A review of new software products that can make a big difference to your business

Professional services automation survey 2005* 

By Michael Burns

*This is an expanded version of a summary that originally appeared in the April 2005 issue of CAmagazine.

Welcome to our second annual survey of professional service automation systems. This year's chart features results from 24 PSA vendors, including Abak, BalaBoss, BST, CaseWare, Clarity, Epicor, MAS 500, Microsoft Business Solutions - Axapta, Great Plains, Navision, Solomon, OpenAir, QuickArrow, SunSystems, TPS and Wind2.

As you may recall from last year's survey (March2004), companies providing professional services – accounting firms, architects, engineers – have needs that are very different from those of product manufacturers and distributors. For a long time, the popular vendors of accounting and ERP systems ignored the special needs of professional service organizations, but recently they have come out with a variety of PSA products.

Although specifically designed for professional service firms, PSA can be used by any organization that manages projects and tracks time, such as internal IT or R&D departments. The Aberdeen Group, one of the leading information technology analysts, describes it this way: "PSA supports the core business processes of services-centric organizations to more efficiently utilize people and streamline the project lifecycle to save time, cut costs, and increase revenues." PSA systems typically cover most, if not all of the core business processes for professional service organizations. But there are other systems such as timesheets, time billing, and practice management that contain components of PSA and that we have included under the PSA umbrella.

This year’s survey includes several new features, including a section where vendors list the top five reasons to purchase their software, and another that covers the costs of PSAs from application service providers. ASPs host the application on their Internet site, which is typically equipped with state-of-the-art technology and security. This allows the user to avoid the costs associated with managing the computer and database that goes with it. Since Professional service organizations often have people scattered across the country, and ASPs run over the Internet, they would seem to be a good match. Also, ASP is PSA spelled backwards, which must mean something.

PSA vendors offer a full range of functionality – from simple to sophisticated. At one end are timesheet systems that include timesheets, expense reporting and project management. Next  you’ll find time-billing systems that include billing and sometimes purchasing, allowing for accumulation of external costs for products and services so that project managers can compare actual costs of time and materials to budget. When targeted to accountants or lawyers, these time-billing systems are usually referred to as practice management systems.

On the other end of the spectrum, you’ll find integrated solutions that meet all the system needs of professional service organizations – timesheet, time billing as well as customer relationship, opportunity, resource and knowledge management.

The various systems in our charts are enablers of business process improvement in organizations. However, good technology is not enough. You need good people and processes. How do you know when your business processes need improvement? One way is to compare your key performance indicators – chargeable ratio, profit, collection period and so on – with the rest of your industry. All professional service organizations are interested in similar KPIs. Unfortunately, it’s not easy to obtain these KPIs from the industry. But in the online version of this article, you’ll find extracts from a report that can be used as a starting point.

Wind2 Software, Inc. recently published the results of its 2004 annual survey of key ratios and statistics. Approximately 68% of the 190 respondents were architectural, engineering or A/E firms. We have assumed that other types of professional service firms would also benefit from the results. Although only 2% of the firms were Canadian, there is no reason to believe Canadian metrics would be significantly different from those of the US.

Here’s a small extract from the 62-page report that can be obtained from Wind2 for US$399 by calling 800-779-4632:

KPI	2004	2003	% change
Chargeable ratio	62.20%	60.00%	3.68%
Net multiplier	2.92	2.85	2.46%
Profit	9.80%	10.40%	-5.80%
Net revenue - all staff	$87,381	$88,889	-1.70%
Net revenue - technical staff	$108,483	$106,570	1.80%
Current ratio	2.91 to 1	2.7 to 1	7.78%
Average collection period in days	67.4	67.6	-0.30%
Completion to billings (WIP) in days	21.4	19.5	10.02%

Wind2 has provided commentary on the KPIs as follows:

Chargeable ratio, the percentage of time spent performing chargeable work, increased from 60% in 2003 to 62.2% in 2004. Over the past 10 years, this ratio has been as high as 65% in 2000 and 2001, and as low as 60% in 2003. Each percentage change in the chargeable ratio typically has a significant effect on profit (income). Usually, an increase in this ratio translates into higher profit percentages. However, this was not the case for 2004.

Net multiplier, a measure of markup on labour costs, rose from 2.85 in 2003 to 2.92 in 2004. This key indicator is somewhat counter to what one usually expects in a somewhat stagnant economy. If you compare the average or mean values, the ratio tends to make more sense with 2004 averaging 2.89, and 2003 averaging 3.01 (a 4% change). Typically the ratio falls as a result of staff time that is not billable or staff  “apple polishing” (spending extra time on a project because no other work is pressing).

The decrease in Profit on net revenue before taxes and distributions from 10.4% in 2003 to 9.8% in 2004 reflects a drop in profitability of almost 6%. This is the fourth consecutive year that there has been a drop.

Net revenue per total staff decreased slightly, while Net revenue per technical staff increased slightly from 2003 to 2004. This interesting occurrence was possibly caused by an increase in the proportion of support staff to the total staff count, and a more billable technical staff.

Current ratio, a measure of how well a firm can meet current obligations, increased by almost 8%. An increase in the current ratio typically indicates more of the profit is being kept in the company; therefore, smaller distributions are made to owners. The 2004 survey indicates firms are continuing to take a conservative stance, retaining more profits in the company than in previous years.

Average collection period stayed about the same: 67.6 days in 2003 to 67.4 days in 2004. The number of slow-paying clients always increases with economic downturns. However, collections tended to plateau along with the economy. Firms must continue to closely monitor their “problem” clients.

Completion to billings (WIP) increased for the fourth straight year (15 days in 2001 to 21.4 days in 2004). The continual increase in this KPI is a red flag: firms are taking longer to process their client billings, or more projects are becoming a challenge to bill. Either way, an increase in the average number of days to bill a project translates into further delays in converting services to cash.

After examining your KPIs, you should review your operations for efficiency and effectiveness. At this point you might realize an investment in technology can bring improvements. You might need some integration or customization or even a completely new system. Replacement should be a last resort because of the costs involved. But if you have a compelling business case, you can change your system and optimize your business processes at the same time.

Many of the PSA vendors in the attached chart should be able to help you improve your business processes. Why not leverage their knowledge of your industry? In fact, your final decision should depend to a large extent on how well they know your industry.

Michael Burns, MBA, CA, is president of 180 Systems (http://www.180systems.com/), which provides independent consulting service, including business process review, business case development and system selection. Michael can be reached at 416-485-2200 or mburns@180systems.com.