Driving Professional Services Growth

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

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 qualityA 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.

  1. Winning the Professional Services Sale: Unconventional Strategies to Reach More Clients, Land Profitable Work, and Maintain Your Sanity by  Michael W. McLaughlin
  2. Some references interchange “quality” for “scope”, “cost” for “budget”, and “time” for “schedule”. In all cases the implications remain the same.
  3. 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).

Who Do You Think You Are?

On the Friday nights when I am not working my way home from a week of business travel, my wife Julie and I like to watch NBC’s “Who Do You Think You Are?” (of course there’s always DVR for those Fridays when I’m not home).  I just so happen to be writing this blog during another new episode, tonight featuring Tom Hanks’ wife, actress Rita Wilson.  My wife became interested in her own family history a number of years ago, and it’s fun to watch these celebrities learn about their past with the extensive resources made available to them to travel the world researching their genealogies.

As human beings, it’s important to our sense of identity, to who we are as individuals, to understand where we come from.  In the same way, it’s important as a successful professional services organization that you are aware of your beginnings and from there how you got to where you are today.  This history is part of your personality; the decisions that were made in your past in many ways define who you are as an organization today.

But to be successful as a professional services organization, it’s not enough to know where you came from. To be successful, you also need to have to know your mission as a services organization and how you differentiate yourself from other firms.  These things must not only be understood by the leadership team in your firm, but they must also be communicated to and ingrained in the thinking and behavior of every member of your organization!

What is your mission?  It could be defined by the markets you serve, the technologies you employ, or the level of intimacy and customer satisfaction you would like to maintain with your client base.  Or it could be defined by a combination of all of these or something altogether different.  For service organizations within larger product-based companies, it is also important that your mission is defined in the context of whether you function primarily as a pure services business or more as a solution provider (more on this in a future article).  All strategic decisions and tactical plans that you make should align with this mission, so again it should be well understood and communicated within your organization.

Success today is an ever moving target, and change is a normal part of any business.  Long term planning has become less and less effective in guiding a business.  More important in today’s fast-moving world is identifying strategies for differentiating yourself from your competition.  Geoffrey Moore’s groundbreaking book on innovation “Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution” describes how established businesses can adapt to ever changing business conditions.  While the focus of the book is technology adoption, there are plenty of takeaways for services organizations.  Moore argues that a focus on innovation in all stages of a company’s maturity is the key to successfully staying ahead of your competitors.  Innovation, he argues, is the antidote to commoditization.  Commoditization results in the spiral to the bottom as firms compete with each other on price alone.  

This is an all-to-familiar phenomenon in the software consulting industry where I’ve spent my career.  Off-shoring accelerated that downward spiral, forcing even companies who had found ways to differentiate (what Moore calls “vectors of differentiation”) scrambling to adapt.  Off-shoring was a disrupter, but does not change the need to differentiate.  Large services organizations have now added off-shore operations, smaller organizations have partnered to compete.  The market has re-equilibrated, and this has now forced these same off-shoring firms to consider how they too can differentiate themselves from their global competitors.

What are your vectors of differentiation?  Differentiation should closely align with your mission.  Actually, your mission should closely align with the vectors of differentiation that you identify.  One of the vectors of differentiation that we identified when I was running global services at Applied Biosystems (now Life Technologies) was speed of implementation.  Our pharmaceutical manufacturing customers were weary of long, costly implementation projects.  What we were able to offer them was implementation in only one quarter the time of a traditional deployment and 90% reduction in total cost of implementation.  We did this by leveraging industry best practices, providing standard documentation for processes that don’t change from customer to customer, and an accelerated, repeatable implementation methodology.  The results were many highly satisfied customers and and a healthy, low risk revenue stream for our business.

So “Who Do You Think You Are?”  To know who you are, you need to understand your history.  You then need to have a clear mission and understand how you differentiate yourself from your competition.  And finally, you must constantly re-evaluate your mission and identify vectors of differentiation that allow you to adapt to rapidly changing business conditions to stay ahead of that competition.