Many professional services companies are focused on optimizing the utilization ratio. They are focused on making sure that all billable staff are at work on customer projects at least 70% of the time (the actual target varies from company to company, with 70% being on the low end). This is assumed to be the best practice and is a key metric for many people on the operations and allocation management side of these companies.
Is utilization optimization the best way to ensure long-term revenue growth and profitability at professional services companies? No.
Prioritizing allocation over other metrics means that teams are primarily built on the basis of availability. Over time, this leads to a downward spiral of commoditization, lower profits, inability to attract the most skilled people and further commoditization.
To avoid this, companies need to actively manage skills to build differentiation. Think of skill management as a cycle where one develops skills, applies them to projects, tracks outcome then uses this information to build differentiation.
Why the focus on differentiation? It is the only way to drive up long-term profitability. Firms with visible differentiation are able to win a premium over their undifferentiated competitors. They will attract projects that feed their expertise, build differentiated skill on their teams, and be able to attract the experts in the field. The work of Tom Nagle on value-based pricing applies to professional services firms every bit as much as it applies to product companies. You can only execute on value-based pricing if you have positive differentiation from the next best competitive alternative. In professional services there are three ways to drive differentiation:
By far the most important of these is people’s skills.
Utilization optimization regards people as fungible and erases the differences between them. This can sometimes make operations easier to manage, but it does nothing good for project outcomes and client satisfaction. Instead of creating the positive feedback cycle of differentiated skills leading to wins at higher profit, one gets trapped in a downward spiral.
People are assigned based on availability
Project teams are undifferentiated
Results are generic (one would get basically the same outcomes regardless of which firm you chose)
Prices are based on cost, not value, as the service has been commoditized
Prices and profit trend down
Firms cannot attract or retain the innovators who would drive differentiation
The only solution is to invest in differentiated skills. To do this, one has to have deep insight into the skills of one’s own firm and be able to compare these with one’s competitors. (See Skill insight can clarify your competitive position.) This is the critical strategic investment that professional services companies must make if they are to thrive.
Of course, the skill differentiation that really matters is not company out, but client in. Overall differentiation is important but what really wins projects, and enhanced profits, is having the right skill mix for a client’s specific project. This is where the people responsible for building project teams should focus: skill-based team building.
Next time you are at a conference, go around to the different professional services vendors and ask them about their differentiation. There are usually a half dozen to a dozen such companies at any major conference. Ask each company how it is different from its competitors – this will give you some insight into customer out differentiation. Then describe a specific project you have in mind, and ask them how they would approach that project. This should help you understand the client-in differentiation. Work with the company that has a differentiated solution that resonates with you. If you use professional services companies that are not differentiated you will slowly lose your own differentiation.
To really get the skill management cycle clicking over it is also critical to measure outcomes. Outcomes, not goals. There are often projects that meet their profit targets and hit all their deliverables but have no meaningful outcomes. “The operation was a success but the patient died.”
A good skill management system holds a rich dataset of people, their skills, projects and roles. It connects skills to each other so that one can find the patterns that underlie success. Outcomes data is collected so that the system can be trained, using modern deep learning techniques, to improve the underlying performance models.
If your professional services are not tracking skills, how they are applied and measuring outcomes, then it is slipping into a downward spiral of commoditization. This is in nobody’s interest, not the firm, not the consultants and not the clients.
Great companies build differentiation based on skills.
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