Discounting Professional Services Too Much?
In my previous entry, Packaging PS, I discussed the desire of PS organizations to package their service offerings to reduce delivery costs and improve repeatability and scalability. I believe this balance of custom and packaged offerings is becoming more critical to the financial health of every technology service organization. Having said that, I want to turn our attention to the “custom” side of the equation.
TPSA benchmarks PS engagement pricing models. We know that a majority of technology PS engagements are still bid and delivered on a time and materials basis. This means that the relevant unit of measure is hourly/daily rate. More specifically, PS organizations need to understand the list rates consulting organizations are using for delivery resources and what realized (or actual) rates customers are paying for those resources. Now, to determine if the rate you are receiving for a resource is reasonable, there are three primary factors to consider:
1. Type of resource (Solution Architect, Project Manager, Technical Consultant, etc.)
2. Seniority of the resource
3. Location of the resource (United States, England, India, etc.)
In addition, the rate the market will support for a technology services professional can vary by the following additional factors:
4. Specific industry expertise
5. Specific technical expertise
Notice I am not mentioning anything about the cost of this resource to you. Your customers don’t really care how much you compensate your delivery staff. If you are paying a technical consultant in San Francisco twice what the market will pay for that resource, good for your technical consultant. Bad for your project margins.
Now, you want to know if you are discounting a specific type of resource too much. What data points do you need? And how would you summarize these data points in a way that quickly tells you if you are discounting more aggressively than others in your industry? This leads us to the image of this entry. To clearly understand if you are discounting too much, there are six data points you want to map for any given delivery position:
1. Average list rate for the position in the marketplace
2. Maximum list rate for the position in the marketplace
3. Minimum list rate for the position in the marketplace
4. Average realized rate for the position in the marketplace
5. Maximum realized rate for the position in the marketplace
6. Minimum realized rate for the position in the marketplace
These data points can be rolled into one concise image as shown below
This image, populated with real data, represents how the market is behaving for a specific delivery position. If you map your list rate and realized rate onto this picture, you immediately gain three insights:
1. Is the list rate you are using in line with the industry?
2. Is your company achieving the same realized rate as the industry?
3. Is your company discounting at a rate greater than the industry average?
TPSA conducts market rate studies on an annual basis. With rate data broken down per position, per seniority, per country, I see companies conduct this mapping. And I see the eyes get wide when they realize their list rates are right in line with the market, but they are discounting at twice the industry average. I can also say that discounting has become tighter. List rates might not be increasing, but companies are less inclined to discount those rates heavily for customers. I believe this phenomenon is a direct result of companies that sell products and services needing to defend vendor specific object evidence (VSOE) for their consulting rates—but that is the topic for another day.