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A Service Performance Insight White Paper

The Road to Professional Service Excellence

March, 2008

6260 Winter Hazel Drive Liberty Township, OH 45044 USA Telephone: 513.759.5443 Mobile: 513.280.1290

25 Boroughwood Place Hillsborough, CA 94010 USA Telephone: 650.342.4690 Mobile: 650.703.6593

www.SPIresearch.com

TABLE OF CONTENTS Table of Contents ........................................................................................................... i Figure ............................................................................................................................. ii Tables............................................................................................................................. ii Introduction ................................................................................................................... 1 Five Service Performance Pillars ................................................................................. 2 Professional Services Maturity Model Levels ............................................................. 3
Level 1 - Initiation ..................................................................................................................... 3 Level 2 - Pilot ............................................................................................................................ 4 Level 3 - Deployed .................................................................................................................... 4 Level 4 - Institutionalized ......................................................................................................... 4 Level 5 - Optimized ................................................................................................................... 5

Building the Professional Service Maturity Model ...................................................... 5 Current Findings from the Study ................................................................................. 6 Conclusions................................................................................................................... 9 Appendix ...................................................................................................................... 10
Author Profiles........................................................................................................................ 10

Jeanne Urich........................................................................................................ 10 R. David Hofferberth, P.E. .................................................................................... 10

FIGURE
Figure 1: The Professional Services Maturity Model ...................................................................... 2

TABLES
Table 1: Performance Pillars Mapped Against Service Maturity .................................................... 5 Table 2: Organization Driving Strategy ........................................................................................... 6 Table 3: Professional Services Corporate Objectives ..................................................................... 7 Table 4: Professional Services Maturity Improvements .................................................................. 7 Table 5: Finance & Operations Performance .................................................................................. 8

The Road to Professional Services Excellence

INTRODUCTION The technology professional services business is starting to mature. Signs that the industry has moved from birth to adolescence or even adulthood are everywhere. Gone are the days of the ants Viant, and Scient, with huge market capitalization but limited profits. The heady days of the dot.com boom have been replaced by large public offerings for Accenture, Cap Gemini and Bearing Point, and consolidation of PWC and Cambridge Technology Partners. Todays Big 10 include Tata, Infosys and Wipro. Within technology product companies there is an intense focus on growing revenue and margin from professional services. Much has been written about the technology adoption lifecycle and technology maturity models with corresponding predictive and diagnostic measures of health for companies at each point of the lifecycle maturity curve. Go to the business section of any bookstore and you will find a plethora of great tools to pinpoint where your company is in terms of product lifecycle maturity and the optimum behaviors, strategy and focus that should be deployed. However, little if any research exists to understand and quantify the technology professional services maturity model. What are the most important focus areas for professional service organizations (PSOs) as their business processes mature? What is the optimum level of maturity or control at each phase of the organizations lifecycle? Can diagnostic tools for assessing and determining the health of key business processes depending on the level of maturity of the organization start to be built? Are there key business characteristics and behaviors which make the difference between success and failure? Do they change depending on how mature the company or industry is? How does the professional service maturity model operate within the wider context of the technology maturity model? Dave Hofferberth of Service Performance Insight (www.SPIResearch.com ) and Jeanne Urich of Adexta Consulting (www.adexta.com ) are conducting research designed to benchmark the correlation between professional service organizational performance and the adoption of best practices and business process maturity. The study focuses on professional services excellence across Five Service Performance Pillars Business Strategy, Finance and Operations, Human Capital Alignment, Service Execution and Client Relationships. Through the analysis of industry benchmarks and practical guidance from experts in the field, the study will measure which key elements are the most important predictors of overall success. Starting in September, 2007 Adexta & SPI Research have surveyed over 40 technology professional service organizations with a goal to expand the study to over 100 organizations in the next month. The early respondents range from small to very large professional service organizations either within technology companies (primarily software) or independent system integrators. Companies who participate in the study will be given a free copy of the final report. Please follow this link to participate in the

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study: http://www.spiresearch.com/ProductPages/SPI2007PerfPillarsQuest.htm Figure 1 shows characteristics of professional service organizations as they move from birth to maturity. This model is built on the same foundation as the Capability Maturity Model (CMM) that has been adopted for software development; but is specifically targeted toward billable PSOs, that either exclusively sell and execute professional services, or compliment the sale of products with services to optimize the products use. Figure 1: The Professional Services Maturity Model

Source: Adexta and SPI Research, March 2008

FIVE SERVICE PERFORMANCE PILLARS Adexta & SPI Research have broken the key business processes required to create and run a professional service organization into five performance pillars: 1. Business Strategy: 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 focus on target customers, their business problems and how our solution solves those problems uniquely (and better) than its competitors. For a service strategy to be effective, the role and charter of the service organization must be defined, embraced and supported throughout the company. Depending on whether the service strategy is to primarily support product sales or to drive service revenue and margin, the goals and measurements will vary.

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2. Financial Execution: The ability to manage services profit and loss. The ability to generate revenue and profit and develop repeatable operating processes. Elements of this pillar provide long-term financial stability, enabling the PSO to manage growth and provide an acceptable level of return to its shareholders. 3. Human Capital: The ability to attract, retain and motivate employees. With changing workforce demographics, human capital strategy has increased in importance as executives work to manage costs while assuring clients have the best personnel working on their projects. As PSOs have adopted a number of new staffing models designed to achieve these goals, they must constantly work to keep their best people on-board and motivated. 4. Service Execution: The methodology, process and tools to effectively schedule, deploy and measure the quality of the service delivery process. Service execution involves a number of factors: from assuring utilization rates remain high to delivering services in a predictable and acceptable time-frame, to reducing cost while improving project quality and harvesting knowledge. 5. Client Relationship: (Sales, Marketing and Communication) the ability to effectively communicate with employees, partners and customers to generate and close business and win deals. It involves improving relationships to better understand client needs, while ensuring they will provide references and testimonials. These five pillars define specific areas where organizations of all types (product or service) strive to improve capabilities that will both optimize profitability and also improve quality, human capital and client satisfaction providing the best environment for long-term success. However, maximizing performance in one pillar could lead to performance degradations in the other four. The objective is to optimize the results within each pillar, while driving overall revenue, margin and customer satisfaction. PROFESSIONAL SERVICES MATURITY MODEL LEVELS Within each of the Service Performance Pillars Adexta & SPI Research developed guidelines for process maturity. These guidelines cut across the five service dimensions to illustrate examples of business process maturity. The study has been developed to measure the correlation between process maturity and service performance excellence. Level 1 - Initiation At maturity Level 1, processes are ad hoc, and fluid. The business environment is chaotic and opportunistic and the focus for the professional service organization is primarily on new client acquisition and building references. Often professional service employees 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 the people in the organization, and not on the use of proven processes, methods or tools. In spite of this ad hoc, chaotic environment,
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young PSOs are often dynamic and fun. Career and skill growth are abundant because there is more than enough work for everyone. Employees willing to put in the time to master the product or take on additional tasks are celebrated and rewarded with increasing levels of responsibility. Rudimentary systems for time and expense capture, reporting and billing are initially developed on spreadsheets. Disciplined financial controls and an intense focus on revenue and profit have not yet materialized. Typically the start-up professional service organization is run as a costcenter and may be combined with presales, support or engineering. Level 2 - Pilot At maturity Level 2, processes are starting 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 Service Performance pillars but they may not be universally embraced. Measurement and reporting systems are under development but may not provide complete visibility or control into all major financial areas. The organization is now run as a value-added profit and loss center. The charter (within product companies) is to build client self-sufficiency and references. Friction may exist with other functions and system integration partners. Level 3 - Deployed At maturity Level 3 the professional service organization 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. A critical distinction between level 2 and level 3 is the scope of standards, process descriptions, and procedures. At level 3, the standards, process descriptions, and procedures have been published and there are structures in place to ensure compliance. For example, a Project Management Office (PMO) has been created to oversee project quality and ensure projects are delivered in accordance with a standard project methodology. Financial measurements and controls are in place to ensure capture and reporting of time, expense and billing. A core set of management reports and operating plans are in place. The organization may be very profitable. The charter is to rapidly implement engagements to secure references while producing service profit. Higher level vertical and business consulting practices may be under development. Level 4 - Institutionalized At maturity Level 4 using precise measurements, metrics and controls, management can effectively control the PSO. Each service performance pillar contains a detailed set of operating principles, tools and measurements. Organizations at this level set quantitative and quality goals for

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customer acquisition, retention and penetration, in addition to a complete set of financial and operating controls and measurements. The business has become predictable and profitable. Centers of technology excellence as well as vertical and horizontal solution practices exist. Interlocking, matrix managed organization and reporting structures may be in place depending on the complexity of the solutions provided and the size of the organization. It may be difficult to innovate and improvise making the organization appear hierarchical and complex. Level 5 - Optimized Maturity Level 5 focuses on continually improving all elements of the five performance pillars. A disciplined, controlled process for measuring and optimizing performance through both incremental and innovative technological improvements is in place. Quantitative processimprovement objectives for the organization are established, continually revised to reflect changing business objectives, and used as criteria in managing process improvement. New initiatives for quality, cost control or client acquisition are in place to ensure optimum performance. The rough edges between disciplines, functions and specialties have been optimized to ensure unique problems can be addressed quickly without excessive bureaucracy or silos. BUILDING THE PROFESSIONAL SERVICE MATURITY MODEL If the service performance pillars are mapped against process maturity a Service Excellence Roadmap can be developed. This tool provides insight into where an organization fits within the service maturity model as well as a guideline to move from one level of maturity to the next. The tool allows organizations to diagnose their performance strengths and develop plans to bring lagging areas into alignment. Table 1: Performance Pillars Mapped Against Service Maturity
Phase 1 Initiated
Initial strategy is to support product sales and provide reference cust. while providing workarounds to complete immature prod. The PSO has been created but is not yet profitable. Rudimentary time and expense capture.

Phase 2 Piloted
PS has become a profit center but is subordinate to product sales. Strategy is to drive customer adoption and references profitably. 5 to 20% margin. PS becoming a profit center but still immature finance and operations processes

Phase 3 Deployed
PS is an important revenue and margin source but channel conflict still exists. Services differentiate products.

Phase 4 Institutionalized
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.

Phase 5 Optimized
PS is critical to the company. Service strategy is clear. Complimentary goals and measurements in place for all functions.

Vision and Strategy

Finance and Operations

20 to 30% margin. PS is a complete P&L. Standard methods for resource mgmt., time & expense mgmt. and billing.

PS generates > 20% of overall company revenue and contributes > 30% margin. Well developed finance and operations processes and controls.

> 40% margin. Continuous improvement and enhancement. High profit. Global with disciplined process controls and optimization.

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Hire as needed. Generalist skills. Chameleons, Jack of All Trades. Individual heroics. No scheduling. Reactive. Ad hoc. Heroic.

Human Capital Alignment

Begin forecasting workload. Start developing job and skill descriptions and compensation plans

Resource mgmt., skill mgmt, career mgmt, employee satisfaction surveys. Training plans. Attrition <20%

Business process and vertical skills in addition to technical and project skills. Career ladder. Training investment. Low attrition.

Continually staff and train to meet future needs. Highly skilled, motivated workforce. Outsource commodity skills or peaks.

Service Execution

Skeleton methodology in place. Initiating project mgmt. and technical skills. Start to use marketing to drive leads. Multiple sales models. Start measuring customer satisfaction.

Collaborative portal, begin looking at Earned Value Analysis. Project dashboard and quality measure. Marketing, inside sales, solution sales with defined solution sets. Deal, pricing and contract reviews.

Integrated project and resource management. Using portfolio management.

Integrated solutions drive performance. Continual checks and balances to assure superior utilization and bill rates. Executive relationships. Thought leadership. Brand building and awareness. High customer satisfaction. Integrated sales and marketing. High quality references.

Client Relationship

Opportunistic. No defined solution sets. Focus on new customers and references.

Business process and vertical solutions in addition to horizontal applications. Centers of excellence. Top client and partner programs.

Source: Adexta and SPI Research, March 2008

CURRENT FINDINGS FROM THE STUDY Evidence that professional services is starting to come of age is shown in the following chart. For product companies, Sales and Engineering (Table 2) may still be driving strategy but increasingly, service is getting a seat at the table and recognized as an important revenue and margin contributor. As products have matured, product companies may start to devalue their system integration partnerships and take valuable service dollars in house. Focus is on strategic not regional partners. Table 2: Organization Driving Strategy
Organization Sales Engineering Service Marketing Partner Rating 1.89 2.58 2.74 2.82 3.79 Rank* 1 2 3 4 5

* (1 = most important 5 = least important)

Source: Adexta & SPI Research, October 2007

Respondents were asked to rank the role of professional services in terms of driving overall corporate objective importance (Table 3). These results demonstrate that professional service is maturing with an increased focus on quality. The professional service organization has emerged as the major client satisfier and reference generator for the corporation. However, within product companies, the primary role of service continues to be a focus on driving product revenue and product quality.

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Table 3: Professional Services Corporate Objectives


Corporate Objective Improve Service Quality & Client Satisfaction Increase Product Revenue Improve Product Quality & provide product feedback Increase Service Revenue Increase Market Share - beat the competition Increase Service Margin Improve cross-functional teamwork & knowledge sharing Improve Customer application knowledge & self-sufficiency Increase Employee Satisfaction
* (1 = most important 9 = least important)

Score 2.41 3.24 3.41 3.73 3.81 3.86 3.89 3.97 4.05

Rank* 1 2 3 4 5 6 7 8 9

Source: Adexta & SPI Research, October 2007

One of the most surprising findings and another sign of maturity is the focus on methodology, project quality and standards (Table 4). Almost all respondents have a defined service delivery methodology and are starting to invest in project quality tools and measurements. Many PSOs have started to look for and adopt industry organizational quality standards in addition to individual skill certification. Interestingly, knowledge management and it infrastructure investment ranked at the bottom. This may be a result of earlier information technology investments as many respondents have deployed professional service automation solutions. Or it may be a result of increasing commoditization of service delivery with corresponding client demands for rigorous, demonstrable project and organization quality standards. Table 4: Professional Services Maturity Improvements
Maturity Improvements Methodology investment and improvement Project Quality measurements and improvement Professional Services standards and employee certification Cross-functional partnering and improvement Employee training IT Investments and improvement Knowledge Management
*(1 = most important 7 = least important)

Score 2.70 2.83 3.70 3.78 3.91 4.22 4.35

Rank* 1 2 3 4 5 6 7

Source: Adexta & SPI Research, October 2007

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And finally, financial indicators are improving in most areas. Almost all respondents are experiencing significant revenue and headcount growth and backlog is growing (Table 5). Contribution margin is a healthy 22% and revenue per billable employee averaged $220K. Project, subcontractor and offshore margins are all healthy and improving. A majority of respondents use some level of offshore resources and are less reliant on subcontractors than in the past. Reported margin from offshore resources versus subcontractors was 47.5% versus 30.8% - a significant difference! One area stands out as an area for significant improvement service selling, deal pricing, deal discounting and responsibility for pricing. There was almost no commonality in reported pricing, discounting and deal authority. Very few organizations reported defined guidelines for pricing and discounting resulting in discount authority all over the map. Control of service sales and pricing is a process maturity focus area which will result in dramatic service profit improvement. Table 5: Finance & Operations Performance
Financial Metrics What is your annual professional services (PS) contribution margin? What was the year-over-year change in PS contribution margin? What is your average annual revenue per person for billable employees (*1000)? What is your average project gross margin? What is your average subcontractor margin? What is your average margin for offshore resources? What % of your quarterly revenue target is in backlog? Has your backlog been increasing or decreasing? What % of discounting exists? What is your quarterly average revenue forecasting variance? Do you have standard contracts - Master PS Agreement & SOW's? Do you have a professional services Deal Review team? Average non-billable expense per employee per quarter? What is the average cycle time for contract review (days)? What is your bid/win ratio? Number of wins per 10 bids? Value 22.0% 10.7% $220 38.9% 30.8% 47.5% 51.3% 57.4% 18.5% 14.9% 95.8% 56.8% $3,637 3.00 5.76

Source: Adexta & SPI Research, October 2007

Another indicator of the need to improve service selling is Bid-win rate. The firms reported greater than a 50% average win rate; this number could improve with an increased emphasis on pricing coupled with a greater focus on bidding on work with a better chance of winning the bid.

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In other words, where single source bids can be created or where the client relationship is strong enough so that the work is ours to lose. CONCLUSIONS With increased global competition for business and resources PSOs must continue to improve. These improvements cut across every aspect of the organization, and all departments and individuals must work together to drive service performance excellence. Executives need performance indicators and a plan for continual advancement. This White Paper provides a glimpse into areas where PSOs can improve by showing statistics for average performance reported by over 40 professional service organizations. Subsequent analysis performed by Adexta & SPI Research will show how the service performance pillars can be optimized and will provide prescriptive advice to help organizations enhance their business process maturity while improving bottomline results. The performance pillars and statistics produced by Adexta & SPI Research are by no means the definitive answer to improving performance in every PSO. Each PSO is different and operates to its highest capability by uniquely providing services and optimizing each pillar in a way that makes them successful. The purpose of performance pillars is to show potential areas of improvement, and provide guidance as to how PSOs can advance. As the technology professional service industry has matured, the stakes and the ante to play have been raised. Todays PSO requires significant investment in tools, methods and process in all areas of Business Strategy, Finance and Operations, Human Capital Alignment, Service Execution and Client Relationships to be successful. High-performing organizations must optimize each service performance pillar and take advantage of technology and process advancements to be competitive. While much progress has been made in service revenue and margin achievement; significant gaps in strategy, service sales and pricing, project methods and service quality and human capital alignment persist. Variable on-shore and off-shore workforces have made a disciplined approach to managing all facets of the business more important than ever before. We believe this study and continued focus on developing a Service Maturity Model while provide a roadmap for achieving Service Excellence.

Service Performance Insight (SPI Research) is a globally-focused research firm specializing in management issues regarding information technology (IT) use in the services sector. The firm closely follows professional services organizations (PSOs), independent software vendors (ISVs) and other technology providers, analyzing how organizations best use technology to make their people more productive and profitable. SPI Research pays particular attention to the integration of the three key assets of a PSO: its people, (business) processes and capital, and how technology can help optimize their use. Visit www.SPIresearch.com for more information on Service Performance Insight. 2008 Service Performance Insight Page 9

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APPENDIX

Author Profiles Jeanne Urich Adexta Managing Director, Jeanne Urich is a management consultant specializing in Service organization improvement for small to large technology companies. Her focus areas include Strategy, Marketing, Business Development, Alliances, Finance, Operations, and Human Resources. She has been a corporate officer and leader of the Worldwide Services Organizations of Vignette, Blue Martini and Clarify. She has a Bachelors Degree in Math and Computer Science from Vanderbilt University. She serves on the Advisory Board of www.psvillage.com, a preeminent on-line community for Services executives, and is a Contributing Editor and Contributing Author of Tips from the Trenches: the Collective Wisdom of over 100 Professional Service Leaders. R. David Hofferberth, P.E. Service Performance Insight Managing Director, David Hofferberth, has over 20 years experience in information technology (IT) serving as an industry analyst, market consultant, and as a product director at Oracle. Hofferberth is focused on the services economy, and in particular, on white-collar productivity issues and the technologies that help people perform at their highest capacity. Hofferberths background also includes the management of application development teams and analytical tool development to support business decision-making processes. Hofferberth earned an MBA from Duke University and a BS in Industrial Engineering from the University of Tennessee. He is also a licensed Professional Engineer (PE).

Service Performance Insight (SPI Research) is a globally-focused research firm specializing in management issues regarding information technology (IT) use in the services sector. The firm closely follows professional services organizations (PSOs), independent software vendors (ISVs) and other technology providers, analyzing how organizations best use technology to make their people more productive and profitable. SPI Research pays particular attention to the integration of the three key assets of a PSO: its people, (business) processes and capital, and how technology can help optimize their use. Visit www.SPIresearch.com for more information on Service Performance Insight. 2008 Service Performance Insight Page 10