Dave Hofferberth shares his critical insights for consultancy firms
The annual Professional Services Maturity Benchmark Report by Service Performance Insight (SPI) illuminates pivotal trends and metrics in the professional services market by measuring the maturity of over 500 firms against 150+ key performance indicators. Ahead of the report’s 2024 release, we sat down with SPI founder Dave Hofferberth to learn what consultancies can leverage from the upcoming report.
Having led every edition since its inception 17 years ago, Dave Hofferberth has had his finger on the pulse of the consulting industry for close to two decades now. According to him, the latest analysis has thrown up several key trends in the industry for the year ahead.
“After a difficult 12 months, there is some real nervousness buzzing across the industry. But what’s interesting is that there is also an excitement for what is to come,” says Hofferberth.
Performance of Europe versus North America
Hofferberth notes that the causes of global consulting’s “nervousness” are unsurprising considering the headwinds all industries are facing, from the macro-environment pressures, including “high inflation, high-interest rates, to clients simply not spending. Leaders across the professional services sector knew that they weren’t going to be the exception in a year of slower growth.”
Over 2023, that’s exactly what manifested, according to the benchmark report. “We’ve witnessed the lowest revenue growth across the firms studied in over a decade, at around 5%, while historically the average has been around 10% per year.”
“But there’s over a million numbers in the model,” he points out. “And there were several cases which bucked the trend. In Europe, for instance, average revenue growth was 10.3%, compared to North America growing at 7.1%. So, Europe did quite well by comparison. Even better, profitability for European firms hit 19.7%, compared to 15.3% in North America.”
Historically, North America is the “bigger market, with more money at play”, so Europe’s performance in what has been a lean year for the global consulting scene is encouraging.
Asked about what might be underpinning the continent’s positive performance, Hofferberth notes that “Europe is selling bigger, longer projects, which is good for stability,” while also noting that players in the region have managed to decrease the expenses incurred by staff – contrary to what is happening in the US.
“We also monitor on-time delivery, and European firms performed well against that KPI up markedly from the year before. This a key KPI for clients, as firms must make sure they deliver on time and on budget to win clients over on the investment they’re making. And for repeat sales, because on-time delivery is what they remember.”
“There are a few areas where Europe still lags, so even though the continent had a really good year compared to North America, firms need to look at how they can make those gains sustainable,” says Hofferberth.
Join the webinar on 7th March: Dave Hofferberth joins Deltek’s Eric McAdam for a live analysis of the European results and recommends his moves to make to increase maturity this year. Register here.
Planning for success
First and foremost, improving on the last 12 months relies on delivery and planning. The firms that best weigh up their development plans, revenue goals and margin goals throughout the year “did the best everywhere” Hofferberth notes. Over the last decade, technological shifts have enabled companies to improve their planning to delivery operations – and with it, their results.
“That’s not just a November-December thing, for 12 months you are constantly looking at your human resources, finances, project backlog, resources, and more. High-performing firms are clearly those firms which excel in this field.”
Technology is key in driving the cycle, with Hofferberth saying two forms of software are particularly important. Enterprise resource planning (ERP) – a software system that helps business run their entire operation; and professional services automation (PSA) – a software application suite that provides specific functionalities to project-based businesses. The two are often combined as ‘project-based ERP’ solutions.
“ERP and PSA are now used quite a bit in planning,” Hofferberth alludes. “PSA shows what services are most profitable, most popular with clients, and where investment adjustments need to be made. Running an integral planning solution on top of that can help streamline the whole process. In recent years, there have been huge leaps in the deliveries of both.”
According to Hofferberth, the trend in the tech space is clear in the market. The benefits associated with project-based ERP solutions have become indispensable to firms. “Last year around 30% of firms reported to have implemented a project-based ERP system but that number is going up by the day.”
So, what are the big drivers behind that shift? “20 years ago, ERP didn’t tend to be very good for providing a holistic planning service,” Hofferberth recalls. “In the last ten years, however, vendors like Deltek have done a far better job of putting solutions together.”
The acceleration of artificial intelligence
Pointing to the impact of evolving ERP and PSA systems, Hofferberth contends that the technologies have “transformed the profitability of consulting”. He adds that whereas “we used to see that single-digit profitability was the norm in professional services”, now he says the technologies help drive higher profitability, up to 15%, or even 20% in good years.
With new revolutionary technology entering that bargain, it is easy to see why optimism in the consulting industry might be rising, even on the back of a tough 2023. In addition, the “wild card” of artificial intelligence (AI) has dominated discussions in the sector over the last 12 months, whilst consultancies considered how it was going to impact their work.
The trend is something which Hofferberth himself is keen to note “will change the industry from top to bottom” – and presents major opportunities moving forward.
Hofferberth says, “The discussion around AI often starts around what we will lose. Consultants worry whether they may become obsolete because AI can do so much. But in the long run, AI is an opportunity like any other digital process. So, consultancies will use it internally to optimise business processes.”
“And obviously, consultants will also end up selling AI as a service. Because let’s face it, most industries don’t have the sophistication of technology that consultants have – they don’t have the time or space to concentrate on it.
As a result, Hofferberth notes that practically every firm in the industry is now focusing on AI, “dedicating resources to how they can integrate it into their offerings. And that is powering a new sense of optimism in the consulting sector looking forward.”
Generative AI looks set to be a central part of that shift. While Hofferberth confesses to still being “a little sceptical” on any new technology, (citing the nature of his job as needing him to stay grounded), he does think generative AI will be “a primary technological shift” akin to the internet or the cloud. With the technology capable of recommending the reallocation of resources, he also sees a chance to further improve the core planning function consultancies – and with it, billable utilisation, and profitability.
Beyond staffing, there may be two other leading use cases, as far as Hofferberth can see. Consultancies can use generative AI for their finance functions, closing books, looking for discrepancies, optimising cash flow – as well as working capital management.
At the same time, AI may become an everyday assistant that the next generations of consultants will simply take for granted in every function of their work.
“The new breed, the next generation of college graduates, they are just going to naturally use the technology. AI will help them to report things, create more accurate analysis… It’s a tool, and an individual consultant armed with the knowledge of how to use it is armed with a lever – enabling them to be more efficient.”
What exactly will or will not manifest before the next report from SPI remains to be seen. Hofferberth cautiously suggests good things are on the horizon, particularly for AI’s use in consulting, but hastens to add that “you and I have no idea where this could end up in 12 months”.
That’s a lesson hard learned from earlier editions of the SPI Professional Services Maturity Benchmark Report, where he was more willing to gaze into the future.
“We don’t typically look ahead,” he concludes. “We say ‘2024 should be a good year’, but we won’t be more direct than that. We put out our 13th annual report in February 2020, suggesting that the year would be a good one. One month later, the world ended with Covid-19! So even though I say I expect a good year in 2024, with all the KPIs pointing the way they are, the research is by no means Nostradamus.”
