Professional services has been in a state of recovery since 2013. But, we’re fast approaching the light at the end of the tunnel. Below is an excerpt from The State of Professional Services Today, a joint white paper from Technology Services Industry Association (TSIA) and Changepoint, that outlines how the industry has shifted since 2013 and what to look for going forward.
Key PS Metrics: The View Going Forward
The question, in a nutshell, is whether there is any light emerging at the end of the tunnel? We’ve established that 2013 was a down year for professional services and the outlook was scary. Is there evidence that the trend is changing? Keep in mind that 2013 was a recovery year for some industries. After a wave of effects from the global, economic downturn in the first decade of the century, a second economic downturn effected industries that deliver elective, as opposed to strictly necessary offerings. Let’s take an updated look:
- Moving Beyond Level 2. We haven’t taken a new pulse on this specific topic over the last year. However, we do have considerable anecdotal information and informal information gathering. This all indicates that PSOs are still heavily oriented toward product services and are only very tentatively moving beyond Level 2. They are moving beyond Level 2, but very slowly overall. The typical PSO is still basically in an 85% to 90% Level 2, 10% to 15% Level 3-Level 4 mode.
- PS Growth Rates. Put simply, growth rates in professional services are charging back. For the benchmark year 2013, we were able to report average PS growth rates of 5% to 7%, on average, slightly better than flat. Our latest snapshot of the PS benchmark data, Q1 2015, with about 150 completes and based largely on 2014 results, tells a VERY different story. Industry average PS growth rates are now 13%. There is no peer group that we track showing lower than 8% average PS growth. Even hard-core product providers (product-centric, services-light technology companies) are reporting average growth rates of close to the overall industry average of 13%. We call companies providing packaged products as services, XaaS companies. For the XaaS (mostly SaaS) providers, the average PS growth rate is 24%! The XaaS peer group is worthy of further examination, which we will provide later in this paper. In a nutshell, PS is alive and well and growing…a very different story from the one we reported last year.
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- List Rates and Discounting. One of the reasons for the strong PS revenue growth last year appears to be market uptick in rates/pricing performance. Based on data from the TSIA 2014 PS Market Rates Study, we can report that list rates have more than recovered to 2010 levels, including a 20% average increase over 2013 list rates. Similarly, discounting is basically down to 2010 levels, including a 1 percentage point decrease over 2013. The result was approximately a 10% average increase in realized or as-sold PS market rates.
- Financial Performance. With better rate performance and stronger growth, the table was set in 2014 to show stronger financial performance overall. That is clearly the case. Some basics: Industry average realized billable utilization is back up with about 64%, and project margins have crept up to 39% on an industry average basis, a margin unachievable in nearly any other industry. This is a high-water mark looking at the entire history of PS benchmarking at TSIA. Average project margins of 39%; it’s rarified air. We’ve never seen it before. And as a result, net operating income (OI) has also reached a benchmark high-water mark of 15%. Is there a trade-off between high growth and profitability? Looking at our benchmark data, the answer is resoundingly no. The “revenue pacesetters”—the top 20% of PSOs based on PS revenue growth rate—also average 14% Net OI, just one point below the industry average. There is no peer group in the data set that averages lower than 12.3% Net OI. The good news is that the service economy is growing, and satisfied customers are rewarding their service providers with high margin business.
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This was only one piece of the TSIA and Changepoint joint white paper, The State of Professional Services Today. Get the white paper and get the full story.