Automation's Bottom Line

Opportunities to integrate so-called customer-facing applications with the back office of professional services firms has drawn a diverse group of both new and old software players. While an array of start-up firms armed with venture funding targeted the space, other more established firms have migrated to the opportunities by promoting their  "project-based" offerings.    
"It was that boast — that PSA would integrate the back office — that  really forced us to stand up and take note," says Kenneth deLaski, CEO of Deltek Systems, Inc., Herndon, VA. Having supplied its software to large government contractors for more than 20 years, Deltek realized that the "project" orientation of its software offerings, along with its unique understanding of resource planning within large enterprises, made it well positioned to pursue PSA opportunities inside professional services firms.

To better serve the requirements of professional services firms, Deltek tailored a unique offering for its non-government customers. Known as Deltek Vision, the PSA solution today boasts 247 clients.
"The idea is to give services firms the ability to economically and strategically mine and share key business information across its enterprise and increase the bottom line," says deLaski.
DeLaski says that just as top management is questioning the payback — the ROI — on their ERP implementations, so too consulting practice executives and partners are insisting on a full ROI justification before buying a PSA solution.
To that end, International Data Corp. (IDC) developed an ROI model based on the total cost of deployment, the sum of projected savings over a forward-looking three-year period, and the increase in revenue over a forward-looking three-year period. In conducting an ROI analysis, IDC first determines the before and after internal and external costs of selling, planning, administering, and managing professional services delivery. Then it measures the gains in productivity, efficiency, and revenues to calculate the associated cost savings and revenue gains. Finally, it evaluates the investment in the purchase and implementation of the PSA solution and calculates the projected payback period and ROI over the three-year time period.

To determine the cost of the PSA solution, IDC looks at the cost of purchasing and installing the software, as well as costs for integration, annual software maintenance, and training for current and projected new users over the three-year time period. To measure changes in operational productivity, the research firm looks at the time spent by sales, consulting, consulting management, and project administration staff on operational tasks, such as maintaining sales databases, tracking time and materials, creating reports, managing the invoicing process, and allocating resources. It also considers reductions and reallocations of total project administration staff as well as the reduction in time spent on data entry resulting from the implementation of the PSA solution.
In short, the payback from PSA solutions comes in three areas: from maximizing revenue, increasing cash flow, and reducing risk, notes Mark Christiansen, vice president, Exigen, Inc., a San Francisco — based PSA application services provider. PSA helps to increase revenue by enabling companies to deliver projects sooner, handle more of them, and get greater utilization of its billable consultants. It improves cash flow by streamlining and shortening the billing cycle, and ensuring that consulting firms invoice promptly for everything they are due. Finally, it reduces risk by enforcing standardized processes that lead to consistent, repeat performance. In addition, PSA can directly cut costs by automating what had previously been labor-intensive, time-consuming, manual — often paper-based — processes, such as time reporting or invoicing.
One PSA client that has reportedly begun to enjoy the fruits of having integrated its project accounting and customer order processes is Lucent Worldwide Services, the largest division of Lucent Technologies with 14,000 employees. Having recently deployed a Lawson Software solution to 8,000 services professionals in 36 countries, Lucent is reportedly eliminating mountains of work by users who in the past accessed multiple applications as part of their daily jobs.

Seeing the payback from a PSA solution isn't all that hard. With about 200 consultants in 12 offices, Sungard found immediate benefit from Changepoint's utilization capability. "We can see who is being used nationally and regionally," DiMartini explains. Previously, the company had had a difficult time balancing the workload across offices. It would find itself in positions where one office was delaying taking on customer work because its people were busy, while another office had appropriate people who weren't being used. "We had an imbalance in the project backlog. Now we can balance the workload and recognize revenue more quickly," he notes
But quantifying that payback, even with the IDC model as a guide, isn't so simple. Although Sungard has not yet quantified its actual returns from its Changepoint investment, IDC studied the experiences of eight other Changepoint customers using the methodology described above and found startling results. For example, implementing Changepoint's solution led to more efficient project management, which in turn allowed the companies to complete a higher percent of their projects on time and bid on and execute more projects per year. Not only did the firms reduce having to pay late-completion penalties by 25%, but by doing more projects they also increased the average revenue per staff member by 4% — resulting in additional revenue of $2.3 million annually.

Given the average total investment in the Changepoint solution made by the companies studied — $276,790 — IDC estimates the ROI realized by these eight companies at a startling 1,819%, with a payback of only 19 days — a figure IDC itself described as exceptional and Changepoint vice president Chuck Tatham characterized as extreme. Studies by others put the payback for PSA at 16 to 18 months, which is more in keeping with other software of this type. "You can expect a three-times-faster payback with PSA than with ERP or CRM," says Ludwig Melik, vice president, Tenrox, Montreal, a co-author of Professional Services Automation (John Wiley & Sons, 2002).
The comparison with ERP, not surprisingly, has attracted the attention of the large ERP vendors, which are entering the market. "The big ERP players, no doubt, are coming into the market," says Dave Hofferberth, research director/professional automation practice at Aberdeen Group, Boston. The players — PeopleSoft, Oracle, SAP, Lawson — are approaching the PSA market from the back-office end of the process. They are taking their HR and financial solutions and adding PSA front ends, he explains.'

These vendors are attracted to the growth opportunity PSA represents. Aberdeen reports 40% market growth last year, despite a dismal economy. Within the market for PSA solutions, consulting firms represent only about 30% of the sales. The bulk of the market — and a vast, untapped potential revenue opportunity — are the professional services organizations within product companies, many of which will use the PSA tools internally. For example, a large IT organization at a bank might use PSA tools to manage the projects it undertakes for the bank's business lines.
Among consulting firms, PSA solutions have been deployed primarily by large operations — those with hundreds or, more likely, thousands of consultants. The ROI receives a tremendous boost when an increase of a few percentage points in the productivity or efficiency of an individual consultant can be multiplied hundreds or thousands of times. This lack of scale and the considerably large up-front investment required have discouraged smaller firms, those with fewer than 100 consultants, from deploying PSA solutions widely.
"We hope this year to upgrade to a practice management system, but it is hard to find one for a firm our size," says David Andrews, CEO, Andrews Consulting Group, Cheshire, CT, an IT consulting firm. Andrews is the author of Revolutionizing IT (John Wiley & Sons, 2002). His 70-consultant practice currently relies mainly on Microsoft Excel and Project for PSA. He even looked at on-line offerings from ASPs, of which there are several in the PSA space, but "at $1,000/month, we need to be very impressed with the software," he notes. The firm is an implementation partner of J.D. Edwards, he continues, "but even that is overkill for a business our size."

Even smaller professional services firms, however, can achieve significant payback with ROI, insists Hofferberth. Aberdeen itself is in the final stages of selecting a PSA solution for its own professional services practice. The PSA solution it ultimately chooses will replace three products it currently buys from ASPs for CRM, invoicing, and time and expense reporting. Replacing three products with one PSA solution will deliver an immediate payback. In addition, it will eliminate "revenue leakage," which occurs when work that is done slips through the cracks and never gets invoiced, Hofferberth continues. Finally, it will help Aberdeen's account reps better work the sales opportunity pipeline. Based on these gains, Aberdeen expects a significant payback even without utilizing the resource management and project management components of the PSA solution.
Although 1,000+% ROI from a PSA solution and a payback in a few days is possible, as IDC documented, executives should play it conservatively and scale back their expectations. Still, in this troubled economy an ROI of a few hundred percent and a 9-month payback would look pretty good.