Professional Services

How Professional Services Can Succeed in an Economic Downturn

Achieving Revenue Growth and Profitability During a Recession

The technology and services industry has been hit hard over the past three years. The pandemic, great resignation, industry transformation to subscriptions, and recent economic turbulence has impacted every aspect of how we do business.

Professional services organizations are reflecting on what changes are necessary to address the “headwinds” (challenges) of the economy. However, you can also capitalize on the “tailwinds”–new opportunities to extend or scale your professional services business.

Today we’ll look at why professional services is important during an economic crisis, what challenges you might face, and how to use your resources to become a pacesetter of success.

Heightened Expectations on Professional Services in a Crisis

Many technology companies suffer from a chronic problem when it comes to articulating a definitive charter for professional services: they don’t. Aligning on clear priorities for professional services is hard in the best of times. But when times are challenging, it can be (and usually is) a lot harder.

However, most of our benchmark submissions have revealed remarkable levels of consistency on the primary objective for professional services: “adoption/customer value.” Professional services is seen first and foremost as a vehicle to enable and improve your customer’s technology adoption and/or the value they derive from it. Stakeholders are more likely to view professional services as a customer value engine versus a business that should drive significant topline or bottom-line financial output.

But all of this changes when the economy starts to look shaky. At the time of writing, economists are widely predicting a recession. This news has been brewing for months now. Many things that we had normalized and had come to expect in our industry— never-ending growth and incessant competition for talent—are turning out to be temporary conditions. As a result, tech strategies and tactics are turning on a dime as we speak.

When times are good, many tech companies see themselves as “growth ventures,” focusing on the topline and valuation, often neglecting conventional business principles. In a downturn, they start looking for ways to plug revenue and margin gaps.    

What does this mean for professional services?​​ Our expectation is that this will inevitably roll downhill and affect professional services expectations, as it has so many times in the past. As the sun rises in the east and sets in the west, professional services organizations will be asked to help cover revenue and margin shortfalls. They will be asked to maximize growth AND profitability.

The Problem Facing Professional Services  

There are two problems with the notion that professional services will be able to accomplish increased growth and profitability in the midst of a recession.

First, let’s face it: professional services organizations are out of practice at being asked to grow significantly while producing high margins. I can’t remember the last time a benchmark submission or a workshop indicated that profitable growth was the prime directive.

The second problem is worse news. Everything we know suggests that high-growth and high-margin output are extremely difficult to achieve at the same time. For instance, there is a nearly perfect negative correlation between professional services net operating income and professional services revenue growth rate. This is a consistent finding based on years of data from the TSIA core professional services benchmark study.

So, does this mean the task for professional services is impossible? Are you setting your team up for failure, or are there things you can do to help your organization succeed?

Find Out If You’re a Pacesetter

In order to answer this question, let’s look at two peer-group professional services metrics: revenue pacesetters and margin pacesetters. Pacesetters are defined here as the top 15% of the entire sample. Are you among the fastest growing 15% of the sample? Are you the most profitable 15% of the sample? If so, you are a pacesetter.  

In nearly all cases, if you’re one type of pacesetter, you are not very likely to also be the other type of pacesetter.

So, from the perspective of high growth and  high profitability, you will most likely have to choose which one to maximize.

But this doesn’t mean you can’t drive healthy profitability while also growing. While less than 2% of benchmark participants achieved revenue and margin pacesetter status, a large number of professional services organizations displayed healthy levels of both.

In other words, you can be a pacesetter in growth and still increase your profitability, or become a profitability pacesetter while still growing. But you will have to decide internally which metric you will prioritize over the other. This sets realistic benchmarks that your team can focus on and create expectations from the c-suite that you can attain.

Optimize Resource Management

Once you’ve decided what your team’s primary focus will be, how can you go about accomplishing your goal? A recession is not something that we associate with times of expansion, but your professional services team will most likely be asked to do so.

However, you already have a “tool in your tool box” that is able to help you not only meet those expectations, but exceed them.

Those of you that look at resource management as merely a function that does staff scheduling are missing out on what resource management can do for professional services. Many of our TSIA members are leveraging resource management with talent management, capacity planning, and employee engagement.

All of the above functions are crucial in a time of economic downturn, and how you can optimize your organization for higher growth and profitability. Here are three ways you can utilize resource management today in order to succeed in a downturn:

Forecast the Future

Strategic resource management organizations (RMO) are providing accurate forecasts of roles and skills needed to meet the company and customer needs 12 to 18 months in advance. Using the same tools used to develop accurate forecast models, many resource management organizations are working through “what if“ scenario planning. 

• What if we hire now to meet the anticipated demands from the economic tailwinds?  
• What’s the impact on short term margin and long term revenue?
• What if we pull back from some of our non-billable customer activities and redirect resources to be more focused on billable activities?
• What’s the impact on our customer satisfaction overall?
• What if we delay hiring due to some stronger head winds than expected?
• What’s the impact on billable utilization near term?
• What’s the impact on employee engagement?
• Will there be potential increases in attrition?

By thinking through these scenarios, you are able to prepare for what’s next and use your resources wisely even in times of uncertainty.

Use Resource Management Data

Resource management is a very data intensive function, and strategic resource management should be even more so. Accurate capacity planning forecasts and “what-if” scenarios require quality data coming from the sales pipeline, closed deals, delivery backlog, and scheduled/unscheduled work. That’s not to mention views on direct and subcontractor data.

Use the data modeling insights associated with pipeline conversion, backlog and revenue conversion combined with data on attrition, utilization, lead-time. This will provide insights on what roles and skills are needed when comparing the demand to the available supply.

Effective resource management provides insight as to where resources are spending time on non-revenue generating activities. Armed with insight from resource management, professional services leaders can make informed decisions on when and where to pull back resources to redirect to revenue generating activities.

Focus on Employee Engagement

Compounding the effects of overall economic turbulence is employee turbulence. Professional services is a people-intensive business requiring a more direct focus on employee engagement. This is not something that should be done by your delivery managers as a part-time function, but instead taken care of by a dedicated team with proper training, focus, and accountability.

Resource managers typically support 60-80 delivery resources. On the heels of the pandemic and the “great resignation,” resource management teams are becoming more familiar with the changing needs of delivering services. Some have even begun reducing the support model to 30-40 delivery resources to one resource manager. For them, this is not a “nice to do.” It’s a “must do.”  

Whether it’s an economic downturn, employee challenges, industry transformation, or mergers and acquisition, resource management is right in the middle of all of it. They provide invaluable strategic insights for professional services. Take a moment and recognize your resource team for the great insight they’re providing.

If the team isn’t yet providing the insights associated with capacity forecasts or what-if scenarios, consider deeper investments. These investments will pay dividends in both the near term and long term value for professional services as you work towards achieving growth and profitability.

Be Prepared for the Shift to Subscription

In addition to the economic conditions, professional service organizations have been dealing with the shift to the subscription model. Many organizations are experimenting with subscription services, but only a few have things dialed in. Still, our professional services benchmark study shows a steady rise in SaaS subscriptions every year.

Where overall technology revenue shifts to subscription, professional services is bound to follow. Since our TSIA webinar and blog on subscription services last year, we have been seeing more interest on the topic. Simply put, moving to a subscription model isn’t easy. Moving to a flexible consumption model–using tokens, credits, vouchers or pre-paid hours–is having mixed results.

When it comes to flexible consumption, these models require the customer to pay upfront for things they hope to use in the future. On the professional services side, it’s our hope that future consumption happens, and will result in the customer purchasing your service again. This makes their consumption and subsequent renewal of high value.  

However, we can’t lose sight of the potential challenges this might cause us and our customers. Many customers buy these subscription services in advance without a formal plan to consume what they have paid for. This leads to the need for your organization to engage the customer in a second sales cycle and a potential loss of renewal.

"Once the solution is purchased, it is absolutely imperative that customers realize value as quickly as possible." - Digital Hesitation

In order to protect your growth and profitability, have a plan in place for the customer to onboard and adopt your solution as soon as possible. This responsibility bleeds into multiple departments including sales, customer success, and professional services, and will require you to work cross organizationally. The digital transformation of the tech industry is an “all hands on deck” shift that’s crucial to long-term success, even after the recession has passed.

Next Steps to Professional Services’ Success in a Downturn

As we’ve established, high growth and high profitability are almost impossible to accomplish simultaneously. However, there are far lower barriers to achieving healthy growth and healthy profitability. Here are four ways you can prepare for the coming economic crisis and come out stronger on the other side:

1. Proactively build a game plan. If you are currently living in the dreamworld of low or no growth or profit expectations for professional services, prepare for that to change. It may not happen tomorrow, but it almost certainly will happen. So, proactively get ready for it. Assess your financial performance and related professional services capabilities. Determine how you could dial-up growth and/or margin if you got such mandates tomorrow. Make a “grow faster, more profitably” game plan.
2. Benchmark yourself. If you’re like many others we’ve seen over the years, you may get new marching orders that are, to put it bluntly, unrealistic. So, another important aspect of proactively preparing yourself is to compare your key current financial metrics to benchmarks. For example, it may well be that you are already among the 2% of professional services organizations displaying extremely high growth and extremely high profits. If that’s the case, you’d better have that information in hand to try directing the conversation to something more realistic.
3. Have the hard discussions with your stakeholders now. As hard as professional services strategic alignment discussions are, they can be downright insufferable and counterproductive when the panic button is officially hit. We strongly suggest taking deliberate steps to educate and align external stakeholders now. Even if there’s turmoil already, systematically walking through a process of level setting and alignment can help. If you’re out ahead of the problem, even better. Either way, don’t waste another minute.
4. Use TSIA. We can help with stakeholder education and alignment, prioritization, growth, and profitability strategies. Our benchmarking will provide the industry data you need to prevent noise in discussions with stakeholders and prepare you to carry out best practices coming from that data.        

Tech companies are likely to put increasing pressure on the professional services organization to perform tasks and achieve objectives well outside their normal scope over the coming months. One of our latest blogs outlines what each organization can do to cut costs and grow; and we will be investigating these solutions in more detail in future reports.

If you take these steps and watch these pages for more guidance, navigating professional services in a downturn will seem more than manageable. It will allow you to get out of “crisis mode” and focus on building sustainable growth and profitability.  
 

  August 1, 2022