Episode 80 Transcript

Brent Trimble: Welcome to the Professional Services Pursuit, a podcast featuring expert advice and insights on the professional services industry. I'm Brent. Today we have a very informative, data-rich episode planned for you. We're fortunate to have John Ragsdale back on the show. For those unfamiliar with John, he is the Distinguished Researcher and Vice President of Technology Ecosystems at TSIA, the Technology Services Industry Association.

We're going to discuss some key findings from Kantata’s State of Professional Services survey, as well as corresponding research from TSIA's 2024 Technology Survey.Get ready for some in -depth data analysis.John, it's great to have you back. For listeners new to the podcast or TSIA, could you provide some background on yourself and the organization?

John Ragsdale: Well, it's great to be back for another episode and always enjoyable to talk to you, Brent. TSIA is a research and advisory firm focused on B2B tech companies, and I have been heading up technology research for TSIA for over 18 years. Before that, I was at Forrester Research for several years and earlier held roles in CRM vendors doing product management and product marketing. This industry continues to evolve, and with AI, it's moving even faster. I'm excited to discuss professional services and professional services automation. In a subscription economy, the role of professional services is becoming increasingly strategic, and the ability to automate and enhance the customer experience, which we will touch on today, is becoming essential.

Brent Trimble: That's great, and thanks so much. At the close of the show, we'll have information on where listeners can go to explore TSIA’s offerings as well as links to some of the research. To dive in, at Kantata in the PSA space, we conduct extensive market research to understand what drives the industry in 2024. To gather insights, we teamed up with Salesforce and commissioned a survey of technology decision-makers in various professional services sectors, including IT, system integrators, technology, finance, health care, and consulting. We asked about their top business challenges, trends in utilization, client expectations, margin fluctuations, and how they plan to overcome obstacles to profitability and success.

The data we've gathered is now being formulated and synthesized, and it suggests a moderate stability in the economy despite recent uncertainty. While the global situation remains volatile, 70% of professional services leaders express optimism about the future. There's an upward trend in basic metrics such as margin utilization, indicating that people- powered businesses are seeking solutions to common challenges.

Technology is a top business challenge for PS firms, with nearly half of organizations planning to upgrade core systems. This reflects the "cobbler's children" phenomenon, where firms deliver innovation for clients but neglect their own infrastructure.

John, TSIA is wrapping up its 2024 tech survey.Are you seeing similar signals of optimism in the market ? Your insights as someone with a primary role in monitoring these trends would be valuable to our discussion.

John Ragsdale: I have conducted these tech surveys for many years. This year, we surveyed 200 CIOs of B2B tech firms about adoption and planned spending across 20 different technology categories. In general, I agree there is a lot of optimism. The percentage of companies planning investments in the next one or two years was very high across almost every category in the survey, showing a significant increase from last year.

Specifically for professional services automation, 66 % of companies said they had a PSA tool, but 75 % had budget for new or additional PSA in the next one or two years.This indicates that legacy PSA tools are not keeping up with the evolving role of professional services.Today, they struggle with implementing subscription services and value - added services.The shift to fixed - price repeatable offers means these legacy platforms, originally designed for long - term, complex custom integrations, no longer meet the needs of modern professional services automation.

The other interesting point is that a decade ago, we thought PSA was primarily for large companies, but spending is high across all revenue sizes.Even the smallest companies in the survey, under $100 million, 58 % have budget for PSA.Best - of - breed professional services automation, infused with artificial intelligence and now Gen AI, will have a significant impact.It is no longer just a tactical solution for managing margins but is becoming a much more strategic platform.

Brent Trimble: So the comprehensive view immerses innovation in a collaborative platform, not simply a rote, “here's a chargeability code. You're on this integration for six months at this planned margin. Hit this level of utilization, then we send off the data to the ERP.” It sounds like it needs to be more nimble, adaptable to different commercial models, and ultimately, drive customer satisfaction, I presume.

Last time we were together, we discussed technical debt and its hidden costs, such as blind spots, bottlenecks, churn, and inefficiencies within an organization caused by outdated tech stacks.In our state of PS survey, we found that 76 % of professional services leaders do not trust their own systems' data due to duplication, silos, and lack of clarity around timelines and governance. What are some of the biggest trends and data points TSIA is seeing around data cleanliness and efficiency, and how can reliable data inform organizational direction?

John Ragsdale: Yeah, this is one of my favorite topics. The tech debt survey asks companies to rate which systems had the highest level of tech debt, and PSA was near the top of the list. They are really burdened with these old legacy systems that aren't scaling, aren't well integrated, and aren't leveraging the available data.

At our spring event in Orlando, we had a keynote from Doug Schmitt from Dell, and he made a dramatic statement that changed my perspective on this data issue.He said that any services leader who is not becoming their own CIO will be out of a job in three years.I truly believe that business leaders have to take ownership of these data challenges.They must be comfortable understanding it and have proactive conversations with IT, rather than assuming IT will fix all of these problems.

I recently completed a survey on roadblocks and challenges to AI success, and data issues were significant.We found that data quality and centralizing data from multiple repositories were major roadblocks in successful AI projects.It's not just about data cleanliness; it's also about breaking down silos to access more data.

One proof point is the median hit rate for PS is 54 %, meaning about half the time, customers reject the proposals sent to them.In my opinion, another survey showed that only 28 % of sales teams are required to capture the desired outcomes of a customer during the sales cycle.They talk about it, and everyone is doing outcome - based, ROI - based selling, but they're not capturing it. Professional services get this project handed to them without knowing why the customer bought it or their timeline for ROI. They probably generate a generic proposal that doesn't meet the customer's needs.

That's just one example of how breaking down these silos and leveraging more of the available information, even capturing some data better, could help craft a highly personalized proposal that specifically addresses the customer's needs.I believe the hit rate would go much higher.

Brent Trimble: Do you think this notion of the services leader becoming their own CIO and breaking down this legacy model, where they're just the downstream recipient of the tool or the stack that the enterprise has selected, and they're just making do with what they've got, putting in some tickets for support, getting some admin time, and maybe implementing a little interface here and there, and making do with spreadsheets and everything outside the system, has to go away? It sounds like the statement at your conference that you referenced suggests that this mode of thinking needs to disappear.

On the flip side of that, there seems to be both in the research we've done and in the research you're doing, an indication that PS professionals are willing to invest in new technology.Do you think it's a culmination of a couple of things: maybe a little more confidence and guarded optimism that while the world is teetering with lots of instability, at least here in the U.S. or globally, the economy seems robust enough to plan for the future, make some CapEx and OpEx investments? But they're grabbing the bull by the horns and saying they are willing to invest or at least advocate for better systems, and then also really drive this notion that we need structured data for AI to work, and we need to do better with what we've got. What's the impetus behind some of that if you had to comment ?

John Ragsdale: I think business users understand their data. They know where the data is, what data is reliable, and what data is probably garbage. Professional services are uniquely qualified here because all of these tech companies we work with are introducing AI components, and their consultants are AI conversant. So they're a pretty informed audience. If they can use what they’re doing for their customers on themselves, they can become much more active participants. They understand the value of data and know what data they have and what they don't have. Assuming that it is going to really understand your data the way it’s structured, the most valuable nuggets of information are, and you mentioned structured data. There's a lot of unstructured data out there with great value as well. They are well-positioned to take a leadership role in not only driving their requirements but also informing IT on how they can leverage existing data to meet those requirements and not just sit back and hope for the best.

Brent Trimble: Sounds good. The next offshoot of that, which is a really interesting finding in the survey, is that close to two-thirds of professionals admitted they had to turn down work in the past 12 months. Again, our audience includes management consulting all the way through embedded service organizations in technology companies. This is due to a lack of adequate available resources, which seems surprising given the bumpy economic times. Now, broadly we're at nearly full employment. But of course, if you look at the data, technology has been down, and consulting has been shedding jobs. Is it a mismatch or a lack of pairing of available talent in the market? Is it going too lean too fast? A services firm is inevitably going to always be a little bit behind the hiring curve because of the nature of things like the bench and so forth. But what do you make of this? Are you seeing something similar in some of the data you're seeing?

John Ragsdale: In all the years I've been with TSIA, we link every conversation we have with numbers to specific business challenges, and resource management is always at the top of the list. This has been a historic problem. It's a very people-intensive business. But there are really fundamental issues with the ability to prioritize resource forecasting. We know that it takes an average of 18 business days to source a project. You've got the sales pipeline with percentages of close rate being predicted. Companies have got to do a much better job of mining this pipeline so they understand what projects are going to be hitting their plate in three months, six months, 12 months, and what skills, certifications, and industry requirements need to be there when that happens.

We need to get ahead of what projects we're going to be getting so we can intelligently start recruiting. Maybe hiring is down, but I haven't seen layoffs of consultants, and most companies are still trying to recruit consultants.It takes something like three months for a consultant to become billable.There's a significant lag time. So absolutely, and I think that this is an area where AI is really showing some early potential. I know Kantata has got some great capabilities for resource forecasting and resource management.

You mentioned turning down projects, and I don't have a data point for that, but I do have one data point from the benchmark that the average backlog of projects being deferred to the next fiscal year because you don't have the resources to complete the project is nearly $9 million.So that is revenue that you were supposed to close this year that is slipping to next year.Not only are you missing this year's revenue number, but you're also missing customer expectations because they've just gone through this 12-month sales cycle. They've signed the deal.They're ready to get implemented. You come back and say, I'm not going to have a team for three months because of the big year - end push.It's a significant revenue impact, but it's also really a significant customer experience impact as well.

Brent Trimble: Just to double down on that point, is that from your research for this calendar year, 2024?

John Ragsdale: Our benchmark is a rolling benchmark for about the last 12 months, so we're constantly collecting this data.

Brent Trimble: So it's recent. This isn't data from a bygone boom period. This is very current data.

John Ragsdale: Yes, current.

Brent Trimble: That's fascinating. We can move along here. I'd love to spend more time on that topic, and perhaps we can revisit it later. But another trend we've seen in our research, specifically the Kantata research, is that improving client satisfaction was a top four challenge in 2023. Survey respondents indicated that it remains a challenge and an area for improvement in 2024. Almost universally, respondents agreed that client expectations around service delivery are increasing, particularly in terms of quality of work, speed of delivery, and project transparency. This is a perennial challenge in a talent-based business, where there is inherent variability in skills and people. Where do you think many firms encounter challenges and perhaps fall short in this area of overall CSAT?

John Ragsdale: I think the biggest challenge is companies that are coming from an on-premise history. Let's be honest, you collected all the money for the deal upfront and you implemented it. If the customer got value, that's great. But if they didn't, their check still cleared. I think some companies were a bit guilty of this launch-and-leave mentality: we're going to go on site, we're going to implement it, and you're on your own after that.

In a subscription economy, that doesn't work. You've got to be delivering on time and on budget.You've got to be delivering the anticipated value that the customer wants. If they don't get that, they're very unlikely to renew. If they don't renew, you're never going to have a profitable account.

I think that one of the things we've seen is that the core charter of Professional Services has been changing. Historically it was revenue and margin. Now the number one charter of our members is delivering adoption and value. Are they taking that to heart or is that something they're being mandated to do? That's a topic for another discussion. But they do have a critical role to play in really setting the customer up for success from the very beginning. I think that many companies are now being forced to rethink the entire services quote to cash process to put the customer at the center of everything.

You mentioned transparency.That's a big one. Today's customer wants accurate information about what's going on. They don't want surprises, definitely don't want surprises. We are starting to see a lot more focus on customer experience. For some companies, this is a completely new shift. It's requiring changes to people, processes, technology, and definitely culture.

Not to give a shameless plug, but I think an amazing example here is the new Pulse release that Kantata is coming out with, which actually integrates sentiment analysis into professional services automation.That's a lot of that unstructured data, such as the angry emails you're receiving from customers and the endless back - and - forth conversations.Now you can measure positive or negative sentiment.So before the project closes and you find out the customer is unhappy, you'll be getting clues from that at every stage of the project. I think it's really a game changer that we can start being more proactive, not only about profitability, margins, and utilization rates, but also in meeting the needs of the customer.You'll know that at every step of the way.

Brent Trimble: At the start of our discussion, you talked a lot about the transition from legacy SaaS products and the shift from an on-premise environment to SaaS. It sounds like, if I had to paraphrase, it’s moving from being in the business of net new sales to being in the business of keeping customers and adopting more of a retention mindset. This focus emphasizes success at the outset and customer satisfaction, rather than a "here you go, you're on your own" approach.

Perhaps the technology providers initially believed that once a system was embedded, it would be difficult to uproot and that the client's threshold for pain with things like service, support, and user experience was high enough that they would be fine. However, it seems that mindset is changing for both providers and customers. Customers now have the option to vote with their non-renewal.

This notion of a holistic approach to running Professional Services(PS) organizations seems to be an ambition that PS organizations want to emphasize, focus on, and prioritize.To achieve this, the right technology must be in place to improve visibility, optimize operations, better manage talent, and maintain strong client relationships.Ultimately, the goal is to ensure predictable revenue and profitability.If the PS organization is oriented towards profitability, achieving a balance between break-even or modest profitability and high client satisfaction(CSAT) is crucial.High CSAT is likely to lead to renewals and long - term success.

Executives and board members, as well as equity partners, demand predictability and parity between sold and earned revenue.How can an evolving PS leader navigate these demands and balance both revenue predictability and client satisfaction ?

John Ragsdale: While adoption and value may be the primary charter, it doesn't mean revenue and margin have disappeared. They still have a revenue number. I think this year everyone was shocked with how big their revenue number was, and that's probably not changing either. That is one of the reasons we're seeing a big emphasis on subscription services, because it's a new revenue stream, it's a value-added service, and it's upsell potential for additional services beyond just implementation, integration, and customization.

I do think that there continues to be a lot of executive pressure to grow that revenue number.It all comes down to predictability.I think that this is a core thing that AI is really going to help solve, and increasingly is out of the box in the PSA platforms available.It's not like you need a team of 200 data scientists to go figure this out.

Just some examples are scoping and creating proposals based on the historical analysis of project costs and profitability.You're pricing things correctly. You know what it cost in the past. You know what obstacles you ran into, so you're pricing those into those projects moving forward.You can even plug in the desired margin, desired utilization rate, and let the AI engine build these proposals and cost models that factor that in, so you don't run into a lot of surprises.

We touched briefly on resource management.But resource management is incredibly important.It can more effectively manage the bench to boost utilization rate and rate realization because in reality, if you're managing resources on spreadsheets, you get familiar with certain consultants and you know what they do, but they're always building skills, and there are a lot of skills out there that you don't even know that some of these folks have. It's really going to allow us to do much more accurate and profitable resource management.

We talked about forecasting, but leveraging AI to better forecast both resources and revenue is really going to help you communicate an accurate plan and a reliable plan that you can deliver.So, I think that if you have not moved off spreadsheets, this is the time to do it.If you're not using a best-of-breed PSA platform that includes these AI capabilities out of the box, then I hope you're part of that 82 % that are shopping because it is available.I'm just hoping everybody takes advantage of it.

Brent Trimble: It's great advice and great insight on the evolution of people and talent, moving it from a static data repository like a spreadsheet—which is really just dead weight to the organization—to something much more meaningful that you can project, power, and enable.

To wrap up, this has been great.There are a lot of practical insights grounded in data from many peers of our listeners.People, I think, will hear themselves in that data and nod their heads, regardless of whether they participated in one of the surveys or not.It's one of the things we try to do on the show, as well as the firms really sponsor a lot of it.

Thank you, John.This has been great.For our listeners, thanks for listening.

Can you give a couple of notes on where you can find this research ? For the Kantata research, the State of Professional Services research report that we discussed, you can go to the show notes or you can go to kantata.com / resources.You can find it there.We'll also have links to some of the data snippets that John referenced from TSIA.

If you want to learn more about TSIA, of course, look at the show notes, but it’s tsia.com, the Technology and Services Industry Association.As always, if you have any follow - up questions for myself or John, we'd love to hear them. Send us an email at podcast@kantata. We'd be happy to get back to you.

John, again, thanks so much for the data, the insights, and sharing your thoughts on the industry.We love having you on and will continue to have you back when you can give us your finger on the pulse of where things are headed.Thank you so much.

John Ragsdale: You're very welcome. It's great to be here and always fun chatting with you, Brent.