Episode 34 Transcript

Professional Services Performance Trends and the Benefits of PSA w/ SPI’s Dave Hofferberth

    Brent Trimble: Welcome again to The Professional Services Pursuit, a podcast featuring expert advice and insights on the professional services industry. Again, I'm Brent Trimble, one of our hosts, and I'm really excited today to talk to our guest. He's been dubbed the Father of PSA, which is a pretty resounding title. He's also the managing director at the Service Performance Insight, or SPI as they're commonly known. His name is Dave Hofferberth. Dave, welcome to the podcast.

    Dave Hofferberth: Thanks Brent, good to be here. I'm excited to talk to everyone today.

    Brent Trimble: No, we're excited to have you and you know, a lot of our listeners and some of our prospective clients, they've been exposed to some of the work you've been doing, and we really want to dive in on that, the dimensions of the work and the type of research you do and have been doing for quite some time. So why don't we start there, tell us a bit about your background and then a little bit of just context about SPI and who you are and what you do?

    Dave Hofferberth: Sure. I've been an analyst covering the professional services market for, it’ll 25 years this week as a matter of fact. I was an analyst at the Aberdeen Group up in Boston for seven years, and that's where I learned about and then started writing about professional services automation. And little did I know how much it would change my career because I wrote the first white paper on it, and then the first major report on it back in the 1998/99 timeframe. And the next thing I knew, I was traveling all over the world talking about it. So I started Service Performance Insight, it'll be 17 years here in about a month. Our focus has been on professional services performance, it's really as simple as that.

    Our tagline is accelerating performance and productivity in profit. And so we're known for the Professional services maturity benchmark, which we publish every year. We're just about done surveying it. We've got roughly 570 firms with probably another 200 to go this week. You know how these things go. Everyone turns their survey in at the end of the last day, so I'm used to that. But besides that, we usually do two studies a year. Our second biggest study is the professional services automation end-user survey, which I conduct every few years. It's a very important survey, and I hope all your readers get a chance to read it because it's very important. It highlights why firms select PSA, how they use PSA, the benefits of PSA, just an invaluable piece of work that I've done four times in 15 years, so there's that. We do it on other solutions, this coming year we'll do one on talent bill rates and utilization, and it's always interesting because talent has become so critically in demand and there just isn't a supply of it. It'll be an exciting survey too. That's pretty much what we do.

    Brent Trimble: That's great. And you mentioned a few terms, and I think for most contextually, most of our listeners would understand, at least nominally the notion of PSA. In other words, technology that helps automate their business, their workflow, from resource management, project management, all the way through revenue recognition and so forth. But you talk about your career now, 25 years as an analyst, maybe start with professional services. And when you think of that category, and it's a broad one, and a lot of, for instance, data in the press right now, as every quarter, every month, labor statistics come out and there's ebb and flow in professional services and so forth. But when you dimensionalize that and measure and survey these firms, give us the array of the firms that you would define that make up the body of professional services.

    Dave Hofferberth: First, we start with NAICS, the North American Industry Classification System, which is NAICS code 54. So you think about IT consulting, management consulting, architects and engineers, embedded software and SaaS firms, advertising, accountancies, legal, which we really don't track. Those are the ones that we primarily cover, but what's happened is that other markets such as manufacturing, such as healthcare, have products that are very important, but the problem is the products themselves are fairly complex. So what do you need? You need a professional services group within a product company to help deploy solutions. Early in my career, I built nuclear power plants. Well, we would buy a turbine from GE or Westinghouse, but we needed a professional services organization within that company to come help install the turbine, do all the quality checks and operate it.

    So PSA professional services, sure, it's that NAICS code 54 I'm talking about, but it is so much more than that. And that's what I'm seeing in the market. So when I do my studies, there may be 800 surveys, I'll get 200 from IT consultancies and then management consultancies and architects and engineers and so forth. But I'll also get quite a few surveys from healthcare providers as well as manufacturers who realize they have to be more efficient and more productive in the services they deliver. And one important aspect is that a lot of these firms aren't necessarily profit-driven, they're client-delight-driven. So you're making a lot of money off selling a piece of equipment, you wanna make sure that a professional service organization deploys it in the right way to make the customer, in that case, happy. So professional service is so important and that's why you're seeing a lot more labor statistics in that area.

    Brent Trimble: You mentioned in your intro, the primary research artifacts or studies that you run annually. So one is for those firms that if we interpret this correctly, that have engaged with an automation platform like PSA, and then their satisfaction, their usage of it and its impact on the business and that would be the end-user survey. Describe maybe the broader survey if there is a split between the two because I think many of our partners and our clients have been exposed to that.

    Dave Hofferberth: Sure. And a lot of your clients are participating in this year's survey. So the larger benchmarking survey is all of professional services. We break it into five primary pillars. One is leadership, how you lead, how you communicate, how you develop culture, how flexible you are and so forth. The second is what we call client relationships and that's how you sell. That's how you market and sell, how successful you are. Do you have to discount? Are you going after new companies or are you selling within the current install base? Third is talent, the most important pillar; it's your people. And we all know that talent is becoming a bigger issue in the professional services market. It's tough to find the people, it's tough to keep the people and so a lot is being done there. The fourth pillar is what we call service execution. That is PSA, what PSA was designed primarily for, it's much more than that, but that's how you deliver the service. Are you on time? Are you on budget? What do the margins look like in service delivery? And then finally, finance and operations, that's the money, counting the money, looking at profitability, looking at are you achieving your goals and so forth. So the survey we're talking about right now, the maturity benchmark that covers all of the areas, and they're all important.

    One of the areas that I always like to talk about is, and I didn't know this when I started SPI 17 years ago, the importance of planning in achieving your goals, understanding that your plans will change during the course of the year, depending on economic conditions. Believe me, we learned a lot when COVID hit. But the point is to continue to plan to make sure you've got the right resources. And so a lot of people, when I started the PSA practice at Aberdeen 24 plus years ago, we weren't looking at that area for PSA. But what we've found over the past two decades, is that PSA is used in the planning process. It's used in the sales process, it's used in the hiring process, and it's used in the financial process because the data within the solutions helps you understand what services you should be selling. Which are the hot services, what do the margins look like? Who are your most profitable clients? I mean, there's a whole host of things in planning that you use the data from PSA, likewise in selling, what services should we focus on this year? Well, which ones have the highest growth potential? Which ones have the highest margins? Which ones have the best win rate when we actually sell them? And how do we price them effectively to not only win the bid, but maximize our margins in the process? And of course, then it comes into talent. Well, who do we hire?

    Professional services organizations work hard to hire a lot of quality people, but if they're over hiring skills, billable utilization will be down and profitability will be down. So PSA helps them understand exactly how many people they need with a specific skill that they should try to hire. And then of course, if you operate efficiently, you make more money and so PSA is used to make sure that we're billing the money first, and then collecting. So I see this all the time, and the organizations that take advantage of their solution just operate a whole lot better.

    Brent Trimble: So for the frequency of these studies, the maturity, if I understand it is, annual. And the end-user you do periodically or in different increments of time. Is that correct?

    Dave Hofferberth: Yeah because the markets change every year. The needs of professional services organizations change every year. Right now, it's interesting again, I've got a ways to go before I know the final results. People will see the final results of the survey in February when we publish it. Right now, for instance, growth is looking good, better than it's been in years in professional services and that's wonderful. The problem is profitability has gone down under 15% at least right now, for the first time in many years. You look at those two things and you realize that what I'll see next year will be this emphasis on building higher margins, becoming more profitable, you know, having the right talent and that direct labor as a percentage of total revenue is going up. I always tell companies, it'd be wonderful to keep it around 40%. Well right now it's around 53% that just cuts into the profit. It's not easy, it’s fairly complex to balance your people with your profit and so the best firms have gotta have insight into that. So their hiring decisions are made correctly, their training decisions, their selling decisions, and it's just difficult. And every firm goes through this and every year it changes.

    Brent Trimble: So I want to touch on a few of those terms you mentioned as far as emerging trends, and certainly we won't ask you to divulge how the results are shaping up. But for listeners, for firms, for leaders of firms, whether it's management consulting, IT consulting, advisory firms, the internal PS practice of a platform software, device manufacturing or marketing services, whatever type of service firm is being reviewed and scored, how would a firm participate in either of these studies? Is it voluntary? Do you seek them out? If a firm or a leader of a firm that's considering this has maybe taken part in reviewing the study to see where they stack up against peers, how would they participate?

    Dave Hofferberth: Sure. Well they could come to our website, www.spiresearch, and at the top of it, click on the link and participate in the survey. It'll take you to a Qualtrics page for a web-based survey, or it'll let you download an Excel version of the survey. A lot of firms do that because year to year the survey doesn't change too much. So they already can see what they said a year ago and they can see how their own firm changed. So when we started this 16 years ago, I think our first survey had 52 firms, that was all we could get. Then the next year it doubled basically, or more than doubled. But for the past seven or eight years, we've averaged around 500 surveys a year. This year we could hit 800 which would be a record, but the survey, we get a lot of positive feedback on it, it's a big report that we provide organizations. But what the leaders do, they don't hone in on all 140 key performance indicators that we provide, they may hone in on 20 or 30 that are very important to their firm. I mean, obviously if you are an architect or engineer, you want to know how well your firm did pair to your peers. So we provide all of that.

    So we grew at 10%, well the average grew 12%. Okay, we didn't do as well as our peers, but maybe profitability we did better. And so you take the comparisons, you know, basically say okay, here's the areas where we need to improve. You know SPI, we have clients that we do that for. We give them a scorecard with all the KPIs and all the areas where they need to improve versus where they do very well. And we have a term around here, we call it getting the red out. Organizations that score from level one to level five, one being poorest performance, five being highest performance. The ones that score in level one, that's red, then orange is level two, then yellow is level three, blue is four and green five. So those organizations that have a red next to their KPI, that tells them that's an area they have to improve. And so the goal is don't improve the things you're doing really well, improve the things you're doing poorest. That's where you'll get the biggest bang for your buck. That's where you'll improve performance, that's where you'll improve profitability. People take the study seriously, they develop three and five year plans to improve performance and we help them along the way.

    Brent Trimble: No, that's great. So you mentioned a term and you mentioned some of the results you're seeing as you begin to digest and process this year's maturity index survey. And one of the notions you spoke to was this idea of direct labor cost. What I find fascinating in our interactions with either current clients or prospective clients are that the richness of the data and the many metrics and levers that firms can use to index against their peers and everybody likes to do that because heads down the entire year, you're driving the firm forward. If you're in the services, pure feed of service business, the analogy is kind of the shark that has to just keep swimming or it'll say fall on the ocean floor, right? I mean it's really around exceeding client expectations, make sure there's revenue coming in where you have a good line of sight. Try to anticipate the right staffing needs, the right mix, the right skills for not only the present, but for the future. But some of them and this is what I think is great about the research, the survey itself illuminates metrics maybe they hadn't heard of or maybe that aren't normally utilized in their industry but could have some great benefit to them. And they think about it a bit differently, whether they're ascendant firms that started as a bespoke consultancy are now up to a couple hundred, couple thousand people or whether they're part of the big 405. Tell us a little bit about that notion of how you would define that labor and revenue metric.

    Dave Hofferberth: We have organizations complete basically an income statement because they have direct labor. Those individuals that actually do the consulting, indirect labor, which might be partners they use. And every year we've done this, firms have averaged between 10 and 15% of their revenue coming in through partners so it's a good thing. Partners are great because you use them when you're selling a lot and you don't use them when you're not selling. It helps you keep your organization operating. The problem is that it isn't the only cost you have in your organization. You could have buildings, you have non-billable labor, you have to purchase equipment and so forth and travel that you might not bill back for. So there's all these other costs and generally we like to see, I like to see direct labor at around 40%. We tend to tell people between 40 and 50% and we're just a little bit over that right now. The direction is definitely up.

    So if you think about it, the last few years, believe it or not, profit looked really good. And why did that look good? Well it looked good because firms weren't spending money on travel. Consultants could spend more time working at home supporting more than one client a day. I mean, from an efficiency standpoint, COVID was good for the market. Was it good long-term? No, of course not because part of professional services is your peer group meeting, learning, developing other skills. You don't get that living at home and working out of your home, but it comes in handy a little. And so we see that the organizations just have to do a better job of balancing direct labor cost versus revenue and with inflation what it is right now, you know, I'm surprised a lot of the firms have not significantly increased rates. I won't find that out for another six months when I do the next study on bill rates. But I'm gonna be interested to see what I find out there.

    Brent Trimble: You know, not to infer or speculate, but do you think some of that could be due to just the ever increasing cost on talent? Is one of the factors.

    Dave Hofferberth: Absolutely. Two really important KPIs that we track have to do with attrition, voluntary and involuntary. And voluntary is when they retire or they go to one of your clients or they go to one of your competitors. And back in the.com era, the total attrition was around 25% annually, which is terrible. Now it's around 10%, which is manageable but still not good considering professional services firms are working hard to limit that. But the other aspect of attrition is involuntary attrition. And what that means is that it could be employees that just aren't cutting it, but a lot of times it's a mismatch between supply and demand for consultants. And so we hired 10 of the skill and we only need five of these skills. So yeah, you just lay five people off. Well, what happens when you do that is the people that are left, go gosh, am I next, creates a problem.

    And so these organizations have to do a great job of hiring the right amount of the right skills. Most consultants would rather work a few extra hours than lose people.

    So you hire enough to get the job done. If work picks up too much, you hire more, but you always make sure that you don't lay off if possible cause it just creates a bad situation within PSOs. And one of the things we do on a lot of the KPIs, you were talking about some KPIs that people just don't track normally, which I understand. We do what we call an impact table to show you as a KPI goes up or goes down. Is there a correlation between that and other key performance indicators? You know, people like to see that if I increase billable utilization, is it really correlated with revenue growth, profitability, maybe client satisfaction and so forth? It is. I mean somebody may see a KPI when they read the report and go gosh, we don't track that. But it seems like it's an important one for the four other KPIs that we do think are important. Again, the report, companies go through this and they dissect this. I mean I'm amazed at the comments and feedback I will get in February, March, April and May of this coming year, just from people who have gone through it. Pretty interesting stuff for most companies.

    Brent Trimble: Before we talk through a few of the other elements, particularly around PSA and investment there and the growth you've seen, any other high level trends you're seeing emerge as you sift through the data of this year's maturity index?

    Dave Hofferberth: The obvious trend was the remote service delivery trend. Everybody knows that that number is going down, people were just not working on site as much as we did five years ago. But in professional services, that's not a big deal because the people that tend to be in this market tend to be self-starters, tend to understand I've got a project, I've got deliverables, I'll get them done. That's what I like about the market. Fairly highly educated individuals, self-motivated, they bill out a lot of money an hour so they want to be productive for their firm, so that's good. But again, the trend associated with attrition is something that I am concerned with. Again, I think a lot of the emphasis for the following year will be on talent as it was last year. It may be the next year too. Try to figure out how to streamline the hiring process because it's taking too long. And then how to keep employees once you get them. And you know, it's not just a bigger paycheck. There's a whole lot of other reasons people stay at work. One of the big ones is people, you know, you like the team of people you work with so you wanna stay, there's just gonna be a whole host of issues associated with that over the next year.

    Brent Trimble: Well, we look forward to that. And then as partners, we share some of that data for those who've both been exposed to it previously, they appreciate the refresh. And then for many firms it's very evocative. They hadn't known previously that the SPI measures our industry so we look forward to that. Pivoting a little bit to a different type of firm, this is one that is ascending, has some maturity probably either inherent or very deliberate and said, we think and believe that technology can really be a catalyst for growth, maturity, efficiency, and profit. And therefore we've made maybe several investments over the years, maybe they were very early to what we call PSA, professional services automation platform. You know, I think as a leader in any services firm, grappling with a month end close or a quarter end close and going through manual Excel files, version control and so forth, that theoretically technology really can benefit, it’s the business we're in obviously and so we see some benefits. But from your vantage point, how do firms responding in the survey really see their return on investment? Because again, particularly a fee of service business has to weigh carefully CapEx outlays and investments really matter, right? I mean, you made the reference toward big industrial firms who have very qualified service individuals to help with implementation of either software or big manufacturing devices and so forth. That's a little bit different from a business model. But for those firms that people are the product, talent is the product, how are they viewing and evaluating their investment? And what are some of the trends you see from that end-user survey?

    Dave Hofferberth: Taking a step back, when I started SPI, I built this triangle, you know, it's on all the reports that I do and it's got around the sides of it: people, process, capital and people were like, it's usually people, process and technology. But I started SPI because I wanted to see how technology impacted your people, your business processes and your money. As an analyst, my goal is to find out whether the technology pays for itself. That's a fair question. Any business, any executive buying anything of value needs to understand what value it delivers. Why should I spend the money on this? And so I conducted my first PSA end-user survey back in 2001 when the market was very young. But then when I started SPI, I routinely, every few years, redid this. The secret is that PSA pays for itself pretty quick. But the funny thing is most organizations say, well I bought PSA to help me increase billable utilization. Well, if you can take your overall billable utilization from 73 to 75%, the PSA solutions paid for itself fairly easily. I think early on the PSA vendors said that PSA was helping improve their utilization 5 to 7%. The vendors say that, but I'm an analyst, it's my job to prove or disprove that and it turned out they were correct in that. It always tended to be that.

    Over the past few years we've seen a lot larger increase in billable utilization. I think one of the problems is that everything's gotten more complicated. And so better management of your people and your projects is just harder to do maybe than it was 10 years ago or 20 years ago when this market started. The benefits of PSA are incredible with that. That's what most people look at. But you also have to look at things like project margins and PSA increases project margins significantly. It's usually the number one or number two benefit of PSA. So you're taking margins from 35% to 40%. Well, guess what, that's a lot of money in your organization. Most people would love to see something like that. On time delivery, well yeah, if you've got higher utilization, chances are you're going to get projects done on time and on budget. Well, guess what? If you get projects done on time, you get to start the next project. And so what happened is people realized that if they were doing a better job of project management in consulting, they would grow their revenue because people could do more work, build more hours and build the firm. It's things like that that maybe people who originally said hey, we just need to increase billable utilization, that's fine, but all of a sudden they're realizing some of these other benefits, the PSA end-user survey you're talking about, it's a good read just to look at your organization and say okay, where do we fit in? How can we improve some of these key areas?

    Brent Trimble: Oh, that's great. That's really great insight and the research is fantastic. And just to reiterate for our listeners and our partners and potential partners, find that just having that richness of data, seeing firms that look like them and being able to measure areas of high performance areas they potentially improve, areas that they hadn't really considered perhaps. Give us some examples you've come across of firms who've maybe participated in the survey, at least accessed a past or present survey and then use some of those insights to improve their own operations. Just some practical applications of that data.

    Dave Hofferberth: Well, there's a few larger firms I'd like to talk about. And again, we've worked with global 10 companies, fortune 10 companies, the biggest in the world. So you take a company like that, they may have 20 different professional services divisions, typically by country or maybe by a product or something like that. And so what firms have done with us in the past is they've benchmarked all of their practices. So I might get 20 surveys from 20 different practices around the world. What we're able to do with them then is to evaluate all of them. And so there's a practice that was in the far east that wasn't doing well. Well the executive said that's okay because it's a fairly new practice. We're ramping up, we don't have the people there yet that we would like to have and so we understand why they're not performing well. But what it enabled them to do is look at some of the other practices across the world and say okay, here's one of the practices. Maybe it's in Europe that really operates at a high level. What do they do so well to achieve that level of performance? So that's what you're gonna do is you start by comparing your own practice or your own company to others, and then you try to learn what they do so well to where they are operating at peak maturity levels.

    Brent Trimble: That's great. Learning from some of those types of firms that have reached some kind of maturity. Finding those pockets of potential and pockets of innovation are really key. So we talked a little bit at the top of our conversation around how firms can both access the data, but importantly participate. So one thing we wanted to note is potentially if you could just give us those avenues of access one more time before we close on your website, that would be fantastic.

    Dave Hofferberth: Sure, you go to our website www.spiresearch.com, and at the top of it, there's a link to a survey page. You can either complete a web-based survey in Qualtrics or you can download an Excel survey, complete it and send it back to me. It's all self-explanatory and fairly easy to do and a lot of firms do it both ways, just depending on what makes sense for them. I'm hoping more firms participate. Again, we have a chance to get 800, which is almost 200 more than our all-time record. That's how popular the survey is these days.

    Brent Trimble: Well, this has been a fantastic conversation. It's, I think, given folks great context in the background of the firm; the primary surveys that you do. When do you anticipate the 2023 readout to be completed?

    Dave Hofferberth: We plan to publish, it's usually around February 8th, so it's the second week in February. We publish it, there'll be a press release from SPI, and the organizations that participated will receive their participant copy of the report. Or you buy it for $2,000. Most companies just like to participate and receive their own copy of it. So yeah, we're really excited to finish the survey if there's two months of analysis ahead of me to get this thing published.

    Brent Trimble: Fantastic. And for our listeners, we'll link to the 2022 professional services automation end-user survey in the show notes. So anyone who didn't pick up the link will be able to access it there. Dave, this has been great, again, thank you so much for being with us today and for our listeners, as always, you can reach out to us at podcast@Kantata with any followup questions and we always like to hear from you. So thanks again Dave.

    Dave Hofferberth: All right, thank you. Have a good day everyone.