PS in a Downturn

With all the gloom that occurred in the financial markets this past week, I thought it would be helpful to repurpose some content from an article I wrote for the TPSA membership several months ago titled PS in a Downturn. In an economic downturn, all departments and business units within a company are typically requested to tighten their belts and improve financial performance. For the PS organization, this request presents itself in four ways.

1. Stop Hiring

If product revenues are flagging, PS will often be asked to stop hiring. This is a cautionary move by executive management to avoid commitments to expensive human capital that may not be engaged if products sales soften. There may even be a request to reduce the size of the services workforce to increase profitability.  Perhaps the most dramatic example is the recent reduction in force as HP and EDS come together. Twenty-four thousand positions axed. The challenge with this request is that PS revenues are dependent on having staff to deliver engagements.

2. Reduce Free Pre-Sales

Another request made to PS during a slowdown is to reduce the amount of non-billable work performed for customers. The TPSA core benchmark study asks the following question:

What percentage of time do billable service delivery staff spend on pre-sales and sales support activities?

A majority of PS organizations have their delivery staff spending 5% -14% of their time in non-billable, pre-sales activities. In a downturn, every opportunity to convert free hours into fee based hours will be explored. Even a modest increase in billable utilization (say 2%-3%) has a wonderful effect on the bottom line.

 The paradox is that this request will come just as the sales force is begging PS to throw everything but the kitchen sink at prospective customers to help secure deals in a dwindling pipeline.

3.  Improve Project Profits

Finally, the actual profitability of the PS engagements that are being billed will be scrutinized. Can PS scrape out a few more margin dollars from each engagement? When booking new deals, can PS improve target margins? From the 2007 TPSA Project Performance Study, we know that there is a wide range of margins experienced on PS projects. From this study, we also know that parameters having significant impact on project performance include:

             Pricing strategy (Time and materials vs. Fixed price value based)

             Project discounting policies

             Project type (architecture, implementation, integration, customization)

             Customer type

             Project sourcing strategy

Managing these project attributes to drive increases in average project margins will have a significant impact on PS profitability.

4. Increase Revenues

Finally, if the downturn persists, PS may be asked to actually find new sources of revenues for the company. Building off of the request for account expansion, PS may be pressed to aggressively identify new service practices and offerings that can keep the top line growing as product revenues weather the slump.

So stop hiring and increase profitability, and increase revenues all at the same time.  How hard can it be? There are multiple tactics I discussed in the original article that a PS organization can pursue to navigate these four requests. However, there is one tactic I want to focus on in this blog entry: attach rates.   

For PS to keep staff billable, keep a solid backlog of projects, and actually increase service revenues, attaching services to a majority of the product transactions needs to become part of the sales force DNA. If attachment rates for PS services are low, PS will struggle to increase revenue growth.  In the TPSA benchmark study, we ask the following question:

What is your attach rate that is the percentage of product deals involving billable technology professional services? Attach rate = Number of product deals involving services / Total number of product deals

PS Pacesetters are companies in the TPSA benchmark dataset that have the best financial results. If we look at the benchmark data on this question, we see that PS Pacesetters drive higher attach rates as shown in the image below.

Attach Rates

Attach Rates

Managing a service business in a downturn can be brutal—you will be asked to deliver more revenue with less people. This requirement can grueling when you are managing a human capital intensive business. So look for opportunities to make existing resources more effective. Taking the same sales staff, and having them attach more services to each customer deal, is one such opportunity.    High attach rates help reduce the cost of sales, increase backlog, and drive billable utilization. Three things you may need over the next few quarters.

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4 Responses to “PS in a Downturn”

  1. Now in the Time for Fact–Not Fiction « Service Visions Says:

    […] for the potential impact from the financial crisis gripping the global financial markets. In a PS in a Downturn, I outlined the requests that come the way of PS when revenues go flat or retract. Those requests […]

  2. 2009: Productivity, Pricing, and Pull « Service Visions Says:

    […] In 2009, this will be a fundamental driver for TPS organizations. Refer to my previous entry PS in a Downturn for reasons why PS management will be under immense pressure to improve productivity. These […]

  3. EMC, HP, and VMware: The Increasing Importance of Services Margin Dollars « Service Visions Says:

    […] in September of 2008, I wrote a post titled PS in a Downturn in which I warned services organizations will be asked to deliver more with the same or less […]

  4. Bye Bye Cost Center: Refining the PS Charter « Service Visions Says:

    […] and profits. These trends go hand in glove with the current economic environment and the role of PS in downturn . This trend does not mean product companies care less about customer satisfaction. They care […]

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