Plugging Service Profit Leaks

This week, I am hosting a TPSA webinar on the topic of strategies that drive service profitability. This is also the theme of our Fall summit in Vegas.  To understand where a service business is losing ground, I have found it helpful to think in terms of two concepts:

1. The Common Phases of the Customer Engagement Work Flow

Every service opportunity passes through similar phases. This is lots of literature dissecting the customer engagement workflow. Let’s use a simplified version that covers six steps that every service organization should recognize:

Identify:  The step of identifying new service engagement opportunities.

Qualify: The step of qualifying service engagement opportunities to determine if the customer has budget, the solution being offered is really a potential fit.

Propose: The process of creating a formal proposal to win the service engagement.

Source: The process of assigning delivery resources to execute the service engagement.

Deliver:  The act of actually delivering the solution proposed.

Learn: The steps taken to capture any lessons learned that can be leveraged in future service engagements.

Now, with a common taxonomy the service management can use to describe how the service organization engages with customers, we can layer on a second concept to discuss profit leaks.

2. The Marble Model

About four years ago, I created this picture to help a hardware company pinpoint where the service organization was leaking service project margins. The framework is based on the children’s game where you drop a marble from the top of a set of pegs and you attempt to get the marble to bounce into a specific slot at the bottom. The visual works well if you think about a new service opportunity dropping down from the first step in the customer engagement workflow to the last step. At the bottom are the project margins the service engagement achieves in the end. The hope is that the marble keeps bouncing in a way that the final project margin meets or exceeds the target project margin.

To illustrate this visual framework, let’s take the scenario I call the “sales divot.” A new service engagement opportunity is poorly identified and qualified. The proposal process is also less than optimal so that by the time the delivery team shows up on the customer site, they realize it will be very difficult to meet the customer expectations within the customer budget. However, the project team puts their shoulder to the wheel and delivers a herculean effort to get the project done as close to on time and on budget as possible.  The scenario is shown on the marble model below:

The Marble Model and the Sales Divot

The Marble Model and the Sales Divot

 

 

Now, where does the marble bounce in your service organization? Do you lose ground early in the customer engagement life cycle, or does the marble start bouncing left after a reasonable service deal is signed?

To find out three practices to keep the ball bouncing right for your service organization, join me on webcast Thursday.

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3 Responses to “Plugging Service Profit Leaks”

  1. Don Arsenych Says:

    Plugging Service Profit Leaks
    By Don Arsenych

    Practical next steps.

    With the current downturn, if you aren’t already getting the calls from corporate and finance to improve margins and cash flow, they will be coming shortly. Here are some key recommendations for finding the profit leakage in your organization.

    1) Shore up your utilization methodology and reporting to ensure that you can measure the productivity to the individual contributor level and communicate the actual performance and trends to corporate.
    a. I recommend using 2080 hours as the standard denominator in your calculation on a worldwide basis. Using available hours by country will provide a more accurate picture, but is harder to communicate to corporate when you are presenting your performance results. When you set the goal by geo, you can accommodate the localization issues.
    b. Make sure you have an established goal for billable utilization and lead with that as the key performance metric. This will keep the Finance folks from undermining your data reporting integrity.
    c. Have a clearly documented set of rules for labor reporting and communicate it widely inside your organization to ensure the reporting integrity.
    d. Build a collaborative site to post utilization data for everyone to see with the ability to slice the data by job title, location, region, and individual. Reviews this often with your leaders to identify excessive bench time and non-billable sinkholes.
    2) Build a realistic six-month forecast of your existing business and projected new business and than aggressively drive your permanent staffing to below the projected low points. Use contract workforce to staff to your peaks, this will reduce your non-billable and overhead costs. Better to cut now than cut later.
    3) Get your staff working on deep dives into your project performance cutting the data by product and service to identify your problem areas. Assign your best resources in each product to tear apart the poorest performing projects to ensure that the issues are not replicated in future quarters. Share the results with all your regions and with the Product Groups to build the corrective action plans to ensure that these results are not repeated. In tough times, you can’t afford train wreck projects being sold to drive revenue performance.
    4) Get even tougher on new bids to ensure they meet the profit targets and that the SOWs are properly constructed. You will have a lot of pressure from Sales to book weak deals.
    5) Reinforce your employee performance review and development process. Often the reviews are tied to salary actions and in tough times, those get cut. That can lead to the elimination of the performance review process, which is more critical in bad times to ensure that you are driving excellence with every employee and that you have a fair and documented process to determine who to cut when the time arrives.
    6) Ensure the you have a collaboration site for forward staffing of all your billable resources and review it weekly with your geo managers. Avoiding bench time by sharing resources across the geos will help you add margin points and to identify weak resources that need to be addressed.
    7) Look at the amount of non-billable hours that sales is consuming with presales effort. If you don’t have a budget with sales for presales effort get one established and a process for charging them for excessive presales work.
    8) Use the TPSA benchmarking data to back up your internal goals for utilization and profitability.
    9) Take a hard look at your mix of resources to see if you are top heavy with Sr. Solution Architects, Sr. Consultants, and Sr. Project Managers. You may have the opportunity with a downsizing to rebalance your organization to make it more cost effective.
    10) Take a critical look at the work your senior resources are performing. Are you assigning a Sr. Consultant to do the work that an Associate Consultant should be able to perform just to keep the Sr. Consultant busy? If you are able to keep your resources in balance you can bid more junior people and reduce the price to the customer without negatively impacting margins.

    Don Arsenych has over 25 years of experience in the computer hardware and software industry and most recently was the Vice President of Global Operations for international wireless software developer. You can contact Don at Don.Arsenych@verizon.net

  2. Thomas Lah Says:

    Don:

    Thanks for the detailed recommendations. We are seeing a significant increase in member inquiries surrounding billable utlization targets, project margins, etc. To your point, PS management teams are working harder than ever to validate their performance with executive management.

  3. The Services Sales Divot « Service Visions Says:

    […] call my “marble model.” I introduced it in this forum over a year ago in a post titled “Plugging Profit Leaks.”  Let me do a quick refresh here. The model is based on the children’s game where you bounce a […]

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