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Benchmarks for Professional Services Organizations
Benchmarks are fine for mutual fund managers, but do they have a role in measuring, managing and improving a Professional Services Organization? Measuring a mutual fund is pretty clear – what percentage did it gain or lose and how does that compare to other funds in its category? But professional services by definition are more complex and face unique challenges with each engagement.
Service Performance Insight (SPI Research) has shown that the work done by services organization can be analyzed in five areas and improvements can lead to sharp increases in revenue and earnings. Based in Ohio, SPI Research has worked with 395 organizations from 2007 through 2009 to evaluate them in five categories. Just to see the categories and the allocation of responsibilities suggests that this is a useful tool for PSOs.
(For the full report, which sells for $995, go to http://www.spiresearch.com/reports/reports.htm)
SPI Research has defined the five categories as:
1. Vision, Strategy and culture, which is primarily the responsibility of the CEO. He, or she, is to provide a unique view of the future and the role the service organization will play in shaping it.
2. Finance and operation, the responsibility of the CFO to manage service profit and loss, and to generate revenue and profit while developing repeatable operating processes, IT applications and management controls.
3. Human capital alignment, HR’s ability to attract, hire, motivate and retain high quality employees and subcontractors.
4. Service execution, or engagement and delivery. The methodologies, processes and tools to effectively schedule, deploy and measure the quality of the service delivery process.
5. Client relationships (marketing and sales) – the ability to communicative effectively with employees, partners and customers to generate opportunities and win deals.
SPI Research’s benchmarking allows companies to compare themselves against others in their field and see where they are underperforming or excelling. In some cases, divergence from the benchmarks may be the result of corporate strategy -- a company may accept a reduction in margins to improve service levels, for example.
The SPI Research Maturity Benchmark evaluations showed that the most important factors in high levels of performance are the result of leadership focus, organizational alignment, effective business processes and discipline rather than the longevity of the firm. Maturity, in the consultancy’s use, refers to effective management and process improvement, not merely the age of the firm or its leaders.
“Relatively young and fast-growing organizations can and do demonstrate surprisingly high levels of maturity and performance excellence if their charters are clear.” The study also found that it helps when goals and measurements are aligned with the mission – the familiar concept of making sure your compensation fits your strategy. Firms also benefit from investing in systems to provide appropriate visibility and controls, something we will focus on in a future report.
For professional services organizations, improving their performance across the five areas which SPI Research has identified can lead to significant gains in profitability. For example, the revenue per billable consultant is $175,000 for a firm at Maturity Level 1-2 but soars to $275,000 for a firm at Maturity Level 4-5 while project gross margins increase from 32.4 percent to 43.1 percent.
The PS Maturity Model, which is a constant state of evolution, is designed to help PSOs better understand their performance. SPI Research works with PSOs to evaluate their performance across the five key areas so they can improve. The model categorizes PSOs within an evolutionary framework as they learn from their experiences and develop the processes to capture and improve upon success.
At Level 1, labeled “Heroic”, the environment is chaotic and opportunistic, which describes about 30 percent of PSOs. Moving to Level 2 (25 percent), services organizations develop repeatable processes but those standards haven’t been fully embraced across the firm. At Level 3 (25 percent) firms have achieved project excellence through standard processes and operating principles in most, but not all, areas. Nonetheless, they are able to exhibit a “consistent, repeatable project delivery methodology.”
PSOs which attain Level 4 (15 percent) have achieved Portfolio Excellence. “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.”
What’s left beyond that? A firm-wide process of continual improvement. Only 5 percent of PSOs operate at this level, according to SPI Research, and they aren’t standing still. “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 Level 5 organizations are both visionary and collaborative both internally and with clients and partners.
For the full report, which sells for $995, go to http://www.spiresearch.com/reports/reports.htm
For more information on solutions that can help your company operate at a level 5, please visit Solutions for the Professional Services industry.
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