SPI Maturity Benchmark Report: 5 Ways European Consulting Firms Can Boost Their Profit Margins
An interview with Dave Hofferberth, Founder of Service Performance Insight
The annual Service Performance Insight (SPI) Professional Services Maturity™ Benchmark Report has become the go-to resource for professional services leaders to gain insight into how to analyse service performance and improve processes to achieve service excellence.
We invited Dave Hofferberth, Founder of SPI, to join Eric McAdam, Vice President at Deltek, on a recent webinar to discuss the SPI report and what the results mean for European firms and what they should watch out for this year.
How Did European Professional Services Firms Perform Overall in 2022?
“Europe did very well from a profitability standpoint”, says Dave. In 2020, Europe, like the rest of the world, suffered in terms of profitability. Since then, European professional service firms have increased profitability year on year. Dave believes that one of the things driving these results is that European firms sold bigger, longer projects, giving them more stability.
“Bigger projects are more difficult to deliver, but from a financial standpoint, they are more beneficial to the business. Your firm can plan much better when you have long projects; you understand where the revenue and costs are going.”
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What Were the Biggest Challenges for European Firms in 2022?
According to the SPI Professional Services Maturity™ Benchmark Report, performance in the Service Execution Pillar dropped for European firms in 2022. Results show lower levels for on-time delivery and lower margins. This trend is not good, and it negatively impacted billable utilization.
SPI advises firms to aim for 80% billable utilization of services based on a structured or standardized delivery methodology. Last year billable utilization in Europe decreased by over 3%, translating into approximately 60 hours lost per consultant per year, which impacts project delivery and profitability.
Why is that important? Dave explained, “Project delivery tells you how your firm performs and drives client satisfaction. Clients don't like late projects, and your consultants don't want to be out in the field with angry clients. Also, lack of on-time delivery means lower project margins.”
So, what should your firm aim for in terms of project margin? SPI recommends around 40%. In this respect, European firms fell short last year which could impact investments for future growth and investment in employees and talent.
The Degradation of European Service Execution Metrics - Shaping the Future of Professional Services: Industry Study Reveal
Where Do Management Consultancies and IT Consultancies Fit into This?
Dave acknowledged that not every professional services firm operates in the same way and used the example of two types of consultancies included in the report, Management, and IT consultancies. The SPI report shows that last year IT consultancies grew over 15% and made over 20% profit, whereas management consultancies did not.
Dave commented, “IT consultancies have been on an upward trend since the pandemic. Both growth and profitability continue to rise.”
He continued, “But, management consultancies have seen a reduction in growth over the past four years. Although profitability is on a slight rise, management consultancies must do more to demonstrate value in the services they deliver.”
“It is easy to see why IT consultancies have thrived since the pandemic. As the SPI study confirmed, there is a greater need for technology. IT consultancies should be on a roll for the next decade.”
Dave predicts that IT and management consultancies will continue to drive cost out of their organizations but are under pressure to demonstrate value. He believes that the key is for management consultancies to sell more IT services to help them tie strategy with operations.
The Two Largest European Segments, IT and Management Consulting - Shaping the Future of Professional Services: Industry Study Reveal
Tracking Your Own Firm Against the SPI Professional Services Maturity™ Benchmark
SPI reviews a firm’s maturity against 150 key performance indicators. Level one, or the red, are the areas you want to improve, moving up to Level 5, the green, where performance is strong.
SPI Maturity™ Benchmark - Shaping the Future of Professional Services: Industry Study Reveal
"When you first look at the benchmark metrics, I'd make sure that you know what they are and what they mean for your business. Are you capable of tracking them? Certainly, in many places I've worked, tracking these metrics has taken a long time. But once you are working with them effectively, they make such a difference. You can make some good dynamic decisions based on that." advises Eric.
Dave’s Top Tips for Using the SPI Professional Services Maturity™ Benchmark Framework:
- Download the SPI report to benchmark your firm and figure out where you are performing well and where improvements need to be made - that's the beginning of getting your organization back to where you want it to be
- If you want to get back to profitability and growth, focus on the areas you don't do well (level one areas)
- Don't waste valuable time and resources trying to improve something your firm already does very well (or considered ‘green’ in the benchmark)
- You can make significant impacts by improving level one and two performance metrics.
SPI’s Five Moves to Boost Your Firm’s Project Margin
According to Dave, the biggest challenge for European firms is the degradation of project margin. “Let's take care of it now,” says Dave, “and not wait till the end of this year.”
So how are the top 20% of firms tackling this now?
- Accurate planning with one source of truth. Planning is year-round; firms need clear communication and collaboration among various departments. Business leaders shouldn’t struggle to determine which set of numbers is correct or have manual data entry from one system to another. Set KPIs to meet your revenue and margin goals and build your pipeline.
- Drive growth through more effective selling. "We like to tell firms that if you win every bid, there's a good chance you’ve priced your services too low. We think you've optimized if you win 70% of your bids. So, you're growing revenue but also making your margins." Says Dave.
- Hire to maximize billable utilization. Don’t hire without a forecast, or you’ll always have consultants on the bench.
- Deliver efficiently and on time. This tracks back to executive real-time visibility—a subjective KPI in the SPI report but highly correlated with the project and organizational success.
- Drive Profitability. Organizations that achieved 20% profitability or more did a better job of planning and executing services. “Firms that can look in the rear-view mirror at what they're selling and whom they're hiring can also look forward, understanding the impact on overall growth and profitability as they sell their services”, Dave confirms.
The Market is Moving to Project-Based ERP.
In professional services and every industry, leaders understand the importance of visibility across the organization.
According to Dave, “Many companies have moved to a project-based ERP solution, and it's starting to take off in the marketplace. Hiring processes are better, sales processes are better, and delivery processes are much better. And the impact of this integration and visibility across the organization yields better financial results."
Project-Based ERP Benefits in Europe - Shaping the Future of Professional Services: Industry Study Reveal
Eric confirmed that “Deltek has found that top-performing firms utilize Professional Services Automation (PSA) systems and enterprise resource planning (ERP) to underpin successful project delivery and achieve the business outcomes that professional services leaders seek. Allowing them to pivot within their firms to drive performance."
The value of cross-functional, cross-departmental information is critical for any organization. The concept of project-based ERP is that all critical solutions are in one system.
“The one big thing with the project-based ERP movement is that, especially in the cloud, the vendor takes care of that integration so that you're continually receiving better-integrated solutions,” Dave commented. “Digital transformation is now a sprint rather than a stroll and your organization must use technology to improve performance, growth, and profitability.”
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