 94 37.5% 59 67 11.7%

Administrative 155 107 -45.1% 173 170 -1.9% 116 145 19.9%

Non-billable project hours 199 186 -7.0% 172 155 -11.0% 186 223 16.4%

Total Billable Hours 1,513 1,464 -3.4% 1,568 1,521 -3.1% 1,518 1,448 -4.8%

Billable hours on-site 942 947 0.5% 928 902 -2.9% 1,197 982 -21.9%

Billable hours off-site 571 517 -10.5% 640 619 -3.4% 321 466 31.1%

Total Hours 2,132 2,016 -5.7% 2,129 2,096 -1.6% 2,071 2,082 0.5%


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


Vacation/personal/holiday 205 170 -20.3% 157 176 10.6% 183 145 -26.2%

Education/training 83 91 8.4% 67 59 -14.3% 104 66 -57.3%

Administrative 203 157 -29.2% 245 246 0.2% 151 190 20.6%



Billable hours on-site 832 567 -46.7% 356 394 9.7% 986 927 -6.4%

Billable hours off-site 481 795 39.5% 919 862 -6.7% 424 462 8.2%

Total Hours 2,114 2,048 -3.2% 2,140 2,072 -3.3% 2,195 2,027 -8.3%


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



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

2010 2011 Change 2010 2011 Change

Vacation/personal/holiday 168 178 5.7% 165 161 -2.2%

Education/training 60 64 5.9% 68 68 -0.6%

Administrative 97 133 27.1% 179 112 -60.4%

Non-billable project hours 205 159 -29.1% 200 219 8.5%

Total Billable Hours 1,561 1,506 -3.7% 1,489 1,413 -5.4%

Billable hours on-site 1,030 990 -4.0% 781 836 6.6%

Billable hours off-site 531 515 -3.0% 708 577 -22.6%

Total Hours 2,091 2,040 -2.5% 2,101 1,973 -6.5%


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 2012.

Table 102: Annual Hour Comparison by PS Market (Advertising, Arch./Engr., Other PS)

Annual Hours

Advertising Architecture/Engineering Other PS


Vacation/personal/holiday 180 153 -18.0% 206 155 -32.9% 177 159 -11.7%


Administrative 165 88 -87.5% 93 134 30.4% 147 136 -8.5%

Non-billable project hours 258 254 -1.8% 136 270 49.6% 211 184 -14.4%

Total Billable Hours 1,415 1,498 5.5% 1,621 1,570 -3.3% 1,481 1,572 5.8%

Billable hours on-site 1,341 1,120 -19.7% 851 484 -76.0% 843 1,013 16.8%

Billable hours off-site 74 378 80.4% 770 1,086 29.1% 638 559 -14.1%

Total Hours 2,065 2,025 -2.0% 2,106 2,170 2.9% 2,073 2,093 1.0%


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



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 2011 2012 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 10 10 - 30 31 – 100 101 - 300 301 - 700 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%




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 2012.

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 2008 2009 2010 2011 2012

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%



Job Title 2008 2009 2010 2011 2012

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 2012. 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


Vice President N/A $156 N/A N/A $164 N/A N/A $151 N/A

Director 148 134 -10.4% 141 136 -3.6% 154 133 -15.9%

Delivery Manager N/A 117 N/A N/A 113 N/A N/A 119 N/A

Project/Program Mgr. 109 104 -4.7% 103 105 1.7% 114 104 -9.9%

Business Consultant 99 98 -1.1% 93 95 2.0% 104 100 -4.4%

Sr. Tech. Consult./Engr. N/A 103 N/A N/A 99 N/A N/A 106 N/A

Tech. Consultant/Engr. 90 86 -4.2% 87 84 -3.4% 92 88 -4.4%



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 2012.



Table 108: Annual Base Salary by Region (k)

Role

Americas EMEA APAC



Director 153 132 -15.6% 113 136 17.1% 170 154 -10.2%


Project/Program Mgr. 110 103 -6.5% 92 100 7.7% 124 126 1.3%



Tech. Consultant/Engr. 93 87 -7.0% 71 72 1.8% 97 107 9.5%



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 10 10 – 30 31 – 100



Director 118 114 -3.9% 144 128 -12.3% 146 133 -9.7%


Project/Program Mgr. 96 94 -2.4% 99 97 -2.0% 111 104 -6.4%

Business Consultant 95 82 -15.9% 94 93 -1.5% 99 102 2.7%


Tech. Consultant/Engr. 79 64 -23.1% 90 83 -8.6% 91 92 0.6%

Solution Architect 81 78 -4.5% 98 104 6.0% 106 116 8.3%


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.



Table 110: Annual Base Salary by Organization Size (> 100 employees) (k)

Role

101 – 300 301 – 700 Over 700



Director 162 137 -18.0% 179 148 -20.6% 168 151 -11.3%


Project/Program Mgr. 116 110 -5.6% 128 114 -12.2% 113 105 -7.6%



Tech. Consultant/Engr. 85 87 2.3% 104 87 -19.7% 110 85 -29.4%

Solution Architect 107 111 4.0% 115 109 -5.6% 110 102 -7.8%


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 2012. SaaS

PSOs saw a rise of 14.6% in 2010 but experienced a -2.2% decline in 2011 and are now flat in 2012.

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 2012. 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



Director 144 137 -5.1% 141 140 -0.4% 129 120 -7.5%


Project/Program Mgr. 106 103 -3.0% 104 112 6.8% 90 102 11.9%



Tech. Consultant/Engr. 86 81 -5.8% 90 90 -0.3% 90 86 -4.3%

Solution Architect 100 108 7.3% 115 106 -9.0% 100 101 0.8%


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.



Table 112: Annual Base Salary by IT & Management Consultancy (k)

Role


2011 2012 Change 2011 2012 Change

Vice President N/A $152 N/A N/A $156 N/A

Director 150 135 -10.8% 165 131 -26.1%

Delivery Manager N/A 123 N/A N/A 116 N/A

Project/Program Mgr. 116 107 -8.0% 126 105 -20.3%

Business Consultant 105 99 -5.9% 109 106 -3.3%

Sr. Tech. Consult./Engr. N/A 106 N/A N/A 115 N/A

Tech. Consultant/Engr. 92 88 -4.3% 107 97 -10.3%

Solution Architect 109 117 7.0% 105 114 7.5%


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)

Role




Director 167 93 -78.9% 148 162 8.5% 139 130 -7.2%


Project/Program Mgr. 77 78 0.6% 90 102 11.5% 103 93 -11.0%

Business Consultant 97 78 -25.2% 175 95 -84.2% 84 94 10.3%

Sr. Tech. Consult./Engr. N/A N/A N/A N/A 97 N/A N/A 98 N/A

Tech. Consultant/Engr. 80 60 -33.3% 79 68 -15.6% 82 83 1.0%

Solution Architect 73 N/A N/A 60 102 41.0% 95 86 -10.1%


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.



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


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



Director 23.2% 19.3% -20.3% 18.2% 16.7% -9.2% 24.6% 15.8% -55.4%


Project/Program Mgr. 14.7% 12.3% -19.1% 12.7% 13.8% 8.1% 13.3% 7.5% -77.3%



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.



Table 116: Variable Compensation by Organization Size (< 100 employees)

Role

Under 10 10 - 30 31 – 100



Director 18.7% 9.2% -104.0% 22.4% 16.6% -34.9% 21.8% 19.9% -9.7%





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

101 - 300 301 - 700 Over 700



Director 24.7% 19.8% -24.6% 24.4% 19.2% -26.9% 26.0% 27.0% 3.7%



Business Consultant 13.8% 9.4% -47.2% 16.3% 10.4% -57.0% 12.5% 17.0% 26.5%


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.



Table 118: Variable Compensation by Embedded Service Organization Type

Role




Director 19.9% 16.5% -20.3% 23.8% 21.4% -11.4% 20.0% 17.5% -14.3%


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%


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


2011 2012 Change 2011 2012 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.



Table 120: Variable Compensation by PS Market (Advertising, Arch./Engr., Other PS)

Role




Director 18.0% 11.7% -54.3% 12.0% 18.3% 34.5% 26.4% 17.5% -50.9%


Project/Program Mgr. 5.0% 2.5% -100.0% 7.0% 11.7% 40.0% 15.9% 9.3% -70.4%

Business Consultant 10.0% 2.5% -300.0% 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% -133.3%

Solution Architect 5.0% N/A N/A 0.0% 11.7% 100.0% 22.5% 11.0% -104.5%


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.



Table 122: Target Utilization by Organization Size

Role Under 10 10 - 30 31 – 100 101 - 300 301 - 700 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.


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%




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 5 Optimized

Se

rvic

e E

xec

uti

on

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;



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.



Table 125: Impact of Resource Management Strategies


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.

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.

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.

EBITDA

Centrally Managed 56.6% 10.7% 161 1,454 81.6% $215 89.8% 18.0%

Locally Managed 25.1% 12.5% 165 1,409 74.1% 189 94.5% 14.9%

Center of Excellence

5.0% 17.3% 165 1,474 83.0% 219 95.0% 18.4%

By Account 8.7% 11.9% 266 1,500 80.3% 201 89.4% 6.6%

By Horizontal Skill Set

2.7% 8.3% 177 1,161 59.2% 217 90.8% 21.5%

Other 1.8% 21.9% 279 1,332 72.5% 169 88.8% 17.1%

Total 100.0% 11.7% 174 1,437 78.9% $207 91.2% 16.3%



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


professional services organizations. In this section SPI Research analyzes 14 Service Execution KPIs that

are critical to attaining superior service delivery performance.



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 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

attained with accurate

visibility to current and

future demand along with

the right mix of required

resource skills, schedules and

preferences.


project staffing time (days)

(12.5) is 1% lower than in last




Staffing time over the past

years has increased

Figure 58: Resource Management Process


Table 126: Project Staffing Time (days)

2008 2009 2010 2011 2012

8.0 6.6 7.2 12.6 12.5


11.1 13.3 9.5 12.4 9.2


11.9 14.9 14.3 8.9 14.9


11.5 11.8 13.0 11.5 11.3


15.2 10.1 10.3 10.4 13.3




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 101 - 300 employees had the highest (15.2) average project staffing time

(days), while those with between 301 - 700 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

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).

Table 127: Impact – Project Team Size (people)

Project Team Size (people)

Survey Percent

Billable Utilization


EBITDA

1 - 2 32.7% 67.0% $210 16.0%

3 - 5 53.0% 71.8% 210 17.7%

6 - 8 11.5% 72.0% 182 10.9%

9 - 11 1.8% 77.5% 181 22.5%

Over 11 0.9% 80.0% 175 9.6%

Total/Average 100.0% 70.4% $206 16.4%






(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).

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 20-20 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.


number of concurrent projects

managed by a project manager to



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 128: Project Staff Size (people)

2008 2009 2010 2011 2012

3.9 4.3 4.0 4.0 3.7


3.4 3.9 4.0 3.8 3.0


3.7 4.1 3.0 2.9 4.0


2.3 3.1 4.1 3.5 4.8


4.5 4.5 4.8 3.4 4.0


Table 129: Impact – No. of Concurrent Projects Managed by Project Mgr.

Concurrent Projects Managed

Survey Percent


Ann. Margin Target

Achieve. EBITDA

1 - 2 28.2% 71.5% 86.5% 12.8%

3 - 5 39.5% 72.6% 88.1% 16.1%

6 - 8 14.1% 67.8% 89.3% 19.9%

9 - 11 5.9% 65.0% 95.0% 25.0%

Over 11 12.3% 68.5% 82.7% 17.1%

Total/Average 100.0% 70.7% 87.6% 16.4%




Table 130 shows the

concurrent projects managed

by a PM (5.3) is 27% higher




average (4.6). This increase

is significant, as project

management time is directly

correlated with project

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

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 101 - 300 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).

Table 130: Concurrent Projects Managed by Project Manager

2008 2009 2010 2011 2012

4.6 4.4 4.9 4.2 5.3


6.5 4.7 4.6 6.1 6.8


5.7 4.1 3.2 6.5 3.8


4.9 5.6 5.1 4.6 9.6


4.6 6.0 7.2 6.2 5.3






(6.0) average project

duration (months), while

those with between 10 - 30


(4.4). SPI Research found the


shows the largest average

project duration (months)

(7.8), while those in the

Hardware & Networking PS


(3.6).

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.


number of concurrent projects

managed by a project manager to



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

Table 131: Project Duration (months)

2008 2009 2010 2011 2012

5.1 4.8 4.5 5.2 5.3


4.5 5.8 5.0 4.8 4.2


5.4 5.4 2.8 3.6 4.9


5.3 4.4 5.7 6.3 7.8


5.8 5.1 6.0 5.0 6.3


Table 132: Impact – On-time Project Delivery

On-time Project Delivery

Survey Percent



Ann. Margin Target

Achieve.

Under 40% 4.1% 63.3% $188 87.9%

40% - 60% 5.5% 64.1% 200 81.3%

60% - 70% 10.1% 68.9% 186 81.5%

70% - 80% 24.4% 69.2% 218 87.4%

80% - 90% 29.0% 69.9% 204 88.1%

Over 90% 26.7% 75.4% 213 91.5%

Total/Average 100.0% 70.5% $207 87.8%




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%


year’s survey average

(77.4%). The table showed

independent service






(83.5%) projects delivered

on-time, while those from

EMEA had the lowest

(76.0%).

Organizations with over 700 employees had the highest (82.8%) projects delivered on-time, while those

with between 101 - 300 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%).

Table 133: Projects Delivered On-time

2008 2009 2010 2011 2012

73.8% 79.2% 77.9% 76.5% 78.6%


74.9% 80.6% 77.4% 72.6% 76.1%


78.8% 76.0% 83.5% 77.8% 78.6%


81.4% 77.2% 78.6% 84.8% 81.5%


75.2% 81.7% 82.8% 82.9% 80.0%






(5.5%) projects canceled,




the Advertising/Marcom

market shows the largest

projects canceled (9.6%),

while those in the

Architecture/Engineering


(1.0%).

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 134: Project Cancellation Rate

2008 2009 2010 2011 2012

2.2% 2.1% 2.0% 2.1% 3.7%


4.5% 3.2% 2.5% 1.8% 8.7%


4.2% 1.4% 1.8% 8.4% 3.3%


1.6% 4.3% 3.1% 1.5% 9.6%


5.2% 5.5% 1.9% 1.0% 3.6%


Table 135: Impact – Average Project Overrun

Average project overrun

Survey Percent

On-time Completion


Annual Rev. Target

Achieve.

Never 7.0% 89.0% $205 95.0%

0% - 5% 35.2% 87.6% 207 90.7%

5% - 10% 27.2% 78.3% 217 91.3%

10% - 20% 18.8% 73.5% 212 92.4%

20% - 30% 8.5% 57.1% 186 91.7%

Over 30% 3.3% 42.9% 142 80.8%

Total/Average 100.0% 78.5% $206 91.2%





project overrun (9.2%) is 10%

higher than in last year's

survey (8.3%), and 14% lower


survey average (10.6%).






from EMEA had the highest

(10.7%) average project

overrun, while those from


Organizations with 301 - 700 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 136: Project Overrun Rate

2008 2009 2010 2011 2012

11.6% 11.9% 12.3% 8.3% 9.2%


10.4% 8.5% 10.6% 12.5% 8.0%


8.9% 10.7% 7.8% 7.5% 9.3%


7.1% 10.1% 8.3% 6.6% 8.8%


10.9% 11.3% 5.9% 10.0% 7.9%


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% $195 9.7%

20% - 40% 7.9% 77.4% 242 17.6%

40% - 60% 16.7% 75.3% 215 15.7%

60% - 80% 24.5% 75.6% 187 15.0%

Over 80% 39.8% 80.6% 208 18.5%

Total/Average 100.0% 78.5% $205 16.1%




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 average (64.6%).

The table showed

independent service


lower than embedded




(65.4%) use of a standardized

delivery methodology, while

those from APac had the lowest (60.0%).

Organizations with 301 - 700 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

Table 138: Standardized Delivery Methodology Use

2008 2009 2010 2011 2012

70.2% 65.2% 57.7% 66.6% 63.6%


67.4% 61.4% 64.6% 63.6% 76.3%


63.4% 65.4% 60.0% 62.2% 61.3%


55.4% 61.5% 68.1% 54.5% 70.0%


62.0% 69.4% 60.0% 77.9% 63.3%




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).


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).

Organizations with fewer

than 10 employees had the

highest (3.61) effectiveness

of resource management

process, while those with

over 700 employees had the

lowest (3.11). SPI Research

found the Other PS market

shows the highest

effectiveness of resource

management processes

(3.69), while those in the



(3.00).

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.

Table 139: Impact – Resource Management Effectiveness

Resource Management Effectiveness

Survey Percent


On-time Completion

EBITDA

1 - Low 0.9% 52.5% 57.5% N/A

2 11.0% 65.2% 71.2% 15.8%

3 36.7% 68.1% 76.7% 16.0%

4 38.1% 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%


Table 140: Effectiveness of Resource Management Process

2008 2009 2010 2011 2012

N/A 3.32 3.28 3.47 3.53


3.44 3.58 3.40 3.35 3.57


3.55 3.46 3.30 3.56 3.57


3.61 3.52 3.60 3.64 3.40


3.53 3.33 3.11 3.00 3.69





effectiveness of estimating

processes to other key


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 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).

Organizations with fewer

than 10 employees had the

highest (3.54) effectiveness

of estimating processes and

reviews, while those with

between 301 - 700


(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).

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

Table 141: Impact – Effectiveness of estimating processes and reviews

Effectiveness of estimating processes

& estimate reviews

Survey Percent

Billable Util.

On-time Completion


1 - Low 1.4% 60.0% 40.0% $175

2 13.4% 64.7% 69.8% 196

3 35.5% 69.6% 75.3% 199

4 39.6% 72.6% 83.9% 216

5 - High 10.1% 73.4% 85.7% 213

Total/Average 100.0% 70.4% 78.5% $206


Table 142: Effectiveness of Estimating Processes and Reviews

2008 2009 2010 2011 2012

N/A 3.45 3.39 3.59 3.44


3.33 3.50 3.47 3.28 3.48


3.47 3.26 3.56 3.44 3.51


3.54 3.44 3.48 3.66 3.50


3.47 3.17 3.30 3.29 3.32




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.


effectiveness of change control

processes to other key



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

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

control processes (3.39) is

the same as last year’s survey



average (3.29). The table

showed independent service


lower than embedded




effectiveness of change

control processes, while


lowest (3.00). Organizations with over 700 employees had the highest (3.70) effectiveness of change

control processes, while those with between 10 - 30 employees had the lowest (3.24).

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%

2 19.3% 76.4% 83.0% 14.9%

3 31.2% 75.7% 86.2% 16.8%

4 33.9% 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%


Table 144: Effectiveness of Change Control Processes

2008 2009 2010 2011 2012

N/A 3.21 3.17 3.38 3.39


3.44 3.36 3.29 3.44 3.52


3.38 3.53 3.00 3.11 3.32


3.43 3.24 3.44 3.50 3.50


3.38 3.44 3.70 3.14 3.40




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%


survey (3.43), and 3% higher



The table showed

independent service






effectiveness of project

quality processes, while

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 301 - 700 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

Table 145: Effectiveness of Project Quality Processes

2008 2009 2010 2011 2012

N/A 3.28 3.22 3.43 3.45


3.17 3.61 3.35 3.05 3.26


3.46 3.46 3.40 3.44 3.56


3.43 3.31 3.68 3.53 3.50


3.34 3.11 3.70 3.71 3.85




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

management processes





The table showed

independent service






effectiveness of knowledge

management processes,

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).

Table 146: Effectiveness of Knowledge Management Processes

2008 2009 2010 2011 2012

2.64 2.85 2.78 3.04 2.95


2.82 3.03 2.87 2.70 3.04


2.96 3.03 2.60 2.78 2.86


3.14 2.86 3.04 3.06 3.22


3.06 2.67 2.50 3.00 3.40




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 2012. 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 2012. 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 2012. Software PSOs moved

from 11.6% in 2010 to 18.6% net margin in 2011 to 19.4% in 2012.

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 5 Optimized

Fin

ance

an

d O

pe

rati

on

s

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.




Survey Results


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


Vice President $265 $253 -4.5% $203 $243 19.5% $298 $256 -14.1%

Director 217 213 -1.9% 188 223 19.0% 244 208 -14.9%








Going into 2013 consulting demand is strong as most organizations reported strong backlog of 45% at

the beginning of the first quarter of 2013. 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.

http://www.spiresearch.com/spi-research/reports/2011-professional-services-global-pricing-report.html



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


Vice President $239 $251 5.2% $379 $249 -34.2% $338 $325 -4.0%

Director 205 212 3.8% 301 199 -33.7% 209 235 12.5%






Solution Architect 191 193 1.0% 196 178 -9.2% 159 185 16.4%


Table 150: Hourly Bill Rates by Organization Size

Role

1 to 100 PS Employees 101 to >700 PS Employees

< 10 10 - 30 31-100 101-300 301-700 >700

Vice President $240 $254 $264 $226 $256 $308

Director 167 226 220 186 220 250

Delivery Manager 145 201 204 176 198 225

Project/Program Mgr. 155 188 183 196 179 159

Business Consultant 123 187 180 189 177 175

Sr. Tech. Consult./Engr. 171 195 179 179 184 159

Tech. Consultant/Engr. 119 181 157 159 163 149

Solution Architect 115 204 187 195 196 159


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.



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



Vice President $219 $217 -0.9% $204 $275 35.0% $0 $325 N/A

Director 181 206 14.0% 233 246 5.7% 200 242 20.8%





Tech. Consultant/Engr. 153 182 18.8% 185 184 -0.7% 177 182 2.9%

Solution Architect 193 218 13.3% 203 217 6.6% 201 175 -12.9%


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


2011 2012 Change 2011 2012 Change

Vice President $213 $229 7.5% $361 $292 -19.2%

Director 185 211 13.9% 323 209 -35.2%

Delivery Manager 174 185 6.2% 147 186 26.4%

Project/Program Mgr. 146 173 18.5% 137 180 31.9%

Business Consultant 148 168 13.4% 132 190 43.4%

Sr. Tech. Consult./Engr. 150 171 13.4% 134 158 17.5%

Tech. Consultant/Engr. 132 152 15.1% 131 130 -0.3%

Solution Architect 165 185 12.2% 195 143 -26.8%


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!



Table 153: Hourly Bill Rates by PS Market (Advertising, Arch/Engineering Other PS) (k)

Role



Vice President $250 $325 30.0% $238 $206 $264 28.3%

Director 175 188 165 210 27.2%


Project/Program Mgr. 128 150 17.6% 150 125 161 29.2%

Business Consultant 150 150 0.0% 150 129 154 19.3%

Sr. Tech. Consult./Engr. 90 250 175 -30.0% 125 162 29.3%


Solution Architect 213 158 -25.5% 133 142 6.5%


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 $155 26.0% $195 $251 47.0% $236 $41 21%

Director 132 19.3% 157 212 51.0% 216 59 37%

Delivery Manager 117 15.7% 135 196 59.0% 231 96 71%

Project/Program Mgr. 103 12.3% 116 184 70.0% 257 141 122%

Business Consultant 98 11.1% 109 180 77.0% 277 168 155%

Sr. Tech. Consult./Engr. 104 11.7% 116 182 74.0% 271 155 133%

Tech. Consultant/Engr. 87 11.2% 97 162 76.0% 246 149 154%

Solution Architect 112 13.3% 127 193 71.9% 278 151 119%




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


Rate Target

Util. Rev.


Vice President $157 23.0% $193 $249 45.8% $228 $35 18%

Director 136 16.7% 159 199 50.7% 202 43 27%








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


Rate Target

Util. Rev.


Vice President $162 23.3% $200 $325 56.7% $369 $169 85%

Director 154 15.8% 178 235 44.2% 208 29 16%










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

quality and on-time project

delivery.

Table 157 compares last year's

results with this year’s. What SPI

Research found interesting is that

although the order of importance

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

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 2011 2012 ESO PSO Amer. EMEA APac

Improve sales effectiveness - higher close ratio, on-target performance, training

3.77 3.91 3.78 3.99 3.88 3.91 4.44

Improve utilization - increase billable utilization

3.68 3.86 3.88 3.85 3.89 3.62 4.22

Improve methods and tools for reuse, consistency, quality

3.64 3.78 3.95 3.68 3.81 3.62 3.78

Improve marketing effectiveness - brand awareness, lead generation, events

3.53 3.72 3.36 3.92 3.73 3.38 4.78

Table 157: Steps Taken to Improve Profitability Comparison: 2011-2012

Key Performance Indicator (KPI) 2011 2012 ▲

Improve sales effectiveness 3.77 3.91 4%

Improve utilization 3.68 3.86 5%

Improve methods and tools 3.64 3.78 4%

Improve marketing effectiveness 3.53 3.72 5%

Improve solution portfolio 3.37 3.65 8%

Improve hiring 3.46 3.55 3%

Reduce non-billable time 3.25 3.51 8%

Increases rates 2.87 3.04 6%




Steps to Improve Profitability 2011 2012 ESO PSO Amer. EMEA APac

Improve solution portfolio - service packaging, new offers

3.37 3.65 3.71 3.61 3.64 3.56 4.11

Improve hiring, ramping, skill-building, training

3.46 3.55 3.75 3.43 3.59 3.15 4.22

Reduce non-billable time - presales, write-offs, admins

3.25 3.51 3.75 3.37 3.54 3.29 3.67

Rate increases - increase bill rates 2.87 3.04 2.61 3.28 3.02 3.00 3.56


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 10 10 - 30 31 - 100 101 - 300 301 - 700 Over 700


3.64 4.02 4.03 3.65 3.89 4.10


3.41 4.02 4.01 4.03 3.50 3.20


3.61 3.72 4.14 3.47 3.44 3.60


3.89 3.91 3.88 3.25 3.17 3.50


3.50 3.70 3.76 3.50 3.39 3.90


2.96 3.30 3.91 3.71 3.83 3.00


2.92 3.52 3.66 3.56 3.67 3.40

Rate increases - increase bill rates 3.04 2.84 3.15 3.00 3.06 3.50


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.



Table 160: Steps Taken to Improve Profitability – PS Vertical Markets

Steps to Improve Profitability

Software PS

SaaS PS

Hdware PS

IT Consult

Mgmt. Consult


Other PS


3.72 3.96 3.78 4.09 4.12 3.67 4.00 3.61


4.14 3.52 4.11 3.85 3.75 4.10 4.57 3.54


3.81 4.00 4.22 3.68 3.73 3.60 3.50 3.81


3.23 3.65 3.44 3.91 4.00 3.70 3.71 3.86


3.65 3.52 4.22 3.69 3.58 3.50 3.67 3.58


3.67 3.78 4.00 3.63 3.66 2.89 3.50 2.93


3.81 3.77 3.78 3.30 3.50 3.67 4.14 3.00

Rate increases - increase bill rates

2.70 2.50 2.56 3.31 3.52 3.22 3.43 2.82


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



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).

It also shows independent service

providers had values 4% lower

than embedded services

organizations ($203k vs.

$212k). Organizations from

North America had the

highest ($214k) annual

revenue per billable

consultant, while those from

EMEA had the lowest

($167k).



($219k) annual revenue per

billable consultant, while

those with fewer than 10


($163k). SPI Research found

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

Table 161: Impact – Revenue per Billable Employee

Revenue per Billable Employee

Survey Percent

Pipeline-to-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%


Table 162: Annual Revenue per Billable Consultant (k)

2008 2009 2010 2011 2012

$190 $205 $184 $197 $206


$212 $203 $198 $210 $219


$214 $167 $203 $197 $199


$163 $210 $214 $201 $215

101 - 300 301 – 700 Over 700 Arch./Engr. Other PS

$209 $219 $204 $196 $219




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.


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.

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 301 - 700 employees had the highest ($190k) annual revenue per employee, while

those with between 10 - 30 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).

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%




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 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.

Table 164: Annual Revenue per Employee (k)

2008 2009 2010 2011 2012

$189 $177 $156 $167 $168


$170 $167 $170 $163 $178


$176 $122 $167 $175 $162


$155 $154 $175 $163 $160


$170 $190 $189 $146 $195


Figure 59: Revenue per Project (k)





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 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).



($254k) average revenue per

project, while those with

fewer than 10 employees

had the lowest ($69k). SPI

Research found the



average revenue per project

($199k), while those in the


had the smallest ($100k).

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% $164 75.5% 6.7%

$25k - $50k 18.9% 63.9% 198 75.8% 3.5%

$50k - $100k 24.3% 73.2% 196 79.2% 3.8%

$100k - $250k 23.8% 75.2% 211 79.6% 4.0%

$250k - $500k 13.1% 73.7% 235 82.0% 1.6%

$500k - $1mm 8.7% 75.6% 231 82.4% 1.3%

Total 100.0% 70.3% $205 78.9% 3.6%


Table 166: Revenue per Project (k)

2008 2009 2010 2011 2012

N/A $234 $165 $202 $170


$168 $171 $193 $188 $149


$174 $159 $135 $150 $187


$69 $123 $203 $199 $100


$254 $210 $120 $113 $132




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 milestone-

based, 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%.

Project Margin – Fixed Price Projects


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

Figure 60: Project Margin


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%




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


(33.4%), and 5% higher than

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 301 - 700 employees had the highest (38.2%) project margin for fixed price projects,

while those with between 101 - 300 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


project margin on time and

expense projects to other key


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

lower profitability levels. This only makes sense if they are not productive enough between projects.

Table 168: Project Margin – Fixed Price Projects

2008 2009 2010 2011 2012

32.1% 34.2% 33.1% 33.4% 35.9%


36.5% 35.5% 34.3% 39.2% 30.5%


37.3% 29.2% 35.0% 35.0% 33.7%


34.2% 37.0% 36.3% 37.3% 53.0%


32.6% 38.2% 38.1% 38.3% 36.5%


Table 169: Impact – Project Margin – Time & Expense Projects

Project Margin – Time & Expense

Projects

Survey Percent

Rev./Bill. Employee

Ann. Margin Target

Achieve. EBITDA

Under 20% 10.9% $196 84.2% 17.2%

20% - 30% 21.4% 195 85.4% 12.5%

30% - 40% 33.9% 204 88.9% 19.0%

40% - 50% 18.2% 216 88.9% 16.7%

Over 50% 15.6% 219 86.4% 12.5%

Total/Average 100.0% $206 87.2% 16.0%




Table 170 shows the project

margin for time & expense

projects (35.9%) is 7% higher


(33.5%), and 5% higher than


average (34.2%). It also







highest (37.2%) project

margin for Time & Expense

projects, while those from

EMEA had the lowest (29.8%).

Organizations with 31 - 100 employees had the highest (37.2%) project margin for time & expense

projects, while those with between 10 - 30 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.


project margin — subs,

offshore (29.7%) is 1% lower




average (31.5%). It also


providers had values 22% lower than embedded services organizations (27.1% vs. 34.8%). Organizations

Table 170: Project Margin – Time & Expense Projects

2008 2009 2010 2011 2012

36.0% 34.6% 35.2% 33.5% 35.9%


35.6% 36.0% 34.2% 36.9% 30.5%


37.2% 29.8% 35.0% 38.9% 37.1%


36.1% 34.0% 37.2% 31.6% 51.7%


35.5% 37.1% 35.0% 43.3% 36.0%


Table 171: Project Margin – Subcontractors / Offshore

2008 2009 2010 2011 2012

38.1% 30.2% 29.6% 29.9% 29.7%


34.8% 27.1% 31.5% 36.1% 40.7%


30.9% 25.0% 25.0% 23.9% 24.2%


28.4% 32.1% 30.4% 28.5% 43.0%

101 – 300 301 - 700 Over 700 Arch./Engr. Other PS

25.7% 29.4% 29.3% 27.9% 28.9%




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 10 - 30 employees had the highest (32.1%) average subcontractor and offshore

margin, while those with between 101 - 300 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 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

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%




Hardware & Networking PS


quarterly revenue target in

backlog (51.7%), while those

in the Advertising/Marcom


(36.0%).

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

Table 173: Quarterly Revenue Target in Backlog

2008 2009 2010 2011 2012

42.7% 42.7% 44.7% 45.1% 43.3%


47.0% 41.2% 44.0% 44.1% 51.3%


44.4% 39.1% 36.1% 51.7% 40.6%

Under 10 10 - 30 31 – 100 Mgmt. Cons. Advertising

27.7% 41.3% 45.7% 38.3% 36.0%


47.6% 48.6% 50.0% 49.2% 48.0%




maintained. It should also be

noted that some of these

organizations were focused on

market share expansion with

profitability a secondary issue.

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%).

It also shows independent service

providers had values 1% higher

than embedded services

organizations (91.4% vs.

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%).



(96.4%) percent of annual

revenue target achieved,




the IT Consulting market

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.

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

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%


Table 175: Annual Revenue Target Achieved

2008 2009 2010 2011 2012

94.9% 87.6% 90.0% 93.0% 91.2%


90.9% 91.4% 91.0% 92.0% 91.0%


91.6% 88.5% 93.9% 87.8% 92.2%


88.3% 89.7% 90.3% 88.4% 90.0%


94.8% 96.4% 90.6% 90.0% 91.8%




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.


percentage of annual target

margin achieved to other key



Similar to the question on

achieving annual target revenue,

this KPI shows organizations

improve financially as they meet

and exceed margin goals.

Table 177 shows the percent of

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




(95.3%) percent of annual

margin target achieved,

while those with between 10

- 30 employees had the

lowest (84.2%). SPI Research

found the



percent of annual margin

target achieved (90.8%),

while those in the


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% $190 83.0% 7.86%

80% - 90% 22.2% 198 89.7% 7.44%

90% - 100% 25.8% 229 96.0% 6.02%

100% - 110% 16.0% 236 96.0% 7.32%

Over 110% 4.6% 181 111.1% 8.28%

Total/Average 100.0% $209 91.2% 7.24%


Table 177: Annual Revenue Margin Target Achieved

2008 2009 2010 2011 2012

88.6% 83.7% 85.4% 89.6% 87.7%


88.6% 87.2% 86.8% 89.7% 87.1%


88.5% 84.7% 84.4% 87.5% 88.0%


87.7% 84.2% 87.0% 88.6% 79.0%


89.4% 95.3% 91.3% 90.8% 84.5%




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

expenses and billing.

Table 178 shows the revenue

leakage (4.0%) is 2% higher




average (4.5%). It shows

independent service


lower than embedded




(4.3%) revenue leakage,

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 301 - 700 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.

Table 178: Revenue Leakage

2008 2009 2010 2011 2012

5.4% 4.3% 5.0% 4.0% 4.0%


4.8% 3.6% 4.5% 5.3% 4.1%


4.0% 4.1% 4.3% 5.3% 3.5%


3.6% 4.1% 3.8% 2.8% 4.0%


5.0% 3.4% 5.3% 4.0% 4.1%




Table 179 shows the

percentage of invoices

redone due to error/client

rejections (2.2%) is 13%




survey average (2.5%). It

also shows independent






(2.9%) percentage of invoices

redone due to error/client

rejections, while those from APac had the lowest (1.3%).

Organizations with 301 - 700 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

efficiently collecting

payment. DSO is also a

powerful measurement of

client satisfaction, strong

operating controls and client

credit-worthiness.

Table 180 shows the days

sales outstanding (DSO)



lower than the past six-year’s

survey average (45.2). It also


Table 179: Invoices Redone Due to Errors or Client Rejections

2008 2009 2010 2011 2012

4.2% 2.8% 1.9% 2.0% 2.2%


2.7% 2.0% 2.5% 2.5% 2.6%


2.2% 2.9% 1.3% 4.3% 2.4%


1.1% 2.1% 2.0% 1.6% 1.0%


2.9% 3.7% 2.5% 1.4% 1.8%


Table 180: Days Sales Outstanding (DSO)

2008 2009 2010 2011 2012

44.2 48.1 43.4 45.0 44.7


45.7 44.1 45.2 49.4 38.8


46.0 42.1 31.7 47.5 41.8


33.1 43.5 45.6 43.6 45.0


48.3 48.8 61.7 45.0 52.8




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

quarterly non-billable

expense per employee

($1,266) is 22% lower than in

last year's survey ($1,613),

and 47% lower than the past


($2,369). It also shows

independent service


lower than embedded

services organizations

($1,180 vs. $1,418).

Organizations from North

America had the highest

($1,298) quarterly non-

billable expense per employee, while those from EMEA had the lowest ($1129).

Organizations with 301 - 700 employees had the highest ($1,736) quarterly non-billable expense per

employee, while those with between 10 - 30 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

Table 181: Quarterly Non-Billable Expense per Employee

2008 2009 2010 2011 2012

$3,071 $2,931 $3,098 $1,613 $1,266


$1,418 $1,180 $2,369 $1,695 $977


$1,298 $1,129 $1,167 $1,063 $1,167


$1,240 $1,028 $1,261 $1,344 $750


$1,406 $1,736 $1,375 $1,357 $1,150




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%




survey average (3.3%). It

also shows independent






(3.6%) percentage of billable

work written off, while those

from APac had the lowest

(3.0%).

Organizations with 10 - 30 employees had the highest (4.2%) percentage of billable work written off,

while those with between 31 - 100 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

Table 182: Percentage of Billable Work Written-Off

2008 2009 2010 2011 2012

4.6% 3.5% 3.3% 2.7% 3.2%


4.2% 2.6% 3.3% 4.1% 4.6%


3.1% 3.6% 3.0% 4.7% 2.6%


2.6% 4.2% 2.5% 1.5% 4.7%


3.5% 3.1% 2.7% 2.2% 3.0%




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 shows executive

real-time wide visibility





It also shows independent



services organizations (3.47 vs. 3.18). Organizations from EMEA had the highest (3.53) executive real-

time 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 301 - 700 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:

Table 183: Executive Real-Time Visibility

2008 2009 2010 2011 2012

3.21 3.24 3.30 3.56 3.37


3.18 3.47 3.35 3.12 3.45


3.34 3.53 3.33 2.63 3.53


4.04 3.38 3.18 3.50 3.50


3.39 3.06 3.25 3.00 3.38




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 234 80 154 185 37 12

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



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 2012. 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 2012. Americas’ indirect revenue declined from 14.1%

in 2011 to 10.7% in 2012. 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 10 10 - 30 31 – 100 101 - 300 301 - 700 Over 700

Surveys 28 64 80 33 18 11

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 301-700 employees spend the most on sales and marketing (8.1%).



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 2012. Software PSOs moved from 11.6% in 2010 to 18.6% net

margin in 2011 to 19.4% in 2012. 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 2012. 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.


Other PS

Surveys 45 23 9 69 34 11 8 35

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%


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 2012. 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 2012.

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 2011.



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-of-

the-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 best-

of-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.

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

2012. 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.

Table 187: Best-of-the-Best Comparison – Demographics

KPI BoB Rest ▲

Organizations 13 221

Size of PS organization (employees) 373 199 88%

Annual company revenue (mm) $72.1 $135.7 -47%

Total professional services revenue (mm) $52.5 $42.0 25%

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%




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

outcome of a strategy to expand into new

geographical areas or competency areas.

Interviews with the leading firms showed a very

strong emphasis on building and communicating the

organizational vision and strategy. And while many

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

Table 188: Best-of-the-Best Comparison – PS Goals

PS Goal BoB Rest ▲

Client satisfaction 4.62 4.84 -5%

PS revenue 4.38 4.36 1%

Service margin 4.23 4.16 2%

Market expansion 3.62 3.80 -5%




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

highest performing organizations

with the remainder of the survey.

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

communication. The two highest

differential scores are a well

understood vision, mission and

strategy and goal and

measurement alignment. Leading

PSOs emphasize the importance of

communication within the organization and provide clear expectations for the workforce.


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 industry-

leading 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.

Table 189: Best-of-the-Best Comparison – Leadership Pillar

KPI BoB Rest ▲

Well understood vision, mission and strategy 4.63 3.66 26%

Confidence in PS Leadership 4.63 3.93 18%

Ease of getting things done 4.28 3.61 18%

Goals and measurement alignment 4.48 3.50 28%

Employees have confidence in PSO's future 4.60 3.76 22%

Effectively communicates w/employees 4.30 3.55 21%

Embraces change - nimble and flexible 4.50 3.75 20%

Innovation focused 4.40 3.61 22%




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

can deliver and delivering what

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.


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

Table 190: Best-of-the-Best Comparison – Client Relationships Pillar

KPI BoB Rest ▲

New clients 33.8% 29.7% 14%

Solution importance to client's business 4.15 4.00 4%

Solution uniqueness 3.85 3.40 13%

Bid-to-win ratio (per 10 bids) 6.08 5.13 18%


212% 192% 10%

Sales cycle (days: qualified lead to contract signing)

91.2 96.1 5%

Service sales effectiveness 3.62 3.18 14%

Service marketing effectiveness 3.08 2.58 19%

% of "referenceable" clients 83.8% 74.9% 12%

Solution development effectiveness 3.33 3.00 11%




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

performance indicators between

the best-of-the-best organizations

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

able to reduce recruiting time by 8

days; they also offer a more

defined career path but

interestingly the number of

guaranteed training days is two

less than average firms. The most

notable difference is billable

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.

Table 191: Best-of-the-Best Comparison – Human Capital Alignment Pillar

KPI BoB Rest ▲

Recommend company to friends/family 4.38 4.28 2%

Employee annual attrition 6.92% 7.26% 5%

Management to employee ratio 9.62 9.21 4%

Time to recruit and hire for std. positions 51.9 63.5 18%

Time for a new hire to become productive 66.9 64.2 -4%

Guaranteed training per employee per year 5.58 7.80 -29%

Well-understood career path for all emp. 3.77 3.05 23%

Frequency of employee satisfaction survey 1.73 1.77 -2%





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

indicators between the best-of-

the-best performing organizations

and the remainder. Most of these

key performance indicators show

significant differences between

the top performers and the other

organizations in this study. While

on average it took one day longer

to staff projects for the leading

firms, they have a larger number

of people on projects, and for

virtually the same duration,

meaning the total man months for

the average project are

approximately 15% higher for the

leading firms. This metric

highlights the importance of long-

term projects, which help maintain

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

Table 192: Best-of-the-Best Comparison – Service Execution Pillar

KPI BoB Rest ▲

Average project staffing time (days) 13.46 12.41 -8%

Average project staff (people) 4.27 3.70 16%

Concurrent projects managed by pm 3.81 5.39 -29%

Average project duration (months) 5.23 5.32 -2%

Projects delivered on-time 83.1% 78.3% 6%

Projects canceled 1.2% 3.9% 69%

Average project overrun 5.8% 9.4% 39%

A standardized delivery methodology is used 78.8% 62.6% 26%

Effectiveness of resource mgmt. process 4.31 3.48 24%

Effectiveness of estimating processes and reviews

4.08 3.40 20%

Effectiveness of change control processes 3.85 3.36 15%

Effectiveness of project quality processes 4.00 3.42 17%

Effectiveness of KM processes 3.46 2.92 19%




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

implementing changes. The

importance of real-time financial

information cannot be

understated here.

Executives of leading organizations

have a continual pulse on many of

the key performance indicators

tracked in this survey. And most

immediately take action when

undesirable situations occur.

Table 193 compares Finance &

Operations pillar key performance

indicators between the best-of-

the-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.

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%.

Table 193: Best-of-the-Best Comparison – Finance & Operations Pillar

KPI BoB Rest ▲




Project margin for fixed price projects 50.8% 34.8% 46%

Project margin for Time & Expense projects 46.2% 35.1% 31%

Average project margin — subs, offshore 47.3% 28.2% 68%

Quarterly revenue target in backlog 67.3% 41.5% 62%

Percent of annual revenue target achieved 97.7% 90.8% 8%

Percent of annual margin target achieved 96.2% 87.1% 10%

Revenue leakage 3.3% 4.1% 18%

% of inv. redone due to error/client rejections 1.8% 2.3% 19%

Days sales outstanding (DSO) 52.7 44.1 -20%

Quarterly non-billable expense per employee $1,788 $1,230 -45%

% of billable work is written off 2.00% 3.28% 39%

Executive real-time wide visibility 3.77 3.34 13%




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

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,

specialized but highly effective organizations

with a focus on excellence. Because of their

reputation for quality, they are able to land

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.

One leader summed it all up “We must

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.”

Table 194: Best-of-the-Best – Income Statement Comparison

Best-of-the-Best

All Others

▲

REVENUE

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%

EXPENSES

Direct Labor 38.3% 41.9% -9%

Fringe Benefit 5.9% 7.0% -16%

Subcont./outside consultant 5.1% 9.8% -48%

Billable travel and business 4.2% 3.1% 35%

Travel 1.4% 2.0% -30%

Sales 2.9% 5.4% -47%

Marketing 1.4% 1.5% -6%

Education/training 0.7% 1.2% -41%

PS IT 0.7% 1.7% -57%

All other G&A 12.6% 8.8% 43%

Total Expenses 73.1% 82.5% 11%

EBITDA 26.9% 17.5% 53%




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 2012.

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):

∆ 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

Figure 61: Services Maturity™ Model Levels




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



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 1-100 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) 0.0 36.6 43.3 52.5 57.9 100.0

Client Relationships (CR) 0.0 27.1 35.3 40.6 49.8 100.0

Human Capital (HC) 0.0 28.9 37.1 45.6 53.6 100.0

Service Execution (SE) 0.0 27.1 34.9 43.5 50.4 100.0

Finance & Operations (FO) 0.0 32.8 39.8 48.9 57.8 100.0




Leadership

Table 196: Leadership Model Inputs

No. Question Weight Leader-

ship Client

Relation.

Human Capital Align.

Service Execution

Finance & Ops.

45 Well understood vision, mission and strategy 0.20 0.612 0.091 0.111 0.087 0.097

46 Confidence in PS leadership 0.20 0.656 0.126 0.058 0.093 0.108

47 Ease of getting things done 0.20 0.621 0.101 0.095 0.106 0.084

48 Goals and measurement alignment 0.20 0.606 0.103 0.120 0.083 0.128

49 Employees have confidence in PSO's future 0.20 0.631 0.125 0.102 0.091 0.102

50 Effectively communicates w/employees 0.20 0.586 0.098 0.067 0.079 0.042

51 Embraces change - nimble and flexible 0.20 0.429 0.153 0.117 0.098 0.056

52 Innovation focused 0.20 0.394 0.131 0.175 0.129 0.079



Table 197: Client Relationships Model Inputs


ship Client

Relation.


Service Execution

Finance & Ops.

61 New clients 1.00 0.073 0.038 0.006 0.007 0.011

64 Solution importance to client's business 1.00 0.249 0.119 0.119 0.082 0.152

65 Solution uniqueness 1.00 0.145 0.032 (0.040) (0.020) 0.023

66 Bid-to-win ratio (per 10 bids) 1.00 0.087 0.235 0.030 0.074 0.119

67 Deal pipeline relative to qtr. bookings forecast 1.00 0.014 0.219 0.047 0.019 0.076

68 Sales cycle 1.00 (0.079) 0.007 (0.063) (0.082) (0.006)

69 Service sales effectiveness 1.00 0.323 0.098 0.114 0.084 0.116

70 Service marketing effectiveness 0.80 0.160 0.045 0.131 0.062 0.028

71 % of "referenceable" clients 1.00 0.168 0.210 0.078 0.102 0.027

73 Solution development effectiveness 1.00 0.289 0.044 0.088 0.075 0.044

74 Time & Expense % of work sold 0.20 0.055 0.007 0.023 0.001 0.023

75 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 0.20 0.004 (0.025) 0.017 0.039 0.009

77 None of the above % of work sold 0.20 (0.006) 0.005 (0.010) 0.036 (0.006)

78 Product sales no. of reps. selling 0.20 (0.017) (0.008) (0.018) (0.042) 0.040

79 Product sales ann. PS bookings target 0.20 0.016 0.054 0.093 0.035 0.072




ship Client

Relation.


Service Execution

Finance & Ops.

80 Product sales annual rep. base pay 0.20 0.033 0.056 0.047 0.030 0.058

81 Product sales on-target variable 0.20 0.019 0.091 0.012 0.013 0.078

82 Service sales no. of reps. selling 0.20 0.035 (0.007) 0.077 0.044 0.046

83 Service sales ann. PS bookings target 0.20 0.035 0.089 0.147 0.131 0.120

84 Service sales annual rep. base pay 0.20 0.086 0.101 0.113 0.133 0.167

85 Service sales on-target variable 0.20 (0.018) 0.077 0.128 0.082 0.050

86 Service delivery managers no. of reps. selling 0.20 (0.011) 0.033 0.088 0.055 0.071

87 Service delivery managers ann. PS bookings target 0.20 (0.042) 0.026 0.086 0.036 0.049

88 Service delivery managers annual rep. base pay 0.20 0.091 0.118 0.125 0.141 0.141

89 Service delivery managers on-target variable 0.20 0.026 0.044 0.087 0.038 0.026

90 Firm or practice managers no. of reps. selling 0.20 0.022 0.031 0.048 0.046 0.054

91 Firm or practice managers ann. PS bookings target 0.20 0.076 0.125 0.140 0.151 0.113

92 Firm or practice managers annual rep. base pay 0.20 0.099 0.172 0.170 0.168 0.186

93 Firm or practice managers on-target variable 0.20 (0.020) 0.100 0.073 0.088 0.084



Table 198: Human Capital Alignment Model Inputs


ship Client

Relation.


Service Execution

Finance & Ops.

94 Recommend company to friends/family 1.00 0.373 0.060 0.032 0.025 0.032

95 Employee annual attrition 1.00 (0.177) 0.008 0.211 0.030 0.025

97 Management to employee ratio 0.50 0.000 0.033 0.056 0.028 0.064

98 Time to recruit and hire for standard positions 0.80 (0.105) (0.050) (0.109) (0.097) 0.023

99 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 0.50 0.055 (0.006) 0.062 (0.018) (0.041)

101 Well-understood career path for all emp. 1.00 0.241 0.084 0.331 0.105 0.095

103 Employee utilization 1.00 0.070 0.106 0.320 0.293 0.118

104 Vacation / personal / holiday hours 0.50 (0.028) (0.027) (0.049) (0.052) 0.006

105 Education / training hours 0.50 0.061 (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 1.00 0.024 0.062 0.105 0.124 0.091




ship Client

Relation.


Service Execution

Finance & Ops.

109 Billable hours off-site 1.00 0.018 0.027 (0.037) (0.016) (0.018)

114 Senior manager/partner ann. base pay (k) 0.80 0.070 0.101 0.126 0.086 0.075

115 Senior manager/partner bonus/variable % 0.50 0.086 0.120 0.065 0.085 0.080

116 Senior manager/partner hourly bill rate 0.80 0.070 0.101 0.126 0.086 0.075

117 Senior manager/partner target utilization 1.00 0.070 0.106 0.320 0.293 0.118

118 Director ann. base pay (k) 0.80 0.070 0.101 0.126 0.086 0.075

119 Director bonus/variable % 0.50 0.086 0.120 0.065 0.085 0.080

120 Director hourly bill rate 0.80 0.070 0.101 0.126 0.086 0.075

121 Director target utilization 1.00 0.070 0.106 0.320 0.293 0.118

122 Delivery manager ann. base pay (k) 0.80 0.018 0.045 0.097 0.081 0.056

123 Delivery manager bonus/variable % 0.50 0.091 0.050 0.046 0.025 0.015

124 Delivery manager hourly bill rate 0.80 0.018 0.045 0.097 0.081 0.056

125 Delivery manager target utilization 1.00 0.070 0.106 0.320 0.293 0.118

126 Project/program manager ann. base pay (k) 0.80 0.059 0.076 0.147 0.092 0.063

127 Project/program manager bonus/variable % 0.50 0.077 0.066 0.068 0.069 0.046

128 Project/program manager hourly bill rate 0.80 0.059 0.076 0.147 0.092 0.063

129 Project/program manager target utilization 1.00 0.070 0.106 0.320 0.293 0.118

130 Business consultant ann. base pay (k) 0.80 0.018 0.045 0.097 0.081 0.056

131 Business consultant bonus/variable % 0.50 0.091 0.050 0.046 0.025 0.015

132 Business consultant hourly bill rate 0.80 0.018 0.045 0.097 0.081 0.056

133 Business consultant target utilization 1.00 0.070 0.106 0.320 0.293 0.118

134 Senior technical consultant ann. base pay (k) 0.80 0.016 0.044 0.110 0.096 0.055

135 Senior technical consultant bonus/variable % 0.50 0.093 0.049 0.038 0.040 0.025

136 Senior technical consultant hourly bill rate 0.80 0.016 0.044 0.110 0.096 0.055

137 Senior technical consultant target utilization 1.00 0.070 0.106 0.320 0.293 0.118

138 Technical consultant ann. base pay (k) 0.80 0.016 0.044 0.110 0.096 0.055

139 Technical consultant bonus/variable % 0.50 0.093 0.049 0.038 0.040 0.025

140 Technical consultant hourly bill rate 0.80 0.016 0.044 0.110 0.096 0.055

141 Technical consultant target utilization 1.00 0.070 0.106 0.320 0.293 0.118

142 Solution architect ann. base pay (k) 0.80 0.070 0.082 0.107 0.096 0.063

143 Solution architect bonus/variable % 0.50 0.071 0.071 0.054 0.073 0.072

144 Solution architect hourly bill rate 0.80 0.070 0.082 0.107 0.096 0.063

145 Solution architect target utilization 1.00 0.070 0.106 0.320 0.293 0.118




Service Execution

Table 199: Service Execution Model Inputs


ship Client

Relation.


Service Execution

Finance & Ops.

147 Average project staffing time (days) 0.80 (0.109) (0.002) 0.057 (0.009) (0.013)

148 Average project staff (people) 1.00 (0.088) (0.017) 0.042 (0.028) (0.015)

149 Concurrent projects managed by pm 0.80 0.023 0.015 (0.019) (0.001) 0.024

150 Average project duration (months) 1.00 (0.083) (0.014) 0.035 (0.020) 0.006

151 Projects delivered on-time 1.00 0.216 0.120 0.133 0.287 0.121

152 Projects canceled 1.00 (0.096) (0.056) 0.000 0.166 (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 0.80 0.086 0.068 0.066 0.035 0.037

155 Effectiveness of resource management process 1.00 0.292 0.095 0.138 0.118 0.098

156 Effectiveness of estimating processes and reviews 0.80 0.281 0.101 0.123 0.164 0.134

157 Effectiveness of change control processes 0.60 0.265 0.080 0.136 0.160 0.095

158 Effectiveness of project quality processes 0.50 0.330 0.074 0.122 0.135 0.070

159 Effectiveness of knowledge management processes 0.50 0.283 0.048 0.114 0.129 0.059


Finance and Operations

Table 200: Finance and Operations Model Inputs


ship Client

Relation.


Service Execution

Finance & Ops.

168 Annual revenue per billable consultant (k) 1.00 0.157 0.126 0.106 0.147 0.281

169 Annual revenue per employee (k) 1.00 0.159 0.114 0.080 0.136 0.315

170 Average revenue per project (k) 1.00 (0.064) 0.046 0.078 0.078 0.080

171 Project margin for fixed price projects 3.00 0.122 0.324 0.080 0.377 0.394

172 Project margin for Time & Expense projects 3.00 0.136 0.322 0.086 0.361 0.396

173 Average project margin — subs, offshore 1.00 0.133 0.211 0.012 0.154 0.210

174 Quarterly revenue target in backlog 1.00 0.109 0.088 0.040 0.006 0.137

175 Percent of annual revenue target achieved 1.00 0.130 0.149 0.083 0.044 0.176

176 Percent of annual margin target achieved 1.00 0.157 0.139 0.074 0.111 0.308

177 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) 0.020




ship Client

Relation.


Service Execution

Finance & Ops.

179 Days sales outstanding (DSO) 0.20 (0.107) 0.020 0.015 0.038 0.228

180 Quarterly non-billable expense per employee 0.90 (0.045) 0.013 (0.014) (0.021) 0.023

181 % of billable work is written off 1.00 (0.085) (0.096) (0.099) (0.155) (0.102)

182 Executive real-time wide visibility 1.00 0.234 0.046 0.275 0.068 0.030

Earnings before Income Taxes, Depreciation & Amortization (EBITDA)

15.00 0.130 0.038 0.017 0.091 0.126


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 10 28 1.93 1.86 1.75 1.89 1.82

10 – 30 64 2.17 2.14 2.06 2.11 2.16

31 – 100 80 2.43 2.50 2.49 2.46 2.43

101 – 300 33 3.12 2.88 3.21 3.03 2.94

301 – 700 18 3.06 3.17 3.22 3.17 3.39

Over 700 11 2.00 2.36 2.09 2.27 2.36

Total 234 2.42 2.42 2.42 2.42 2.42


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.



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


Organization Size (people) Count LE CR HC SE FO

Embedded 80 2.61 2.45 2.34 2.39 2.63

Independent 154 2.32 2.41 2.47 2.44 2.32

Total 234 2.42 2.42 2.42 2.42 2.42


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


Market Count LE CR HC SE FO

Advertising (Marcom) 11 1.64 1.73 1.45 1.55 1.64

Architecture/Engineering 8 1.88 2.13 1.88 2.13 2.00

IT Consulting 69 2.64 2.74 2.80 2.74 2.62

Management Consulting 34 2.35 2.38 2.59 2.53 2.26

PS within HW & Networking 9 2.56 2.56 2.44 2.44 2.67

PS within SaaS company 23 2.70 2.30 2.30 2.30 2.61

PS within Software company 45 2.62 2.53 2.40 2.44 2.64

Other PS 35 1.97 2.03 2.06 2.09 2.06

Total 234 2.42 2.42 2.42 2.42 2.42


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



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 3.86 3.98 4.08 3.86 4.54

Confidence in PS Leadership 3.98 4.22 4.37 4.09 4.62

Bid-to-Win ratio (per 10 bids) 4.56 5.04 5.47 5.56 6.38

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).



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 100 – 300 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.



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. 2013 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. 2013 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



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 e-mail 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.

2013 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 (www.spiresearch.com) for more information.




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




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 www.wikipedia.org http://www.investopedia.com 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 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 Utilization %

Annual Billable Hours/(2080 hours – vacation and holidays) or

Billable days/(260 days – 10 vacation – 10 holidays ~ 240 days)

Attrition % Attrition % = (Voluntary + involuntary) / Total Beginning Employees

Backlog

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

Bid Win Ratio 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.

Billings Completed, accepted work that can been billed (T&M, Work in process, Milestone, Deliverables)

Bookings Signed Contracts (signed PS Agreement + signed SOW + PO)

Burdened Cost 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.

Capitalization

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.

Cash 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.

Cash flow 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 Cost Per person = Base + Fringe (~25%) + Bonus

Days Sales Outstanding (DSO)

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:

http://www.wikipedia.org/

http://www.investopedia.com/

http://en.wikipedia.org/wiki/Internal_rate_of_return

http://en.wikipedia.org/wiki/Net_present_value



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 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.

Direct Costs Cost incurred as a direct consequence of producing a good or service, as opposed to overhead or indirect costs.

EBITDA

Earnings Before Interest, Taxes, Depreciation and Amortization.

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.

EITF

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 08-01 and EITF 09-03 are scheduled to go into effect in June, 2010. 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).

FASB

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 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.

Fringe Benefits

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

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 Percentage

Gross Margin % = (Total Services Revenue – Expense or Cost of Services Delivered) / Total Services Revenue

Gross Margin %= Gross Margin / Revenue

Gross Profit Percentage

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.

Income Statement or Profit and Loss Statement

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).

http://www.investopedia.com/terms/e/ebitda.asp



Term Definition

Labor Burdened Cost

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

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 take-home 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

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

Lagging Indicators

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.

Leading Indicators

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

Loaded Cost per Person

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 % Margin % = (Revenue - Cost)/Revenue

http://www.investopedia.com/terms/l/laggingindicator.asp

http://www.investopedia.com/terms/l/laggingindicator.asp

http://www.investopedia.com/terms/c/cili.asp






Term Definition

Markup %

Markup % = (Revenue-Cost)/Cost

For example, 60% markup = 40% margin

Measurement Utilization %

Billable Hours + Approved non-billable hours (pre-sales, Customer Satisfaction, Special Projects)/(2080 hours or 260 days -vacation and holidays)

Measurement Utilization

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.

Net Income

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

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.

On-Target Earnings (OTE)

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

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

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

Operating Profit / Margin

The amount of profit realized from a business's own operations. A ratio used to measure a company's pricing strategy and operating efficiency.

Overhead Costs

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.

Profit Margin = Return on Sales (ROS)

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 Margin £$€

Project Revenue – Direct Cost of project service delivery

Revenue Estimate

Revenue Estimate = Billable headcount X Billable hours X Average Bill rate X Average Utilization Rate

Revenue

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.

Revenue per person

Actual Bill Rate * Billable Hours + re-billable travel and expense

Recurring Revenue

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



Term Definition

valuable and garner a lower price-to-earnings multiple for a company.

Run Rate

How the financial performance of a company would look if you were to extrapolate current results out over a specified period of time.

Revenue Recognition

http://www.mmmlaw.com/publications/article_detail.asp?articleid=103

(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. 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 91-1.

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

Subcontractor Margin = (Total subcontractor generated revenue – total subcontractor cost)/ Total subcontractor generated revenue

Variable Costs 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

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

http://www.mmmlaw.com/publications/article_detail.asp?articleid=103



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 2013



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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.



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 Quick-Start initiatives to begin immediately

o 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 [email protected] for more information



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 www.SPIresearch.com for more information on Service Performance Insight, LLC. © 2013 Service Performance Insight 211

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 world-

renowned thought-leader, speaker and author on all aspects of Professional

Services. Contact Urich at [email protected] or 650-342-4690.

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

[email protected] or 513-759-5443.

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 high-

performing 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

[email protected] or 949-521-3830.




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service excellence

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