Thomas Lah, author of the Service Visions blog, was just telling me that his recent post on calculating utilization has been one of the more heavily read posts he’s ever written. This should come as a surprise to no one. There are a handful of topics that are of interest to pretty much all TPS organizations and utilization is definitely one of them. In fact, utilization and all of the challenges that surround it, make up one of the key distinguishing characteristics of any professional service business. However, professional services businesses are not all the same when it comes to utilization. As a complement to Thomas’ very useful blog on how to calculate utilization, in this blog, I want to briefly comment on the benchmarking side of the utilization problematic.
One of the things that makes the topic of, in particular, billable utilization such an interesting one is the fact that so many TPS professionals have come out of the pure play consulting services environment and therefore have pure play consulting style targets in their heads for utilization. Because stand alone consultancies rely exclusively on revenue from the delivery of consulting, billable utilization targets have to be very high — 75% or higher – by definition. Much less than that and there are simply too many consultants on the bench or otherwise not making money for the firm. But such a number as an across the board benchmark for embedded TPS is really little more than a red herring.
To demonstrate this, let’s look at some data from the Q308 snapshot of the TPSA PS benchmark study.
As is plain from the above graphic, very few technology professional services organizations have target billable utilization rates of 75% or more. The vast majority of companies (81%) report target utilization of less than 74%.
Why is this the case? Well, when PS is only a part of the portfolio, PS revenues and profits may or may not be the #1 priority. The typical technology product company is … well … product centric. The average TPSA member has only about 10% of revenues on average coming from PS and an even lower contribution of PS to earnings per share. When these things are the case, billable utilization is relatively less important than it is for consulting services pure plays and productive utilization (“I’m not billable, but I’m doing something that is benefitting the client or the company or both”), comes relatively more to the fore.
All this being said, it stands to reason that as PS becomes more important as a source of company revenue and profits for product companies, billable utilization will be more important and targets will be higher. Is this the case?
In many other contexts, TPSA has developed and written about our core segmentation analysis around the concept of Service Strategy Profiles. This refers essentially to the size of the PS business relative to the overall economic engine of the technology company. Two of the key segments outlined in this analysis are Product Providers (PP) and Product Extenders (PE). Product Providers are very product centric and have on average about 5% of overall revenues coming from PS. Product Extenders have rather large PS businesses, with PS constituting on average about 20% of overall revenues. This key factor creates many substantial differences between the two groups across virtually all of the results and practices that we analyze; billable utilization is no exception:
Two interesting facts emerge from the above figure. First, Product Providers are far less likely even than the average TPS organization to report very high billable utilization targets (only 4%). Meanwhile, Product Extenders, the companies that are rather PS-oriented, are more likely than average (31%) to report pure play like utilization targets. So in both examples, the hypothesis is correct. However, the second observation is this: the vast majority of even Product Extenders reports utilization targets of less than 74%.
Whatever way you look at it, billable utilization benchmarks for technology professional services look very different from those often associated with pure play consulting services. But as the title of the post suggests, this is merely example #5,246 of the inapplicability of the pure play consulting services example for TPS organizations. What are the other 5,245? Keep reading this blog regularly and I’ll get to as many of them as I can!
Tags: Consulting Services, Service Strategy Profile, Utilization
March 16, 2009 at 7:11 pm |
[...] note of how much traffic Thomas Lah’s blog about billable utilization was getting, I wrote a post of my own on the topic. Lo and behold, that post has become by far the most read post I have written to [...]