Three Forces Impacting Labor Margin

I am Thomas E. Lah. The author of Building Professional Services and Mastering Professional Services. I have spent the last twelve years of my life analyzing how technology companies build, scale, and optimize professional service businesses. Yes, I need a hobby.  

In this forum, I will post observations on the technology services industry that I can summarize in a key image. I  want to start with the labor margins.

 

Last week I hosted our Technology Professional Services Association (TPSA) quarterly webcast reviewing the results of the largest providers of technology professional services. Despite the current economic challenges, technology service providers are faring well. However, there is a brutal reality facing this industry. The ability to increase billable rates has been under pressure since the industry began truly globalizing with the Wipro’s and the Infosys’s coming online. At the same time, the cost of experienced, onsite consulting staff has not been decreasing. Has it gotten easier to find talented technology consultants with great soft skills? I don’t think so. Finally, tactics to dramatically improve the productivity of PS staff have not gained momentum. The worse case scenario of the impact of these three forces is summarized in the image below.

Three Forces

Three Forces

These three factors could combine to create a perfect storm that will slash labor margins and thrash the traditional tactics of building, delivering, and optimizing technology professional services businesses. These trends are not new to 2008. The Accenture’s of the world have already been pounded by their force. But now, the relentless nature of these three forces is having an impact on even the most differentiated service organizations. In the webcast last week, over 70% of the attendees felt market rates would remain flat in 2008. In other words, the ability to increase what you charge for your billable consultants will be limited for the foreseeable future. This reality of tepid increases is not new. At our last TPSA Summit, one of the keynote presenters commented on how they had pulled out a customer proposal that was over three years old–and the daily rate qouted was the same one used today!

If market rates are flat, the pressure to improve productivity of current staff and reduce cost of delivery must become the primary levers to economic success for TPS organizations. Otherwise, labor margins and PS profits will simply erode under the relentless pounding of higher costs and flat pricing.

 

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2 Responses to “Three Forces Impacting Labor Margin”

  1. Chris Dowse Says:

    Focusing solely on the cost side of the equation as the “primary economic driver” is a race to the bottom for TPS. TPSA has data that proves TPS “economic success” is more than just the margin on services (higher license sales, higher customer retention etc.). In addition to cost improvement, an equal focus on the top line lever of service innovation is required. Expanding the charter of TPS beyond implementation services to increase the total economic pie for the organization is just one example.

    The need to communicate and prove the total TPS economic success story is even more critical if rates for the existing service portfolio are going to stay flat.

  2. Packaging PS « Service Visions Says:

    […] expertise will be appealing to large companies as well. Going back to the first post of this blog, Three Forces Driving Labor Margin, I argued that reducing delivery costs and increasing productivity were exactly the pressure points […]

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