Bill Rates Are Increasing!

2010 Professional Services Maturity Model Benchmark survey early results
by Jeanne Urich and Dave Hofferberth of Service Performance Insight

The technology professional services industry is recovering from the worst recession of a lifetime. The good news: With recovery, bill rates are returning to previous levels and aggressive discounting has begun to subside.

The early results from the 2010 Professional Services (PS) Maturity Benchmark survey show significant growth in year-over-year technology professional services revenue and achievement of 2010 PS revenue targets. The significant improvement in revenue achievement is the direct result of increasing bill rates accompanied by a lower level of discounting.

Across the board, average bill rates for most technology consulting job titles have improved moderately to significantly. Bill rates for almost all job categories have returned to prerecession 2007-2008 levels after two years of decline.

The average business consultant bill rate showed the greatest percentage improvement (110 percent), from $171 to $188 per hour. Only the average senior manager/partner bill rate category is showing a year-over-year bill-rate decline — from $232 to $222 per hour.

Establishing a rate sheet

Competitive pressures in the technology professional services industry have created “mini-markets” for technology skills. The most prolific technologies — Oracle, SAP and Microsoft — have well-established bill rates for specific skill sets. Most technology services providers that focus on these platforms understand the unwritten “market rate” for consultants, but huge variances in price ranges occur, depending on services provider reputation, specialization, industry knowledge and skill sets.

Bill rates in emerging technology areas are far less predictable, but a best practice for all services providers is to establish a rate sheet based on skill level with uplifts for risk, complexity, geography or terms. Base your rates on analysis of market rates combined with consultant cost.

In the technology professional services industry, the “rule of thumb” is to establish rates at a minimum of two times (2X) the fully loaded average cost of all the consultants in that job category. In many other professional services specialties such as legal or accounting, the bill rate rule of thumb is four times (4X) the average base salary for all specialists in that job category.

For project managers, here’s a simple example for establishing a published bill rate:

  • $100K average annual salary for all the project managers at a particular skill level.
    • Add $20K for 20 percent average uplift for benefits; selling, general and administrative costs, and overhead plus IT and facility cost allocations.
    • Add $10K for 10 percent average annual bonus.
    • $130K average loaded cost.
    • $260K required average revenue per project manager (2X loaded cost).
    • 1,400 billable hours per year (70 percent billable utilization).
    • $186 per hour required average bill rate.
    • $205 per hour published bill rate accommodates an average 10 percent discount.

Average bill rates flat for the past five years

The interesting news is that domestic rates in the U.S. ($200 per hour on average) have remained relatively constant since 2000 because of increased global labor arbitrage and pressure from low-cost offshore providers. Another factor influencing the billable labor rate is enhanced product quality and ease of use, enabling technology professional service providers to use lower-skilled and less expensive resources.

Premium rates still exist (more than $250 per hour) for highly skilled management consultants and technology gurus — particularly in the areas of business process design, business intelligence, security, service-oriented architecture and enterprise integration.

Flat bill rates have placed pressure on professional services organizations to increase utilization and reduce overhead and benefit costs to produce margin. Increasingly, organizations are investing in labor-enhancing technology and tools — remote services delivery, knowledge management, collaboration, mobile solutions, professional services automation and quality control to wring the greatest productivity out of their work forces.

Many factors influence bill rates, but companies experiencing the highest growth also reported the highest rates. This correlation indicates that demand (and scarcity of qualified resources) significantly influences rates.

Increasing bill rates

Our research shows an increase in bill rates can have a dramatic positive impact on both profit and the employee work environment. Best-in-class professional services organizations tightly control pricing by carefully managing estimating, discounting and contract terms.

Leading services providers charge premium rates because they are recognized as specialists in their focused competency areas and have a demonstrated track record of producing excellent client results. The leading firms tend to pay more than average to ensure they hire only the best and brightest. They protect their rates by limiting discounting while providing employee incentives for achieving quality and profit targets.

Time after time, we have seen leading firms create a “circle of excellence” where their hiring practices contribute to building a quality work force that consistently delivers successful client outcomes. This leads to an excellent reputation, which supports a premium rate structure and ongoing investments in employee development.

Unfortunately, the exact opposite “circle of commoditization” is seen in “me too” services providers that compete on price. Bottom-feeders treat both their clients and their work force as commodities. Because they have a low rate structure, they cannot pay enough to attract or retain a premium work force, which means they must compete on price. Once a services provider becomes known as “the low-price leader,” its only successful strategy is to run a lean and mean organization with no frills and limited investment in employees or skill building.

Services providers should carefully review their market positioning and pricing to ensure they have not become “staffing providers” when they intended to be “solution providers” because the level of accountability for superior client outcomes directly influences pricing strategy.

The effect of bill rates on financial performance

Table 1 shows the impact on financial metrics as professional services organizations (PSOs) increase bill rates. Firms with average consulting bill rates of less than $150 per hour tend to be much smaller than organizations billing out at more than $200 per hour. The firms with higher bill rates can afford the luxury of more overhead and greater investments in employees and sales and marketing than those that bill less.

Table 1: The effect of bill rates

No. Demographic PSOs with bill rates below $150/hour PSOs with bill rates above $200/hour
1 Annual PS revenue (millions) $11.1 $37.0
2 Percentages of employees billable or chargeable 76.0 percent 71.9 percent
3 Average consulting/billable staff hourly bill rate $110 $267
4 Annual professional services contribution margin (fixed price) 24.7 percent 31.3 percent
5 Average annual revenue per person for billable employees (thousands) $157 $194
6 Percentage of discounting 13.9 percent 12.3 percent

Source: Service Performance Insight, November 2010

The table shows organizations achieve significantly higher professional services contribution margins as bill rates increase, as well as significantly higher annual revenue per employee. Firms that sell services at higher bill rates control discounting and produce greater levels of profitability. Obviously, firms that charge more should make more. But firms can only attain higher bill rates by continually providing high-quality services that offer significant value to clients.

The cause and effect of higher bill rates

Bill rate combined with utilization is a leading indicator of the overall quality and differentiation of the organization. The fact that organizations with the highest bill rates tend to reinvest profit into their employees leads to a continuing improvement cycle.

Highly skilled, well-trained, motivated and loyal consultants undoubtedly produce the best results for clients. In turn, satisfied clients provide referrals and buy additional services resulting in improved sales effectiveness.

The correlation between high bill rates and employee investment that result in superior project delivery metrics and overall financial profit is one of the most dramatic findings from the early results of the 2010 PS Maturity Benchmark survey.


Participate in the survey to receive a free copy of the entire 2011 PS Maturity Benchmark report (worth $995). Send your completed survey to Dave Hofferberth.


About the authors

Jeanne Urich, Service Performance Insight managing director, is a management consultant specializing in improvement and transformation for project and services-oriented organizations. She has been a corporate officer and leader of the worldwide services organizations of Vignette, Blue Martini and Clarify, responsible for leading the growth of their professional services, education, account management and alliances organizations. She is co-author of the PS Maturity Model 2010 Benchmark report. Contact Urich at jeanne.urich@spiresearch.com or 650-342-4690.

Dave Hofferberth, Service Performance Insight managing director, has more than 25 years of experience in information technology, serving as an industry analyst, market consultant and product director. Hofferberth focuses on the services economy, especially on white-collar productivity issues and technologies that help people perform at their highest capacity. Hofferberth’s background includes the management of application development teams and analytical tool development to support business decision-making processes. He is also a licensed professional engineer. Contact Hofferberth at david.hofferberth@spiresearch.com or 513-759-5443.

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Comments

  1. Kai Haasler says

    Good food for thought, many thanks.

    As most of us are likely in the 150 to 200 $/hr range I would be interested in seeing the metrics of table 1 applied to the medium segment (150-200$/hr). Can you add that?

    Thanks!

    Kai

  2. Ed Kless says

    I agree and disagree with your conclusion.

    I agree that investing in the deepening of the knowledge of the individual members of the firm is partially a cause of a more profitable firm. Increasing the knowledge of firm members makes them more valuable to customers. This implies that it is the knowledge that is valuable to the customer correct?

    If yes, then why do you say, “satisfied clients provide referrals and buy additional services”?

    It is with this point in your conclusion that I disagree. Customers of professional firms do not buy services, they buy access to and/or transfer of knowledge. I invite you to carefully consider this point.

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