Strategy, Legal & Operations

How professional services firms can thrive in an uncertain economy

In this article, we offer advice based on SPI's latest annual research.

people in office

At a time when nobody seems to be sure where exactly the economy is headed, the best thing for any business is to focus on the things they can control. In the context of professional services, SPI Research’s annual Professional Services Maturity Benchmark report sheds light on where firms should concentrate their efforts, for maximum results.

The report looks at various types of service organizations and common business drivers. With hundreds of participating organizations globally, it provides a reliable basis for determining what makes service businesses successful. SPI’s data goes back to the 2008 financial crisis and, more recently, covers Covid-19.

The data shows that services companies that fared well through difficult economic times are the ones that understand their financial and operational data.

But what are the key metrics to pay attention to? Retaining customers and executing projects as effectively as possible has always been essential, but becomes vital in shaky economic times. Therefore, we will take a closer look at the service execution metrics in this article.

For professional services firms, service execution metrics measure the quality, efficiency, and repeatability of service delivery. It encompasses the core activities for planning, scheduling and delivery of engagements. Service execution is where the money is made in professional services. Because each business varies in how they work with their clients, these metrics can differ across all types of services companies.

But we can already see the pervasive effect of Covid-19 across the board, as those metrics have taken a hit and continue to decline since the start of the pandemic.

According to SPI’s latest report, service execution metrics were down year-over-year from 2021 to 2022 in all categories, including billable utilization, on-time project delivery, and standard delivery methods. As a result, project margins have also slipped 35%, down from 36.5% in 2021.

Service execution metrics in detail

Taking a closer look at industries within the professional services umbrella, this downward trend does not apply across the board.

IT consultants, for example, often tasked to help organizations become more efficient through technology, are a notable outlier—managing to increase their billable utilization and are above even 2021 numbers at 73.4%. They also recruit and train new talent the fastest and have some of the highest project margins in the industry, despite scoring below average on standard delivery methods.

Architecture and Engineering firms are also ahead of the curve regarding billable utilization, making the most use of standard delivery methods, at 68.7%. However, due to the nature of these businesses, they also have the longest-running projects on average and experience relatively frequent overruns at 10.9%, translating into lower-than-average project margins.

Marketing and Advertising agencies fare the worst regarding billable utilization, at 67.8%. While they are slightly above average for on-time project delivery (78%), they are below average for standard delivery methods (61.5%).

Healthcare Services, broken out separately in the SPI Benchmark report for the first time, shine in utilization (72.5%) and on-time delivery (78.7%), but report the lowest use of standardized delivery methodology at 56.3%. However, the highly specialized nature of the field is reflected in the revenue per project, where Healthcare Service companies far outpace other professional services companies with $321k revenue per project, despite also having the largest staff per project (5.66 employees).

Management consultancies have come out on top for efficiency. They have the highest on-time delivery (82.7%) and lowest project overrun (7.5%), good margins for a fixed time (35.7%), and fixed project engagements (40.1%).

Revenues per project, in general, are improving, especially in sectors that were disproportionally affected by Covid-19, like Marketing and Advertising. However, the dollar values on project revenues do not account for inflation, so projects may be shrinking for companies reporting more minor improvements, like Management Consulting firms.

To improve service execution and margins, SPI recommends further increasing the use of standardized delivery methodologies. They help service organizations improve project forecasting and resource management, which will have a positive effect on profitability. PSOs that can accurately plan and execute services in a structured way are more productive and more likely to deliver quality.

Service-driven organizations have been pushing to become more focused. As a result, the number of project overruns dropped as standardized delivery methodologies increased.

But standardization is not always the answer. While standardizing delivery methods is critical to delivering quality, firms offering specialized services, like healthcare service companies, may have a more challenging time putting them into practice across the board.

It’s also important to note that an organizational focus on reducing the cost-to-service will require lean relationship strategies (e.g., online self-help tools instead of on-site tech support). This will sharpen the risk of losing clients to lower-cost competitors due to the increased commoditization of the service provided.

What do high-performing service organizations do differently?

The have a relentless focus on excellent execution—projects are completed faster and more often on time (85.7%) than their peers. Their employees are much more efficiently utilized and they use more standard delivery methods.

Their project margins for fixed-time and fixed-price projects are 46%, which means 96.8% of them achieve their annual margin target. As a result, their revenue per employee is 39% higher than their peers, and their EBITDA is 50% higher.

Increasing visibility and management controls

Service organizations already extensively use standardized delivery methods, but they are not always feasible or a healthy long-term strategy for the firm.

In the end, operational excellence is the key to success in an increasingly competitive marketplace. And to fight off competition, organizations should use best-in-class tools and business applications to support efficient, consistent, high-quality service delivery.

SPI found that by using these tools, resource-management strategy by horizontal skill set led to higher revenue growth (13.1%) and project margin (38.1%).

Leveraging technology to increase business-level efficiency

By adopting software that enables central-resource management or tighter financial controls, firms could start changing the focus of technology investments from stand-alone project-related issues to integrated, company-level initiatives.

Technology applications ensure that such a strategy can be executed against. In time, the tools and the data they generate will also help organizations identify other areas for potential improvement.

A more comprehensive approach includes intelligent financial-management applications that allow professional services organizations to use real-time project-level data and proactively manage all aspects of their projects. These help to issue accurate invoices quicker, and ultimately improve cash flow, customer satisfaction, and margins.[AS6] 

Next-generation technologies like AI and machine learning can provide accurate and complete insights to manage a service business profitably. For example, intelligent timesheets and expense reports can save time for the professional staff, while advanced technology like outlier detection can help project managers and finance teams spot errors quickly.

Firms should take a holistic perspective that optimizes processes with the help of integrated software. This gives their teams access to the best-in-class solutions for their needs. Organizations can reduce operational friction and ultimately improve overall service execution in a meaningful way.  By doing so, in the short term professional service firms can improve execution and margins. While in the long term, firms can use the same principles and technologies to identify and prioritize engagements that make the most sense for their business.