ServiceLine White Papers

Services Engineering

- by Thomas E. Lah, author of Mastering Professional Services

Why Services Engineering

For a professional services organization, it's always clear why you need Delivery Consultants. If you don’t have Delivery Consultants, you don’t make money. For most professional service organizations, it eventually becomes clear why you need Service Sales and Service Marketing departments. These two capabilities become critical for demand generation. You need folks that can sell and market the service portfolio. But Services Engineering? What is this all about? Engineering for services? You can’t engineer what our consultants do—that is why we get paid so well. If this is your perspective, you may be facing a rude awakening sometime in the next four years.

Services Engineering is the group responsible for productizing your service portfolio. By investing in this function, you create leverage—leverage you need to drive service margin. Productizing your services encourages repeatability. Repeatability drives margin. How? By reducing risks and costs associated with delivering fledging services. Each time you deliver a service, you get better at it. Fewer surprises. Greater efficiency.

The first time a consulting team tackles a solution, there is a great risk. The cost of delivery is always higher than anticipated. In fact, when working with project managers and technical architects, it is not uncommon to see the most senior of these people grossly miscalculate the effort required to complete a new solution, often by a factor of two. However, the next time that same team estimates what it takes to deliver that same type of solution, the risk goes down. The team has a better understanding of what it really takes. The estimation is much more accurate. The cost to deliver also goes down because delivery staff spend less cycles learning. But the real trick is the last step, that is, to productize your service. When you develop and document clear delivery methodologies for your solutions, you drive consistent, efficient delivery and minimize risk. This is the holy grail of the professional services business. The correlation between increasing project margins and decreasing project risks is shown in Figure 1: Engagement Types.

Figure 1: Engagement Types

This graph maps three types of service engagements:

1. New Solution: When a professional services firm delivers a solution for the first time. The risk during this type of engagement is high and the costs can exceed revenues.
   
   
2. Local Engagement: When field staff have previously delivered the solution. There is less risk in this scenario, and based on team experience, the cost to sell and deliver the solution should be less.
   
   
3. Target Solution: When PS delivers a solution that is well documented and well understood. In this type of engagement, the PS firm often can command a premium price due to expertise that is documented and easily defended. The risk to deliver a well-understood solution is lower and the mature delivery methodology drives down costs and improves margins.

So, it becomes clear that delivering target solutions has financial benefits. However, successfully productizing intellectual property to generate target solutions can be the most challenging aspect of managing a PS business. Why? Because service firms have a tendency to under-value and under-resource this activity.

“Hey, our consultants can document delivery methodologies in their spare time.”

“You know, it’s practically impossible to document what our consultants do at a customer site.”

“Sure, we'd like to have delivery methodologies—we just can’t afford the staff to develop them.”

To date, these arguments have won. However, in a hypercompetitive, global marketplace, service firms must be able to create some type of sustainable competitive advantage. An effective Services Engineering discipline can be the source of such an advantage. The deliverables of this organization decrease delivery costs, decrease customer risks, and increase a service firm's ability to articulate value. However, to achieve these benefits, a service organization must invest in this function and structure it for success. To do this, let’s further explore what this function looks like.

Function Overview

The Services Engineering function is designed to take solution knowledge full circle— from the first implementation of a solution, into captured intellectual property, to the next successful implementation of the solution. The mantra for this group is simple: Capture, Improve, Leverage. Capture valuable intellectual knowledge that the service organization is creating when it solves customer problems. Improve that raw knowledge by finding best practices across multiple customer engagements. Finally, make sure the entire delivery organization can leverage this knowledge by making it easily consumable through web sites, training, etc.

One way Services Engineering accomplishes these objectives is by getting heavily involved in the tail end of the project delivery life cycle. Figure 2: Service Life Cycle documents a standard service sales and delivery cycle. In this figure, the Delivery phase is highlighted and the steps of this phase are broken out.

Figure 2: Service Life Cycle

Services Engineering works closely with Services Delivery in conducting the actual project review step. Intellectual property from project reviews is evaluated by the Services Engineering team and the Services Marketing team. Solutions that have potential are taken into development by the Services Engineering team and then rolled back out to the field. The specific steps of the review process are as follows:

1. Customer Project Review: Actual meeting where Services Engineering staff debriefs with delivery staff to discuss the solution delivered to the customer. A project review report is written that highlights key deliverables, project profitability, and lessons learned.
   
   
2. Solution Review: Services Engineering and marketing staff meet to determine if the solution has any potential to be resold to other customers.
   
   
3. IA Capture: If the solution has merit, Services Engineering works with the delivery staff to capture all relevant solution IA (intellectual assets) such as project plans, report deliverables, etc.
   
   
4. Solution Development: Services Engineering improves and generalizes the solution IP from the customer project for general use. Creates formal delivery methodology.
   
   
5. Solution Rollout: Services Engineering trains field delivery staff on the refined delivery methodology.
   
   
6. Sales Support: Services Engineering supports initial sales opportunities.
   
   
7. Solution Evaluation: Solution methodology is reviewed and improved based on additional customer implementations.

Figure 3: Services Development Life Cycle

Figure 4: Services Development Pipeline

I would argue that service firms that do not have a dedicated Services Engineering staff have a difficult time managing any type of formal SDLC. By not having a formal SDLC, it becomes difficult to commit to both customers and sales reps when service capabilities and offerings will be available. This inconsistency can lead to customer frustration, lost project opportunities, and decreased brand equity.

Function Details

Sourcing
There are at least three critical roles a Services Engineering department must source:

Services Engineering Roles

These three Services Engineering roles are mapped with the other critical roles of a mature PS function on Figure 5: PS Position Map. First of all, the employees that staff this function must truly be experts in the focus solution areas of your company. This may require these employees to have both specific business and technical knowledge. Secondly, these employees must have the soft skills required to work with both customers and field consultants as solutions are perfected. This combination of excellent hard and soft skills is often reserved for front line customer consulting positions. However, by populating the Services Engineering function with technology bigots, you increase the risk of this function creating technology-centric solutions that do not truly meet customer needs and sales staff cannot sell. This department should not be the resting ground of really smart staff that simply can’t work well with customers.

Figure 5: PS Position Map

Key Interfaces
Although Services Engineering is often called upon to engage directly with customers, it is not a front line function. Its primary objective is to be an enabler for the delivery function, providing critical technical information and delivery methodologies. A secondary objective is working with the Services Marketing folks to provide data marketing needs to establish solution credibility. Another secondary objective is to work with external partners to merge outside technologies and capabilities that complete a target solution. Figure 6: Interfaces for Services Engineering documents these critical interfaces using a logical organizational map.

Figure 6: Interfaces for Services Engineering

Successful interchanges between Services Engineering and the other departments are critical to the success of the function. Table 1: Inputs and Outputs summarizes some of the key inputs and outputs that should occur. The processes that support these interchanges should be clearly defined to all parties involved.

Table 1: Inputs and Outputs

Measuring Success

Often, the success of the Services Engineering function is poorly measured. As an R&D investment, Services Engineering constantly faces the danger of being downsized our removed entirely. After all, this is overhead cost here. If margins are decreasing or revenues are flat, this function will be the first to face scrutiny. To avoid the strategic mistake of cutting this function, the management team must identify and track metrics that demonstrate the positive financial impact service R&D has on the overall service business. Table 2: Metrics for Services Engineering provides eleven metrics that can be used to track the impact of R&D investment.

Specifically, by investing in Services Engineering, a service organization should see improvements in service margins, a reduction in the time required making new hires billable, and less project overruns due to unplanned surprises. If these metrics are not improving, Services Engineering will soon find itself struggling to defend its budget. More than any other staff function in a services business, Services Engineering must be extremely disciplined about measuring success.

Table 2: Metrics for Services Engineering

One metric that is conspicuously missing in Table 2 is billable utilization. Setting a utilization target for Services Engineering staff is usually a by product of having no other clear metrics to defend the value of the function. When all else fails, show management how much revenue you generated! If Services Engineering is given a billable utilization target, the function has a tendency to become a glorified global delivery organization. When this occurs, the leverage the function was designed to create never materializes. Solution knowledge becomes lost or poorly managed.

The Future of Service Profitability

Historically, professional service firms made money using one simple lever: charging customers more for consultants than they cost the firm. As an industry, we have talked about the concept of value based pricing. But when the dust settles, a majority of firms are delivering time and material T&M) based projects where the billable hourly rate has enough margin to keep the lights on. For those firms engaging in fixed bid contracts, the underlying pricing approach is a T&M estimate with a risk premium built on top to provide cushion for project surprises.

Over the past few years, offshore firms have entered the project based professional service marketplace. These firms have entered with an incredible cost advantage that has allowed them to offer lower T&M rates. Because of the cost advantage, these firms can often offer fixed priced bids with a significant risk cushion and a total price tag much lower than onshore firms. This is only the beginning the hypercompetitive marketplace we can expect to see when more nations turn to services for economic growth. Look at impact this changing marketplace has had on Accenture over the past four years. Gross margins have dropped from 36% in 2002 to 30% in 2005.

In the future, profitable professional service firms must excel at two dimensions:

1. The ability to articulate the business value of the service delivered.
2. The ability to minimize the cost and risk of service delivery.

Only by excelling in both areas will firms be able to sustain acceptable margins and operating profits. I would argue the Services Engineering function is a critical capability to meeting both of these objectives. To help prove this point, the Technology Professional Services Association benchmark study being launched later this year will track the amount of investment technology solution providers make in this function as a percentage of service revenues. The study will also query members on several aspects of how the Services Engineering function is managed. The interesting correlation will be to map the margins and profits achieved by service organizations to the maturity of their Services Engineering function. As an industry, we need to move the concept of Services Engineering from theory to proven success. I do not know many service organizations that can make the argument for this function with confidence. I believe industry dynamics and better industry data will soon provide that confidence.