Growth and PS Profitability

I was in a conversation with a company this week regarding growth and its impact on professional services profitability.  It is a law of business physics that as enterprises grow it becomes harder for them to grow rapidly.  This natural law applies to professional services as well.  That is not the question the company asked.  The real question, is how fast can you grow the technology professional services business before profitability begins to suffer?

The primary factor impacting the growth of a professional services business is human capital.  For human capital intensive businesses, the critical path to profitable scalability is not a supply chain of parts, but of people.  Unfortunately, it is difficult to produce people predictably when they are required to deliver complex tasks.  The end result is a lower ceiling.  You just can’t scale a professional services business at the same rate you can scale a product business.  But how low is the ceiling?  The image for this blog entry is a graph that maps the size of a professional service business to a maximum growth rate that can be achieved before profitability begins to diminish.  I built this graph over three years ago based on the actual performance I saw from various PS organizations.

Ever since I started using this graph, folks have wanted to challenge it.  Which is great.  As an industry, we should challenge any of the limitations that are currently placed on us.  We should be pushing the boundaries and discovering new tactics that allow us to scale professional services just as rapidly as a tangible product.  And of course, there are examples of professional service organizations that have experienced incredible growth—well beyond the boundaries set in this image.  Do you remember Cambridge Technology Partners in the 1990s?  They grew from $35 million to over $400 million in six years.  Doing some research last year, I stumbled on company called Open Text that grew PS revenues from $38 million to almost $100 million in three years.  And the Indian service firms have taken the concept of profitable growth to new levels. A fellow blogger comparing Infosys to Microsoft made the observation that Infosys earned $100 mn (sales) with 5000 employees by end of 1999. Six years later they will be earning close to $2 bn with 50000 employees. This proves their ability to scale”.

Despite the examples cited above, I do not believe a majority of technology professional service organizations are positioned to sustain growth greater than 40%, year after year, without profitability suffering.  The good news is I can now apply more data to this discussion.  TPSA benchmarks the annual and three year growth rates for professional service organizations.  We can also correlate growth rate to PS profitability.  The data tells me my three year old graph is not far off the mark.  If you are tasked with creating a three year business plan for your PS organization, I would absolutely use the  growth parameters that fall within this image.

I think the image in this blog entry is helpful for PS managers. It frames the question of growth vs. profitability for PS. It provides guidance based on data, not management hubris. But in some ways, I hate that image.  As an industry, we need to blow that image up.  We all need to be able to scale our professional services businesses like an Infosys.

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