Want to drive the value of your professional services business? Understand and then intentionally manage the triple constraint of PSO profitability.
Professional services leaders are constantly being challenged to deliver more with less, to provide more services to more customers with fewer resources, all the while maintaining the quality of those services. Savvy customers have further complicated this seemingly impossible task by requiring prototypes or workshops prior to the services sale, demanding specific resources for their projects, and inserting procurement professionals to aggressively negotiate pricing.1
The Triple Constraint of PSO Profitability
The key to driving services growth in the face of these ever increasing challenges is to understand and intentionally manage the triple constraint of PSO profitability. The concept of a triple constraint was introduced in project management, and simply states that a change in any one of the scope, budget or schedule of a project will impact the other two — they are intimately interrelated.2 In his book Building Professional Services: The Sirens’ Song, Thomas Lah proposes the “Iron Triangle of PS Profitability”, wherein the three interdependent variables for professional services organizations are revenue, references, and repeatability. Lah suggests that the way to drive professional services growth is to focus on these three factors, where revenue and references impact the top line of the business and repeatability impacts the bottom line.
The triple constraint of PSO profitability is analogous to the triple constraint for project management. It is essentially the same triple constraint, but applied to the larger professional services organization instead of to a single project. Time is replaced by revenue rate3, budget by delivery cost, and scope by service quality. A sustained increase in profitability only occurs when the revenue rate is increased and/or the cost of services delivery is decreased without adversely impacting quality of service.
Profit Levers: References and Repeatability
So how do we meet the demands of delivering more with less, without sacrificing quality and our sanity? Here is where references and repeatability come into play. Building and maintaining a solid list of reference customers will tangibly help you to navigate an increasingly complex services sales cycle. References reflect your quality of service and help to drive your revenue rate. The triple constraint, however, says that in order to realize increased profits from this uptick in revenue rate, you must minimize any increase in delivery costs required to satisfy the additional demand. Repeatability — offering pre-defined services and pre-configured solutions (reusable IP) — can be used to minimize or even reduce your delivery costs. In addition to lowering delivery costs, repeat services and pre-configured solutions also reduce the risk and increase the quality of service delivery by eliminating the learning mistakes inherent in custom services. Repeat services and pre-configured solutions can themselves drive your revenue rate, as they typically result in shorter delivery time frames compared to custom services.
Lah’s iron triangle of PSO profitability, or the triple constraint of PSO profitability presented here are complementary ways of thinking about the same challenges. So which works best for you? If you’re a seasoned professional services leader who is already using the iron triangle to help manage your business, there’s no need to change. If you’ve not been introduced to the iron triangle, and in particular if you come from a project management background, the triple constraint may make more sense to you. In either case, it is critical to the success of your professional services business that you understand these constraints, and that your strategy and operational tactics are built to intentionally manage them.
- Winning the Professional Services Sale: Unconventional Strategies to Reach More Clients, Land Profitable Work, and Maintain Your Sanity by Michael W. McLaughlin ↩
- Some references interchange “quality” for “scope”, “cost” for “budget”, and “time” for “schedule”. In all cases the implications remain the same. ↩
- The revenue rate is a measure of the growth of an organization’s revenue stream (measured month to month, quarter over same quarter previous year, year over year, etc.). According to the triple constraint, increasing the revenue rate without sacrificing quality of service would typically require an increase in delivery cost (i.e., more resources). ↩