The Professional Services Hourglass - the Changing PS Model - Prepared by Thomas E. Lah

The Professional Services Hourglass - The Changing PS Model
- Prepared by Thomas E. Lah, Executive Director, TPSA

OVERVIEW

The literature on professional services organizations focuses on the success and optimization of the PS pyramid. This is the classic PS organizational structure in which veteran partners sit at the top of a pyramid of junior resources. PS success is driven by the partners’ ability to keep junior resources billable. Focus is placed on concepts such as leverage, bill rates, and staff utilization. Unfortunately, this classic approach to building a professional services practice is not well-suited to the technology professional services (TPS) organizations of the 21st century. This article reviews the deficiencies in the pyramid model and introduces a new model to consider when building and scaling a TPS organization.

THE PS PYRAMID

The basic organizational structure that professional services organizations have been built on is the classic PS Pyramid. In this model, senior partners sit at the top of the organizational pyramid. Below these partners, senior managers and junior consultants work to deliver the service offerings of the firm. This basic PS pyramid is documented in Figure 1: The Pyramid.

Optimizing the Pyramid
Many experts on the topic have written on the techniques of optimizing this classic pyramid structure. Common challenges and responses are as follows:

Matching skills with work type: For the PS pyramid to be profitable, there must be an effective match between the skills that staff the pyramid and the type of work customers require. If the pyramid is top-heavy with knowledge workers and the service organization delivers mostly procedural work, the firm becomes unprofitable. The billing rates received don’t match the cost of these expensive knowledge workers. However, the reverse can be just as painful. If customers are expecting deep industry experts, and the pyramid is full of generalists, customers will become dissatisfied and revenues will drop.
Leverage and Margin: There are only so many billable hours in a day for partners at the top of the pyramid. For the pyramid to be profitable there must be a healthy balance between expensive partners and junior consultants. The more junior consultants a senior consultant or partner can keep billable, the more revenues the service organization generates. If the firm can sustain a premium rate for these junior consultants, the leverage drives maximum margins for the firm.
Productivity: Of course, the pyramid will never be profitable if staff are not billable a majority of the time. Staff must meet acceptable utilization targets for the pyramid to be profitable. Otherwise, employee costs exceed service revenues.

In 2004, Harvard Business School published an article titled “Profitability Drivers in Professional Service Firms.” The article documented a clear correlation between increased leverage, increased productivity and increased margins on the profitability of PS firms. In fact, the levers for optimizing a professional services business seem straightforward in this modeling:

• Keep your consultants billable
• Charge the highest rates you can
• Create leverage wherever you can

Technology companies have aggressively adopted this pyramid model when incubating their professional services capabilities. The pyramid is instituted as a “practice.” Each technology practice area is assigned a practice manager. This practice manager is responsible for growing the pyramid of resources in the practice. Unfortunately, this pyramid approach is not well-suited to the professional services organizations of most technology companies. There are concepts inherent in the pyramid model that do not transfer well to the technology professional services environment.

CRACKS IN THE PYRAMID

The classic pyramid model has worked extremely well for traditional professional services organizations such as law firms. However, the model has characteristics that are not well-suited to the business of technology professional services.

First of all, the lifeblood of technology services is not partners but solution experts. These are subject matter experts that can articulate the value of the solution being delivered. As talented and knowledgeable as these individuals are, they are not necessarily suited to sit at the top of a services pyramid. Perhaps their management skills lag behind their solution expertise. Perhaps they have absolutely no desire to manage multiple consultants. Regardless of the reason, these solution experts do not fit the mold of a partner. Using the pyramid approach, technology companies translate the role of partner into “practice manager.” Then, outstanding solution experts are rewarded by being placed into the role of practice manager, where they often fail at management aspects of the role.

In conjunction with this preoccupation with the top of the pyramid, the classic pyramid approach is embedded in a culture of “up or out.” The implied objective of a consultant in the PS pyramid is to work his or her way up to the top of the pyramid. In traditional professional services organizations, it is an embarrassment to not make partner. If an employee is passed over for this promotion, it is a signal they should consider “pursuing other opportunities.” This value system is economically destructive to technology professional services organizations. Once again, senior solution experts are the lifeblood of success, regardless of their ability to manage practices.

Next, the pyramid structure funnels both sales and operational responsibilities to a partner. Technology companies attempt the same approach by endowing practice managers with the objective of making their practices financially successful. The practice manager finds himself attempting to secure new services opportunities while sourcing existing projects. A practice manager that excels in business development often pays minimal attention to project implementation. Practice managers that focus on customer success often have little passion or energy for sales. This common dichotomy between hunter and gatherer personalities is a challenge traditional professional services firms constantly struggle with. How much of a partner’s time should be spent selling? Can you be a partner without being a good salesperson? But, if all our partners only excel at sales, who focuses on execution? This problem is exacerbated in the world of technology services, where practice managers have technical solutions that serve large geographic territories. How does the practice manager effectively scale sales and delivery capabilities across the globe? The answer to this question depends on the overall sales structure of the company, which leads to the next challenge.

The pyramid model implies that pricing and scoping responsibilities are ultimately resolved at the top. Partners are responsible for determining the price of their services and the overall scope of an engagement. This makes good sense since ultimately these partners own the financial success of their business. Practice managers in technology companies have much less autonomy. Pricing expectations are likely set by a salesperson outside of the services practice. Project scoping and costs must come from technical experts. To hold a practice manager to the same financial responsibilities as a partner makes little sense when the practice manager must operate in a much more integrated environment.

Finally, the pyramid model does not focus on required investment. Technology solutions require investment. The solutions must be architected, documented, and tested. If the solution is untested, initial reference customers must be secured through discounting. This is not the world of lawyers where every hour is billable. How much should the organization plan to invest in these types of solution completion activities? Simply focusing on utilization, billable rates, and leverage will not provide an answer to this investment question.

In summary, applying the traditional pyramid model to technology professional service organizations creates the following challenges:

• The up-and-out culture of the PS pyramid is economically destructive for technology practices.
• Practice managers rarely have the same economic command and control available to partners managing an enclosed pyramid.
• Profitability drivers in the pyramid model do not address the investments required to incubate technology services offerings.

To address these deficiencies, technology companies should look at their professional services organization as an hourglass as opposed to a pyramid. The next section describes this new approach.

THE PS HOURGLASS

The professional service organizations firms we are addressing deliver complex technology-centered services. In other words, complicated technology is at the center of their services offering. This creates a difficult burden on these services providers. To scale this type of professional services organization, you must possess a competent delivery staff that has the following profile:

• Strong technical knowledge of the company’s core product offerings (hard skills)
• Good understanding of the customer’s operational and business environment
• Strong interpersonal, consultative skills (i.e., soft skills)

Typically, it is difficult to find delivery staff that truly possess all of these skills in adequate amounts. Such employees are often dubbed “subject matter experts” (SMEs). These SMEs become the lifeblood of a technology services business. SMEs are the consultants the customers love to see because they bring real value add.

The problem with SMEs is that there aren’t enough of them. When you shake the recruiting tree, twenty don’t fall out. Get used to this shortage—it will be getting worse in the next ten years. Technology companies are approaching their current SME shortages by raiding competitors. But who is investing to develop new SMEs? When existing SMEs in the market migrate away from professional services or retire, who will be replacing them?

To help offset the SME shortage, a professional services organization must think about managing an hourglass. Figure 2: The PS Hourglass introduces this model. At the top of the hourglass are front-end sales resources that sniff out new deals and verify initial deal qualifications. Is the customer serious? Is a budget established? At the bottom of the hourglass are junior-level delivery staff or subcontractors that are qualified to deliver components of the complex technical solution. In the middle of the hourglass are the subject matter experts. The trick is to shield these hard-to-find SMEs from involvement in every sales call and every project status meeting. In other words, keep the SMEs away from the edges of the hourglass.

Figure 3: Expanding the Hourglass shows how sales-channel partners and delivery subcontractors are used to expand both the top and bottom of the hourglass. This expansion is all about creating leverage for the expertise locked in the bodies of the SMEs.

Consulting firm McKinsey, author Geoffrey Moore, and others have introduced the term “embedded professional services organizations.” This is a great term for professional services organizations that exist within a product company and are there to support product success. A common phenomenon in embedded professional services organizations is that they often make no money on their subject matter experts in the PS organization. These talented consultants are used to drive product adoption and account success. To offset this investment, embedded professional services organizations must do an even better job of creating leverage in the PS hourglass. Sound qualification must occur before the expensive SME is engaged and invested. Margin must be generated by using partners and subcontractors on the bottom of the hourglass. If this leverage does not occur, embedded PS organizations quickly become a cost center.

Finally, Figure 4: Roles and Responsibilities provides a detailed breakdown of how geography-based sales staff partners with subject matter experts to manage services opportunities. In this version, SMEs are represented as Practice Managers, Competency Managers, and Solution Engineers. This version of the hourglass highlights the fact that SMEs work with product and services sales representatives to establish technical feasibility and project costs. However, the sales staff ultimately owns the final pricing pitched to the customer. Also, SMEs must work with resource managers and project managers to verify resource availability. SMEs may know the solution, but they may not know who is available to implement this specific customer project.

Up and Over
Approaching your professional services organization as an hourglass as opposed to a pyramid is not without challenges. The beauty of the pyramid model is its simplicity of responsibility. In a pyramid, there is no doubt who is ultimately responsible for economic success. The visual of an hourglass lacks this crisp sense of responsibility. Yet, does this picture not more accurately map the reality of your professional services environment? Even if you have placed practice managers in charge, are they not relegated to executing within an hourglass structure?

The hourglass creates a new focal point for a management team to apply its energy. Figure 5: Pyramid vs. Hourglass shows this shift in focus.

The critical path in scaling a technology professional services organization centers on the subject matter experts. The management team must constantly be strategizing how to secure competent SMEs, or how to develop new ones. Are there natural sources of SMEs in other parts of the company? R&D? Support Services? How can we reward talented employees to play this critical role for PS (and ultimately the company)? These are the relevant questions for the professional services organizations of today. As a perfect example, IBM just announced the release of some new software. As part of the product release, IBM specifically announced its strategy to provide competent consultants that could actually design, implement, and successfully integrate the new software. Without this qualified expertise, the software does not sell1. This is the reality of technology adoption today. Without enough SMEs, products never become solutions. Without the middle of the hourglass, the sand never flows.

1 - "IBM to seed software with $1 billion," Marketwatch.com, February 16, 2006.

Managing the Resource Pool for Just-in-Time Resourcing

- by Randy Mysliviec, President RTM Consulting

Introduction

In Part 1 of this article, Managing the Demand Forecast for Just-in-Time Resourcing, we discussed new methods, processes and tools required to more effectively manage demand forecasting to enable Just-in-Time Resourcing (JITR). Now, in Part 2, we will discuss how to manage the resource pool for JITR.

Objectives of Effective Resource Pool Management

The outcome of effective resource pool management affects many stakeholders throughout the enterprise. Finance is expecting the business to deliver on forecasted revenue commitments to support pro-forma estimates. Delivery teams need to hire, train, and deploy the right resources in the right places at the right time. Sales teams want on-time quality implementations resulting in happy customers. And so on.

Therefore some key objectives for effective resource pool management include:

• Financials
• Deliver on forecasted commitments
• Achieve target margins
• Revenue
• Deliver on forecasted commitments
• Avoid missed or lost opportunities resulting from resource deployment issues
• Skills Management
• Enable skills balancing (by region or geography)
• Development of needed experts in key technologies
• Delivery
• On-time and on-budget
• Consistently high quality

Key Benefits of Effective Resource Pool Management

Resulting benefits from effective resource pool management include:

• Effective project support and execution
• Improved talent and skills management
• Supports a JITR system
• Lowers costs
• More satisfied customers and employees
• Leads to more revenue and profit!

The Fundamentals of Effective Resource Pool Management

We will discuss two fundamental aspects of resource pool management:

• Foundational elements – the infrastructure needed to support the resource pool management aspects of a JITR system (Note: demand forecasting is discussed as an essential element for a JITR system in the February, 2008 Service Line Newsletter)
• Process and methodology to execute effective resource pool management

Foundational Elements

Warm Pool Recruiting:
In Part 1 of this article we discussed the need to modernize the way we recruit and train new employees. There are many ways we have traditionally accomplished acquisition of people such as recruiting firms, hiring fairs, web-boards, etc. Today’s environment requires less expensive and more responsive approaches to acquiring the right people to arrive at the right place at the right time. This timeline must also allow for proper on-boarding and training of new personnel. A proven technique is the adoption of a “warm pool” recruiting program, driven by a continuous recruiting process vs. the start/stop method deployed by most firms today. The warm pool approach uses methods to create “warm” candidates in a pool that are later recruited into permanent roles in a “just-in-time” hiring system to meet specific job or project needs.

Figure 1: Warm Pool Recruiting

Employee Training:
The subject of training and re-skilling could take up an entire paper on its own. Key points to consider are:

• Define your skills roadmaps and have a plan as to how each key skill is developed
• Build reasonable estimates into budgets/utilization estimates for training time
• Leverage technology assisted training – it is a proven and cost effective way to build skills
• Consider developing employee/technology certification programs which are growing as a way to validate effectiveness of training, and improve the predictability of and quality of work
• Use your PS Automation system to help keep track of available skills

Building a Bench:
Building a bench of resources is a critical element of a JITR system that enables the “right time” element of JITR. For too long companies have viewed building a bench unnecessary, defaulting to hiring only when a contract is in hand. Contemporary thinking on investment in a bench is changing, and must change. Reality is that the lost opportunity cost of losing a deal because you could not serve it quickly enough, or the failure to find needed resource in time to serve a committed project, can more than offset the cost of funding the bench. The bench is also a source of often needed resource to support business capture needs which helps avoid disruption of resources already committed to client funded projects.