Lessons from the Pandemic for Professional Services Firms – Service Execution is Key
SPI Research's annual Professional Services Maturity Benchmark report provides one of the most comprehensive views into service organizations and the common benchmarks that drive them. This year's survey presents a first detailed view of the pandemic's impact and provides clues for how professional services firms have adapted to changing priorities in the wake of Covid-19.
Effects of the pandemic on business
Unsurprisingly, the pandemic prompted many clients to hold or cancel projects. For example, marketing and advertising agencies saw a 37% drop in client projects, with 282 delivered on average in 2020 versus 445 in 2019. With their customers putting strategic projects on hold, management consulting firms were hit even worse and saw their delivered projects decrease by more than 90%. Engineering firms reported a 47% drop in projects delivered in 2020 over 2019.
Project margins, however, increased 2.2% (Marketing and Advertising agencies) and 4.7% (Management Consulting), respectively. Engineering firms increased project margins by 11.8%. However, Engineering firms have the lowest margins in the SPI benchmark report and, as Deloitte points out in a recent industry study, profit margins for Engineering firms have been thinner than in other areas of professional services for many years.
Additionally, high material costs are slimming margins in residential projects, and the weakness in the commercial space, as a result of the pandemic, is likely to continue through 2021. Still, 68% of the executives surveyed in that same study characterized the business outlook for their industry as somewhat or very positive.
IT Consulting firms marked a 7.9% increase in delivered projects and marked a margin increase of 4.7%. For them, the pandemic accelerated their business with the shift to virtual and remote work environments – a trend that had been underway for several years and is likely to continue in 2021 and beyond as more and more business leaders expect that their workforce to work from home at least multiple days a week.
For the broader professional services space, the forced move to virtual operations has been relatively friction-free, with higher productivity and lower operating costs. SPI reports that nearly 59% of all services were delivered remotely in 2020, up 7% from the prior year.
To sum up, while project deliveries are down significantly, margins are slightly increasing. The shift to virtual delivery has certainly helped with that. But at least some clients will expect their service providers back in the office, so relying on virtual delivery to increase margins can only be a short-term strategy.
Standardizing delivery methods
SPI finds in its benchmark report that standardized delivery methodologies help service organizations improve project forecasting and resource management, improving profitability. PSOs who can accurately plan and execute services in a structured way are more productive and more likely to deliver with quality.
Even before the pandemic, service-driven organizations have become more focused. As a result, project overrun went down as the use of standardized delivery methodologies increased.
Across the board, the use of standardized delivery methods ranges from 63% (marketing/advertising firms) to 66% (IT Consulting firms). While standardizing delivery methods is, without a doubt, critical to delivering with quality, its impact on margin is minimal, especially in firms offering specialized services.
As organizations focus on reducing the cost-to-service, which requires lean relationship strategies (e.g., online self-help tools instead of on-site tech support), they will increasingly be at the risk of losing clients to lower-cost competitors due to the increased commoditization of the service provided.
Increasing visibility and management controls
Service organizations already make extensive use of standardized delivery methods, but they are not always feasible or a healthy long-term strategy for the firm. In the end, it is operational excellence that determines success in an increasingly competitive marketplace. To fight off competition, organizations should look to use best-in-class tools and business applications to support the goal of efficient, consistent, high-quality service delivery.
As example of how such tools help, SPI found that a centrally managed resource management strategy led to the lowest project overrun, 81% on-time delivery, and the highest revenue per consultant and project margin.
Leveraging technology to solve business-level efficiency problems
PSOs could start changing the focus of technology investments from stand-alone project-related issues to integrated, company-level initiatives, for example by adopting software that enables central resource management. Technology applications ensure that such a strategy can be executed against. In time, the tools and the data they generate will also help firms identify other areas for potential improvement.
A more comprehensive approach includes the use of intelligent financial management applications that allow professional services organizations to make use of real-time project-level data and proactively manage all aspects of their projects, issue accurate invoices quicker, and ultimately improve cash flow, customer satisfaction and margins.
Next-generation technologies like AI and machine learning can provide accurate and complete insights to profitably manage a service business. 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.
By taking a holistic perspective of optimizing processes with the help of integrated software, that allows teams to use the best-in-class solutions for their needs, organizations will be able to reduce operational friction and ultimately improve overall service execution in a meaningful way.
By doing so, professional service firms can improve execution and margins in the short term. And as the impact of the pandemic wanes, firms can make use of the same principles and technologies to identify and prioritize engagements that make the most sense for their business in the long term.
Juergen is a Senior Marketing Manager at Sage, covering the Professional Services and Biotech & Life Sciences industries for Sage Intacct. He advises on the industries within the company and helps customers and prospects to maximize the value of their investment in Sage Intacct. Connect with Juergen on LinkedIn: https://www.linkedin.com/in/jutess/.
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