I spend too much time these days talking about what seems to me to be basic, obvious facts about professional services. So, to save time, three quick points about project management, PSO economics, and metrics.
The project management triangle
The project management triangle is time, cost, and scope. You want to spend less time on a project? Fine; the scope will have to be less. You don’t want that? Fine, you’re going to spend more on the project then.
You want to spend one week working on the project with one person (labor is value, and all that; cost = resources = effort = people)? That’s great! But I’m going to tell you what the scope is and you’re probably not going to like it.
You can decide the scope if you’d prefer, but then I’m going to tell you how much it’s going to cost and how long it’s going to take.
It is an iron law.
Professional services are not products
Professional services have low capital expenses and high incremental costs. That means that a PSO (professional services organization) can develop a new consulting offering, for example, at little cost, especially compared with the cost of developing a product. But the cost to deliver that product is high and there aren’t scale economies. To put a brighter spin on it, the cost is recognized closer to the point of value.
In other words; to actually do the work, you need to assign people (=cost = value) to the project and they are, most likely, going to have to go to the customer location and in doing so (opportunity costs!) will not be able to work on other projects. Also, they will incur additional costs transporting their corporeal selves from their location to the customer location and back again.
Professional services are simple to manage
The only two numbers that matter to a PSO are effective bill rate and utilization. You have to look at other things — costs, pipeline, deal size, margin % and $ (both as sold and as delivered), delivery issues (individual projects gone bad can damage an entire organization), and so on — and you have to be able to drill into those two main numbers to see what’s going on in detail, but it’s actually a simple business to model. There are only 2,000 hours in a work year* and that is not going to change. The number of hours that you bill, and the rate that you get for those hours is what you really care about.
So, when you’re talking to a good consultant — and this is not a bust, it’s just the reality — you can be assured that they’re thinking utilization and rate.
* To be precise: there are 2,088 or 2,087 hours in a year in the US, depending on if it’s a leap year or not.