A new path

During the boom years the growing demand for IT services encouraged companies to scale their internal team sizes and increase operational costs. The key drivers here can probably be summarized as follows:

· A vast pool of businesses opportunities and market tolerance for fee levels drove salary levels up and companies aggressively competed with each other to acquire and retain valuable skill sets

· Internal service delivery teams started to be sized based on forecast rather than actual demand in the belief that this was the most cost effective and controllable way of absorbing new business

· Sales teams were more concerned about the risk of having to delay or turn away business and applied a lot of pressure on IT managers to provide assurances that they could cope

· Internal career paths were linked to departmental size, the larger the team the bigger the career reward, there was little focus on cost of delivery

· IT vendors progressively insisted that their partners maintained a number of expensive, and at times quite exotic, organisational roles to realize product discount levels.

When the market slumped in 2008 increased client price sensitivity and competition for a smaller pool of new business sent costs to the top of every CFO’s list of priorities. Many companies were forced to cut back staffing levels and some also retreated into core territories where the cost of sale was lower and work pipelines more assured.

The new market drivers will catalyse dramatic change in our industry as less efficient businesses either fail or are acquired by those that have greater economies of scale who are better able to win new business and generate higher profits via consolidated services.

The new challenge for all of us moving forward is to:

· Make pricing levels more competitive to win business and generate better profit levels from existing services

· Differentiate from competitors and provide a compelling reason for clients to both renew and extend contracts by delivering a better quality of service

· Implement an organization that can work efficiently and scale without lag or additional overheads to meet new demand

· Change the internal behaviours that created the existing issues.

The start point is a roots and branches review of how services are currently being delivered to understand the true existing cost of delivery. Few companies currently have the information needed to help them accurately assess these costs as there was no pressure to implement them when business was plentiful and fee levels were steadily increasing. One example is with staff utilisation levels where the lack of understanding of its purpose created KPI’s that often falsely indicated a high level of utilisation. This due to one of more of the following reasons:

· The reporting mechanisms were not granular enough (e.g. billable and non-billable time was not clearly broken out)

· Personnel had not been correctly trained in using the reporting system and/or there was not enough oversight to ensure that the system was being used correctly

· In some cases the system can be so difficult to use that personnel take an easy path through it. One client used a phone based time recording system that required keypad entry and long chains of options. Many teams set up bucket tasks to speed entry!

· Personnel are financially incentivised to achieve high billing levels, not surprisingly they will book as much time to billable codes as possible regardless of actual time spent.

Our analysis of a number of companies indicates that on average 30% of in-house professional services personnel are not being fully utilized throughout the year with up to 50% for operational teams with field services.

In terms of bottom line profitability a company with 50 consultants, 5 project managers, 12 operational analysts and 20 field services engineers could be carrying over £1M of annual overheads. One client recently estimated that out of their 60 man field services team around 25 were ‘white space’ at an annual cost to the company of £750K!

Once you understand the current run costs of your services the next challenge is to look at the alternate options to delivering those services at lower cost and higher quality. The two options that tend to be exercised most frequently are:

· Offshore

· Cut back more

Offshore is a viable approach if the services are highly defined and tightly controlled. It is not as effective where clients expect a flexible and adaptive service. Cutting back more requires a lot of insight into just where those cuts could take place without impacting service delivery agreements and client satisfaction. Many outsourcers have had to reduce planned staffing levels to make a service operationally profitable and many have also lost the business at a later date!

Another option is look at identifying what areas of service fulfil a core and known demand and which address potential or un-planned requirements. It can be quite staggering to see just how much your company may be investing on a ‘just in case’ basis. One approach here is to contract out potential and un-planned demand to a trusted partner. The unit cost of delivery may be a bit higher but the operational run cost is likely to be significantly lower. This model also allows the company to transition back in-house work that starts to be new core and known to realize the cheaper operational run costs.

Behind the scenes there is also a need to re-work the HR policies and practices that encourage managers to create large empires to achieve career objectives. As one of our very astute clients put it ‘I need to teach my teams to stop thinking so much about team management and a bit more on running a service to a P&L’.