Key performance indicators in

professional service firms

Oliver Grasl
transentis management consulting GmbH & Co. KG
Kranzplatz 5-6
65193 Wiesbaden
mobile: +49 173 6546727
e-mail: oliver.grasl@transentis.com
August 2, 2009

Four major factors affect the performance of project based professional ser-
vice firms: The ratio of senior to junior staff referred to as the firm’s leverage,
the average fee charged per unit of time, the percentage of billable time referred
to as utilisation, and the profit margin. This paper takes a holistic approach
to analysing the performance of a particular professional service firm with
respect to these key performance indicators depending on the time senior staff
allocates to the following tasks: Project acquisition and delivery, contact and
customer maintenance, service innovation and development and hiring junior
staff.

Keywords: Professional Service Firms, Business model, Key Performance Indicators,

Service Innovation

1 Introduction
Four major factors affect the performance of project based professional service firms:
The ratio of senior to junior staff referred to as the firm’s leverage, the average fee
charged per unit of time, the percentage of billable time referred to as utilisation, and
the profit margin (Maister, 1997, p. 32-39). Maister (1997) refers to the first two factors
as health factors and the latter to factors as hygiene factors, indicating that to become
high-performers firms should concentrate on the health factors.
A number of system dynamics studies have explored the behaviour of professional
service firms, mainly concentrating on staff utilisation and leverage: Warren (1998) con-
centrates on resource dynamics and the implications of quality, Rode (2001) discusses

1
 2 The case study

the reenforcing effects between a firm’s reputation and the talents it can attract, Bayer
and Gann (2006) discuss bidding strategies and workload dynamics and Kunc (2008)
concentrates on finding the right staff ratios to ensure both short term demands (such
as developing new business and delivering projects) and long term demands (such as
developing junior staff) are met.
This paper contributes by taking a holistic approach that analyses the performance
of a particular professional service firm with respect to all of the four key performance
indicators leverage, utilisation, fees and profit margin depending on the time senior staff
allocates to the following tasks:

• Project acquisition and delivery.

• Contact and customer maintenance.
• Service innovation and development.
• Hiring junior staff.

2 The case study

The case study reports from the German division of a global professional service firm
that is a pioneer and a thought leader in a field of software development known as
“Agile software development”. The firm has developed its own unique Agile adoption
methodology by building on the extensive experience it has accrued over the past eleven
years. This approach provides the firm’s clients with the momentum and ready-to-use
structure needed to “go Agile”. In addition, the firm also provide accelerated knowledge
transfer and just-in-time learning services.
The firm offers Management Consulting, IT Consulting and Global Sourcing to com-
panies world-wide. The German division focuses on the banking and insurance, the
aerospace, the telecommunication and the automotive markets. The currently has over
1100 employees worldwide and over 70 employees in Germany.
This case study was carried out from August 2008 until March 2009. The main par-
ticipants on the firm’s side were the CEO and CFO of the German subsidiary. The head
of business development and the branch heads where involved as needed.
Conceptually the firm’s business model (“the business idea”) operates as follows: The
sales process starts with a concrete business opportunity. Both the number and quality
of such business opportunities have improved in recent years through access to high-level
contacts with budget-making power. Access to these contacts has improved due to both
increased market credibility, through a sales partnership with a well-connected individual
“rain-maker”, and a service partnership with a tool-vendor.
The main driver for business opportunities is the product portfolio of both business
and IT consulting services. If all goes well these business opportunities turn into concrete
sales objectives and finally into IT solutions projects and business consulting projects 1 .
1
The firm follows the Miller-Heimann sales process as discussed in Miller et al. (2005) and Miller et al.
(2005), the terms Business Opportunity and Sales Objective are used accordingly.

2
 2 The case study

These projects enable the firm’s consultants to improve both their horizontal, technically
oriented skills as well as their vertical, domain-oriented skills. These improved skills in
turn help increase the firm’s market credibility and refine its product portfolio, leading to
new business opportunities. A causal loop diagram of this conceptual model is illustrated
in Figure 1:

Business Consultants with

vertical domain knowledge
Sales Partnership
Market Credibility

Business Consulting Projects

Hire new business High Level Contacts with
consultants with vertical skills budget making power
New Business
Consulting Products
Concrete Business Opportunity
IT consulting products Service Partnership

IT consultants with
horizontal skills
IT consultants with vertical
Concrete Sales Objective
domain knowledge

IT Solutions projects
Hire new IT consultants with
vertical domain knowledge

Off Shore Development Center

Figure 1: Conceptual model of the firm’s business idea

Analysis of the main causal loop shows that the following capabilities are important
for the business model to be successful:

• Sales capabilities for business opportunity and sales objective management.

• Consulting skills for service delivery.

• Know-How management, Innovation management and product development skills

for creation of up-to-date consulting products.

• Management skills to ensure that products developed match both market require-
ments and consultant skills.

The firm’s main issue in operationalising its business model is how to divide these
responsibilities among its senior consulting staff:

3
 2 The case study

• Should selling be done by dedicated sales specialists, or by the firm’s most senior
consultants, the principal consultants?

• Is product development done by principal consultants who work on consulting

projects, or by an in-house “think-tank” of senior consultants that have no other
responsibilities?

• Whose responsibility is it to transfer new product know-how to more junior con-

sultants?

• Which goals and incentives should be set for the principal consultants?

The firm had been discussing theses issues for some time when the study began and
was particularly drawn to the ideas discussed by Maister (1997) on managing professional
service firms—In particular the formula for the professional services detailed in Maister
(1997)[p. 32-39] had been found highly relevant:

P rof it P rof its F ees Hours Staf f

= × × × (1)
P artner F ees Hours Staf f P artners
= M argin × V alue × U tilisation × Leverage

It was quickly decided by the stakeholders that improving the margin was an operative
hygiene measure and that business model analysis should focus on the key performance in-
dicators value, utilisation, and leverage. An early analysis—depicted in Figure 2—showed
that these KPI’s are highly dependent and that clear policies are needed concerning al-
location of principals time to sales, project delivery, innovation and standardisation:

• Utilisation depends both on the effort a typical project has as on the number of
consultants involved in a project (the project leverage).

• The project leverage is dependent on product standardisation—if the content of

every project is unique then only high-skilled consultants can delivery them, leading
to lower leverage.

• The value (fees) that can be generated by a project depends on how innovative the
consulting product is.

• High product innovation is detrimental to product standardisation, both at the

level of selling the product in a standardised way as at the level of delivering it in
a standardised way.

• Standardising products also means that know-how has to be transferred to consul-

tants, which is a further burden on principals time.

Based on the discussion above, the following strategic question was formulated:

4
 2 The case study

+ Gross Margin

Value Leverage -
+ +

Utilization Product innovation

+ Principals
+ - Consultants
+ +
Project effort sold

Project leverage Consultants a

Client Maintenance
+ Principal can manage
effort -
+

New client Staff Issues

acquistion effort Organizational Standards

+
Delivery Standards

-
Standardized Products Consultant management effort
+ + + +

Delivery standardization Knowledge Transfer effort needed

effort needed Maximum Principal time available
Standardization Effort

Figure 2: Dynamic interdependencies between KPI’s

Strategic Question 2.1 Which organisational policies should be followed to ensure value
is maximised within the firm’s business model, and how should these policies be opera-
tionalised within the organisation?

In particular this means finding an answer to how effort should be distributed between
the following tasks, given the current market and customer situation:

• Generating repeat business through client maintenance

• New customer acquisition

• Attention to project delivery

• Recruitment and consultant development

• Development of new consulting products

2.1 Products and transactions

The firm’s products are IT consulting services that are sold and delivered in the form
of projects. Two kinds of projects are distinguished: Fixed price projects and time and
material projects. Sales figures show that fixed price projects are much more difficult to

5
 2 The case study

sell, but they offer better scalability and higher returns due to the increased risk. Time
and material projects have better sales figures and are low risk, but mostly consist of a
single consultant only and thus offer little scalability.
The company distinguishes between delivery projects (which are fixed price) and the
time and material IT consulting and Solution projects. IT consulting projects are low-
know-how projects with little profile, solution projects are high-profile, high-know-how
projects.
All projects are acquired by heads of branch and principal consultant resources and
are delivered by principal consultants (who take the project lead) and consultants. It is
a business policy that a principal consultant should not be involved in more than two
projects at a time.
The firm’s products are shown in Figure 3.

«resource»
Principal

«Transaction»
deliv er consulting 1
serv ices manages acquires

<3

«Service» «resource»
is delivered via IT consulting acquires Head of Branch
serv ices

is sold via

«Transaction»
sell consulting
serv ices
«Service» «Service» «Price»
Fixed Price Time and Material T&M Budget
Proj ect Proj ect
+ Person Days
+ Daily Rate

«Price»
Fixed Price Budget

+ Fixed Price Charge

«Service» «Service» «Service»
deliv ery proj ect consulting proj ect solution proj ect

is part of

1..*

«resource»
provides
Consulting Staff
Member 1 provides

Figure 3: The firm’s products

The main transactions the firm engages in are:

Sell consulting services Consulting services are sold by the heads of branch and the
principal consultants.

Delivery consulting services Consulting services are delivered by principals and consul-
tants.

Maintain business relationships Consulting services are mostly sold to long standing
business relationships. Maintaining business relationships is therefore a core trans-
action in the business model. Business relationships are maintained by the heads
of branch and the principal consultants. Business relationships include contacts
who may become customers and all current customers.

6
 2 The case study

Hire consultants The firm works with few freelance consultants, making the hiring pro-
cess even more important.

Fire consultants The firm has a fairly high fluctuation and so firing consultants is rarely
necessary in practise. A firing policy is currently not included in the model.

2.2 Business model dynamics

The dynamic view of the firm’s business model examines how the elements of the struc-
tural model (such as customers, consultants and projects) are changed by the business
transactions (such as selling projects, hiring and firing consultants) in the behavioural
model.
The structural and behavioural model therefore form an important basis for developing
and validating the dynamic model.
A high-level overview of the firm’s dynamics is depicted in Figure 4 and briefly discussed
here. The details of each module are discussed subsequently:

Principals The principals are the firm’s most senior consultants. Their top priority is
writing proposals that bring new revenue. The remaining time is spent hiring and
firing consultants, managing and working in projects, maintaining business contacts
and creating and standardising new consulting products. Their central role in the
business model is evident from Figure 4: The principal module is the only module
that is connected to all other modules.

Contacts Each principal maintains a list of qualified contacts, who provide leads that
may ultimately lead to new projects and customers—identifying, qualifying and
maintaining contacts costs principal’s time, which is then not available for project
work and consultant management. If the partners invest to little time in their
contacts the number of contacts diminish, ultimately reducing the number of leads
generated.

Projects Principals are also responsible for following up on leads, writing proposals and
winning new projects. Projects may be won from new customers or from current
customers (i.e. new business or repeat business). In the firm’s experience winning a
new customer is much harder than winning repeat business from a current customer,
a fact that is reflected in the model via two distinct sales pipelines, one for new
customers and one for repeat business. The firm just has one product (“consulting
projects”)—projects are characterised by total project effort and the average team
size deployed.

Consultants Consultants are needed to delivery projects and are hired and fired by a
full time recruitment officer, assisted by the principals. The hiring policy is driven
by a yearly consultant growth target. This target is set by senior management
and is independent of immediate demand for consultants by projects—the target

7
 2 The case study

is modelled as a constant, the target setting mechanisms are currently not consid-
ered. A consultant fluctuation rate is included in the model, consultant growth is
constrained by a maximum principal to consultant ratio (the “maximum leverage”).
Customers The customer module discerns between new and mature customers: New
customers require a higher maintenance effort, mature customers are more likely
to purchase substantial solution projects. Customers are maintained by principals,
thus cutting back even further the time principal have for project work. It is
assumed in the model that customers have a very long life time.
Products Principals are responsible for product development. This follows a simple pro-
cess: Innovative ideas that arise in projects are developed into mature, marketable
products. Only marketable products lead to consistently high consulting fees. To
ensure high leverage in projects (i.e. deployment of more junior consultants as op-
posed to principals) these products must be standardised and knowledge transferred
from principals to consultants.
Value Value is calculated via two gross margins: The Gross_Margin_I represents rev-
enues minus direct project costs (which in this model is equivalent to the consultants
wages), Gross_Margin_II is equal to Gross_Margin_I less the sales costs.

+ Projects
+ +

+ Value
+

Customers -- +

+
Consultants
+

-
Principals

-
+

Products
+

Contacts

Figure 4: High-Level dynamics of the firm’s business model

8
 2 The case study

2.2.1 Principal Dynamics

In the current model, the total number of principals consultants is constant. Cur-
rently the firm has fourteen principals (including the four heads of branch) and only
45 consultants in the initial setting—as the desired principal to consultant ratio Maxi-
mum_Leverage is initialised to 20, this restriction is acceptable and does not affect the
analysis:

T otal_P rincipals = P rincipals + Heads_of _Branch (2)

The principals are involved in all major business processes, therefore the main task
of the principal module is to manage and track principals allocation of effort to these
processes. Principals allocate their time according to the following prioritisation:

1. Writing proposals

2. Hiring consultants

3. Working in projects (project management and architectural work)

4. Contact Maintenance (lead generation and client maintenance)

5. Product development

The maximum time principals can allocate is calculated as:

M ax_P rincipal_W ork_Ef f = T otal_P rincipals (3)

× Average_P rincipal_W ork_Ef f

The principals number one priority is to write proposals, in the extreme case they
allocate all their time to this task:

M ax_P rincipal_P roposal_Ef f = (4)

M ax_P rincipal_W ork_Ef f

In most scenarios the actual time allocated to writing proposals is less, the remaining
time is allocated to the next most prior task, hiring consultants:

M ax_P rincipal_Hiring_Ef f = M ax_P rincipal_W ork_Ef f (5)

− P rincipal_W ork_Ef f

9
 2 The case study

The remaining time is shared between projects, contact maintenance, and product
development. As either of these tasks could be a full time task, the principals have to
make a conscious decision concerning their allocation of time between these tasks, leading
to the following equations:

M ax_P rincipal_P roject_Ef f = (6)

M AX(M ax_P roject_T ime_Share
× (M ax_P rincipal_Hiring_Ef f
− Hiring_Ef f ), 0)
M ax_Contact_M aintenance_Ef f = (7)
M AX(M ax_Contact_M aintenance_T ime_Share
× (M ax_P rincipal_Hiring_Ef f
− P rincipal_P roject_Ef f ), 0)
M aximum_P roduct_Ef f = (8)
M AX(0,
M ax_P rincipal_Hiring_Ef f
− P rincipal_P roject_Ef f − Contacting_Ef f )

These dynamics are illustrated in Figure 5.

Contacts.Contacting Effort

Contact maintenance effort

Customers.Customer
Heads of Branch
maintenance effort Maximum Product Effort

Projects.Principal
Project Effort

Maximum Project Time Share

Consultants.Hiring Effort
Total Principals Maximum Contact
Maintenance Effort
Principals
Maximum Principal Project Effort
Projects.Principal
Proposal Effort

Maximum Principal Work Effort

Maximum Principal Hiring Effort Maximum Contact
Maintenance Time Share
Average Principal Work Effort
Maximum Principal
Proposal Effort

Figure 5: High-Level dynamics of principal submodule

2.2.2 Contact Dynamics

Contacts are the basis for lead generation. They follow a fixed life cycle: First they need
to be identified. At this stage a contact is literally just that: contact information be-
longing to a person that may be a potential client of the firm. Identifying contacts takes

10
 2 The case study

time (duration)—the effort is not accounted for separately though, as contacts are mostly
identified while performing other activities (such as working in projects). In the current
model the only source for new contacts are new customers, as most new contacts are made
within projects. Other sources could easily be added, but this does not seem necessary
as there is no bottleneck here. Once contacts have been identified, they need to be qual-
ified: Not all contacts are potential new customers. Contact qualification requires con-
scious principal effort and is therefor constrained by Max_Contact_Qualification_Rate
(which in turn depends on the time principals have available for contact maintenance)
and takes a minimum amount of time Min_Qualification_Dur. Only a certain frac-
tion of identified contacts Contact_Qualification_Frac actually qualify. These leads
to a dynamic qualification rate Contact_Qualification_Rate. This rate is constrained
by the fact that a principal can only manage a limited amount of qualified contacts
(Max_Qualified_Contacts_Per_Principal=50 in the initial setting).
To remain qualified contacts require principals maintenance time, otherwise they fall
back to the identified stage. Identified contacts also have a finite lifetime, defined by
Identified_Contact_Lifetime.
These dynamics are illustrated in Figure 6.

Qualified Contacts Required Contact

maintenance effort

Maximum qualified contacts

Qualified contact
maintenance effort
Minimum Qualification Duration

Qualification Fraction Contact qualification Qualified

rate Contact loss

Maximum Qualification rate Qualified Contact Lifetime

Contact identification Identified contact loss

Identified Contacts

new customer contact potential

identification duration
Identified contact lifetime
Customers.New Customers
identification fraction

Figure 6: High-Level dynamics of contact submodule

11
 2 The case study

2.2.3 Project Dynamics

The project dynamics module is by far the most complex module of the dynamic model:
It contains three separate project acquisition and delivery chains (one chain for each
product: delivery projects, solution projects and consulting projects) and the accounting
mechanisms that track the effort needed from consultants and principals during project
acquisition (e.g. writing proposals) and project delivery. Structurally the chains are
identical, but the actual acquisition and delivery rates differ for each project type and
are matched to the firm’s sales figures with respect to these project types. The structure
of the model will be described here using the project chain for delivery projects.
The project chain models the life-cycle of a project beginning at the initial lead, which
turns into a concrete proposal, then into a project that has been won, and finally into a
project that is delivered and completed.
The chain has two parallel sub-chains: One sub-chain is for projects that are won from
new customers (“first time customer sub-chain”), the second sub-chain is for projects that
are won from mature customers (“repeat customer sub-chain”).
The lead generation rate for first time customers First_Time_Delivery_Lead_Ge-
neration depends directly on the current number of Qualified_Contacts, the fraction of
leads generated from these contacts First_Time_Delivery_Lead_Fraction and the time
it takes to generate these leads First_Time_Delivery_Lead_Generation_Duration.
There are two further influences to the first time lead generation rate: The Lead_Ge-
neration_Pressure and the Effect_of_Delivery_Project_per_Principal:
The Lead_Generation_Pressure represents the idea that the pressure to generate leads
goes down once the targets set by management are achieved. In this case case the
incentive to generate leads is a financial reward that is not capped—therefore there is
always an incentive to generate more leads. For this reason Lead_Generation_Pressure
is set to 1 in this model.
The Effect_of_Delivery_Project_per_Principal arises due to the fact that the num-
ber of projects a principal can manage cannot become too large and is set to

Ef f ect_of _Delivery_P roject_per_P rincipal = (9)

M AX(0, M IN (3 − 2 × Delivery_P roject_per_P rincipal, 1))

This ensures that the incentive to generate new leads goes down once each principal
is responsible for one delivery project on average.
Leads must be further qualified to get to the next stage in the sales process, de-
livering proposals. Qualifying leads does not require any effort, but the qualification
process has a fixed duration of Delivery_Lead_Closing_Duration days. Of course not
all leads actually reach the next stage—only the fraction defined by First_Time_Deli-
very_Lead_Success_Fraction do. This is a constant that is set using historical values
derived from the firm’s sales figures.
Once a project has reached the proposal stage, a large amount of principals effort is
required to move things forward and actually win the project: The less time principals

12
 2 The case study

can invest in writing and closing proposals, the longer this process will take. As writing
proposals is the principals top priority, the time a principal can invest on a proposal only
depends on how many proposals he is currently involved in, i.e. the share of his proposal
time he can devote to a particular proposal, Delivery_Proposal_Effort_Share. This
effort share is calculated as the share of effort required for delivery proposals compared
to the total effort required for proposals:

Delivery_P roposal_Ef f ort_Share = (10)

Required_Delivery_P roposal_Ef f ort
Required_P roposal_Ef f ort
P rincipal_Delivery_P roposal_Ef f ort = (11)
P rincipal_P roposal_Ef f ort × Delivery_P roposal_Ef f ort_Share

The dynamics of writing proposals are illustrated in 7: Depending on the Deliv-

ery_Lead_Success_Rate and the Effort_per_Delivery_Proposal the effort required to
close all proposals accumulates in the stock Delivery_Proposal_Effort.

Required_Delivery_P roposal_Ef f ort = (12)

Delivery_Lead_Success_Rate
× Ef f ort_per_Delivery_P roposal
P rincipal_P roposal_Ef f ort =
M AX(M IN (Required_P roposal_Ef f ort,
P rincipals.M aximum_P rincipal_P roposal_Ef f ort), 0)

The more effort Principal_Delivery_Proposal_Effort that Principals invest into writ-

ing proposals the faster proposals are written and closed:

Delivery_P roposal_W riting_Rate = (13)

P rincipal_Delivery_P roposal_Ef f ort
× Ef f ort_per_Delivery_P roposal

But the closing rate Delivery_Proposal_Closing_Rate does not only depend on the
time principals have available: There is also a fixed minimum duration Minimum_-
Duration_Per_Delivery_Proposal involved. This variable depends on many exogenous
influences and is therefor set to a constant of 40 days.

Delivery_P roposal_Closing_Rate = (14)

M IN (M inimum_Duration_P er_Delivery_P roposal−1 ,
Delivery_P roposal_W riting_Rate)

13
 2 The case study

Delivery Proposal Effort

New Delivery Delivery Proposal Writing Effort

Proposal Effort

Principal Delivery
Proposal Effort
Delivery Proposal Delivery Proposal Writing Rate
Closing Rate Delivery Proposal Effort Share

Principal Proposal Effort

Minimum Duration
Per Delivery Proposal Required Delivery
Proposal Effort
Effort
Delivery Lead Success Rate
per Delivery Proposal

Delivery Project effort

First Time Delivery

Delivery Proposal Lead Success
Effort Fraction
Repeat Delivery
Lead Success

Figure 7: Dynamics of writing proposals

In addition, only a constant fraction First_Time_Delivery_Proposal success fraction

of projects are actually won. This constant was again derived from the firm’s sales figures.
Once projects are won, they wait Average_Time_To_Delivery_Project_Start time
until they are started. Then delivery commences and proceeds at a rate Delivery_Pro-
ject_Completion_Rate.
Project acquisition and delivery dynamics are illustrated in Figure 8.
The delivery rate Delivery_Project_Delivery_Rate depends on how much delivery
capacity is available (i.e. how many consultants are available for project work), and how
much of this capacity is devoted to the current project.
The maximum delivery capacity Maximum_Delivery_Rate is determined by the num-
ber of consultants and principals available for project work.

M aximum_Delivery_Rate = M aximum_Consultant_W ork_Ef f ort (15)

+ M aximum_P rincipal_P roject_Ef f ort

The actual delivery rate may be smaller than maximum capacity though: Depending
on how many projects are in the pipeline, the current demand for consulting power
Demand_Delivery_Rate may be smaller than the current capacity:

Actual_P roject_Delivery_Rate = (16)

M AX(M IN (M aximum_Delivery_Rate, Demand_Delivery_Rate), 0)

14
 2 The case study

Repeat Delivery Lead Fraction

Customers.Mature Customers

Repeat Delivery Leads Repeat Delivery Proposals

Repeat Delivery
Repeat Delivery Lead Generation
Lead Success Repeat Delivery
Delivery Project effort Proposal
Repeat Delivery Repeat Delivery Success
Lead Loss Proposal Loss
Customer Delivery Lead
Generation duration Delivery Lead
Closing Duration
Products.Project Leverage Delivery Proposal
Closing Rate
Effect of Delivery Delivery Project effort
Project per Principal Average Time To
Repeat Delivery Lead
Delivery Project Start
Lead Generation Pressure Success Fraction Repeat Delivery Proposal
Delivery Project per Principal Success Fraction
First time delivery lead First Time Delivery Leads Active Delivery Projects
First Time Delivery Proposals Delivery Projects won
generation duration

First Time First Time Delivery Delivery Delivery

First Time Delivery
Delivery Lead Proposal success Project start Project completion
Lead Success
Generation
First Time
First time delivery Delivery Lead
lead fraction Loss First Time Delivery
Proposal Loss
Delivery Proposal Delivery Project Delivery Rate
Delivery Lead Closing Rate
Closing Duration
Contacts.Qualified Contacts First Time Delivery Proposal success
fraction
First Time Delivery
Lead success fraction

Figure 8: High-Level dynamics of project acquisition and delivery

The demand delivery rate is simply calculated from the staff requirements for each
project category:

Demand_Delivery_Rate = Average_W ork_Rate (17)

× (Delivery_P rojects_Staf f _N eeded
+ Consulting_P rojects_Staf f _N eeded
+ Solution_P rojects_Staf f _N eeded)

In practice, projects mostly begin even if full man-power is not yet available, so it
is acceptable to allocate delivery capacity evenly between projects. So, putting all this
together, the Delivery_Project_Completion_Rate can be modelled as follows:

Delivery_P roject_Completion_Rate = Actual_P roject_Delivery_Rate (18)

Delivery_P rojects_Staf f _N eeded
×
T otal_P roject_Staf f _N eeded

Project effort accounting structures are illustrated in Figure 9.

15
 2 The case study

Delivery Project per Principal Consultants.Consultants

Principals.Principals
Active Delivery Projects

Principals.Maximum
Principal Project Effort
Maximum Delivery Rate
Active Delivery Projects
Products.Project Leverage
Total Consulting Staff

Maximum Consultant Work Effort

Delivery Projects Staff needed

Consultants needed

Total Project Staff needed

Active Consulting Projects

Consulting Projects Staff needed Average work rate

Demand Delivery Rate

Consulting Project Leverage

Solution Projects Staff Needed Actual Project Delivery Rate
Active Solution Projects Maximum Consultant Work Effort

Principals.Maximum
Principal Project Effort
Principal Work Effort

Utilization %

Solution Project Leverage Total Project Staff needed Consulting Projects Staff needed

Delivery Project Delivery Rate

Solution Projects Staff Needed Consulting Project Delivery Rate
Solution Project Delivery Rate Delivery Projects Staff needed

Figure 9: Project effort accounting

2.2.4 Consultant Dynamics

Consultant dynamics are simple compared to the project dynamics:
The initial number of consultants is set to 45, the number of consultants varies accord-
ing to the fluctuation rates and hiring rates. Active firing of consultants is not considered
in this model, as this rarely occurs in practice.
The fluctuation rate is a constant that is set to 20% per year. The hiring rate depends
on a number of factors: The firm sets an annual consultant growth target which is also a
constant of 20% per year in the current model. Another factor influencing the hiring rate
is the number of consultants needed due to projects that have already been sold—this
factor Consultants_Needed is defined in the projects module.
The next factor influencing the hiring rate is the maximum consultant leverage Max-
imum_Leverage a principal can achieve: This represents the number of consultants a
principal can manage next to his client maintenance and project acquisition and delivery
effort. Currently Maximum_Leverage is set to 20 (at least two senior consultants and
up to 18 junior consultants).
Finally the hiring rate also depends on the average time it takes to hire a new consul-
tant, defined by Average_Hiring_Duration in the model. This constant value is set to
60 days in the model.

Hiring_Rate = M AX(M IN (M AX(Consultant_T arget, Consultants_N eeded), (19)

16
 2 The case study

P rincipals × M aximum_Leverage)
− Consultants, 0)
× Average_Hiring_Duration−1

Consultant dynamics are illustrated in Figure 10.

Projects.Consultants needed
Annual Consultant
Growth Target %

Consultant Target

Fluctuation Rate
Hiring Ef f ort
Consultants
Hiring Ef f ort per Hire

Hire Rate Fluctuation

Principals.Maximum Principal
Hiring Effort

Av erage Hiring Duration

Maximum Lev erage

Principals.Principals

Lev erage

Figure 10: Consultant dynamics

2.2.5 Customer Dynamics

Customer dynamics are kept simple: The model differentiates between new customers
and mature customers. The differentiation is necessary because some services (such as
delivery projects) cannot be sold to new customers.
A new customer is recorded every time a service is sold successfully to a new customer.
Effort must be spent on customer maintenance to ensure customers are not lost. New
customers that are successfully retained become mature customers after the MATUR-
ING_DURATION, whose initial setting is 216 days (i.e. one year).
Once customers are mature they again require maintenance effort to ensure they are
not lost. Customer maintenance is done by principals. Their maximum time available
for contact maintenance is allocated between new and mature customers proportionally.
Customer dynamics are illustrated in Figure 11.

17
 2 The case study

Total Customers

New Customers
Mature Customers

Customer acquisition Customer maturing

Customer attrition

Customer Project Conv ersion Maturing duration

New customer loss Customer Lif etime

Mature customer loss

Projects.First Time
Solution Proposal
Success
Customer errosion time
Projects.First Time Delivery
Proposal success

Projects.First Time Required mature customer

Consulting Proposal maintenance ef f ort
Required new customer
Success maintenance ef f ort

New customer contact

maintenance ef f ort share
Mature customer
maintenance ef f ort
New customer New customer contact per customer
Mature customer contact
maintenance maintenance ef f ort
maintenance ef f ort
ef f ort per customer

Principals.Maximum Contact
Maintenance Effort Customer maintenance ef f ort

Figure 11: Customer dynamics

2.2.6 Product Dynamics

Product (or service) innovation is the responsibility of the principal consultants. The
product life-cycle follows a simple pattern which is modelled as a product development
chain: New ideas are considered innovation products. Some ideas are rejected, others
are developed into Marketable_Products. Marketable products are products that can
be marketed to customers and can be delivered by the principals involved in product
development. To ensure high leverage in projects these products must be standardised
into Standardized_Products.
Creating an innovation product requires effort, determined by the constant Required_-
Product_Innovation_Effort. Depending on the time Product_Innovation_Effort prin-
cipals allocate to product innovation, the innovation rate is calculated as
P roduct_Innovation_Ef f ort
P roduct_Innovation_Rate = (20)
Required_P roduct_Innovation_Ef f ort

Similar equations hold for product development and standardisation rates. Depending
on the typical P roduct_Lif etime, products become obsolete.
A simple model of the product life-cycle is illustrated in Figure 12. Though the firm’s
product development process is not formalised, this fits well into processes described in
literature (Young, 1961, p. 249). In the current model only the time required by principal
consultants is considered, time required by consultants for training is omitted.
On the basis of the product life cycle two key performance indicators can be determined:

18
 2 The case study

Principals.Maximum Product Effort

Product Standardisation Ef f ort %

Product Marketing Ef f ort %

Product Innv oation Ef f ort %

Product Standardisation Ef f ort

Required Product
Product Innov ation Ef f ort Marketing ef f ort
Required Product
Product Marketing Ef f ort Standardisation ef f ort
Product Lif etime

Required Product
Innov ation Ef f ort Standardised Product
Innov ation Product Marketable Product

Product Standardization Rate Product Obsolescence Rate

Product Innov ation Rate Product Marketing Rate

Innov ation Reject

Marketing Reject

Innov ation Reject Fraction Dev elopment Reject Fraction

Innov ation Reject Duration

Dev elopment Reject Duration

Figure 12: Product dynamics

Time to market This measures the average time it takes from the conception of an
innovative idea to the creation of the marketing materials and reference projects
that are needed to successfully sell projects based on the idea.

Time to standardisation This measures the average time it takes from the conception
of an innovative idea to the creation of training materials and the training of junior
consultants that is necessary to ensure projects based on the new idea can be
delivery by junior consultants.

It is assumed that the time to market of innovative ideas has an effect on the average
consulting fee that can be realised by the firm, and that time to standardisation has
an effect on the project leverage—these causal effects are mentioned in Maister (1997,
p. 38) and are part of senior staffs mental model, but no thorough analysis or study
showing this effect could be found in literature. A recommendation was made to senior
management to set up a measurement program to validate the model.
The effect of time to standardisation on project leverage was modelled as illustrated in
Figure 13: Project leverage is modelled as a stock that can fall as low as M inimum_P ro-
ject_Leverage and rise as high as M aximum_P roject_Leverage, depending on the
flows Leverage_W in and Leverage_Loss. If T ime_to_standardisation is too long,
then Leverage_W in is zero and Leverage_Loss is positive, leading P roject_Leverage
to diminish at a rate determined by the P roject_Leverage_Adjustment time. But if
T ime_to_standardisation is short (smaller than a constant defined by T ime_to_stan-
dardisation_excellence), then Leverage_W in is positive and Leverage_Loss is zero.
So when

19
 2 The case study

T ime_to_standardisation < T ime_to_standardisation_excellence (21)

this leads to the following equation for Leverage_win (the equations for Leverage_-
Loss are the exact opposite):

Leverage_win = M AX((M aximum_P roject_Leverage

− P roject_Leverage)/Leveragea djustmentt ime, 0) (22)

The fee level dynamics are modelled analogously.

Project Lev erage %

Maximum Project Lev erage
Minimum Project Lev erage

Project Lev erage

Time to standardization
excellence
Lev erage win Lev erage loss

Product Standardisation Effort

Lev erage adjustment time
Time to standardisation

Required Product
Standardisation effort

Figure 13: Project leverage dynamics

2.2.7 Value Dynamics

The value generated is calculated via two gross margins—Gross_margin_I and Gross-
_margin_II—via the following formulae:

Gross_M argin_I = Revenue − Consultant_Cost

T ravel_Expense_%
× (1 + ) (23)
100
Gross_M argin_II = Gross_M argin_I − Sales_Cost (24)

The revenue is accumulated daily from the consultant fees earned in project delivery.
The consultant costs are accumulated from daily principal and consultant wages and the
monthly bonus. The sales cost is accumulated from daily head of branch wages.

20
 2 The case study

2.3 Scenarios
Matching the strategic question three scenarios were developed that differ according to
how principals allocate their time to their main tasks: writing proposals, hiring new
consultants, working in projects, maintaining customers and developing new products.

2.3.1 Scenario 1—Base Case

The objective of the base case is to ensure the model is calibrated to match the reference
mode, which was chosen to be the firm’s revenue development in recent years. In this
scenario, principals devote their time to writing proposals and hiring consultants as
needed. They spend up to 50% of their remaining time working projects, again as
needed. Of the time remaining up to 50% is spent maintaining contacts. All of their
remaining time is then spent on product innovation, with no time spent on creating
marketing materials and standardisation.
Once the model has settled into steady behaviour the principals spend over 40% of
their time working in projects, around 20% of their time on product development, and
another 20% maintaining current customers. Just under 10% of their time is spent on
writing proposals, the remaining few percent on contact maintenance and hiring new
consultants. This behaviour is shown in Figure 14

Scenario 1 Time Allocation

100

Product Effort %
Project Effort %
Proposal Effort %
80

Contacting Effort %
Customer Maint. Effort %

Hiring Effort %
60
Percent

40
20
0

0 20 40 60 80 100 120

Months

Figure 14: Scenario 1 Time Allocation

The resulting financial performance over a time period of ten years is displayed in
Figure 15: Once the model has settled into a steady state the revenue growth rate

21
 2 The case study

is less than 6% per annum. This is mainly due to the fact that the company relies
almost exclusively on maintaining current customers and does too little in acquiring new
customers. Project leverage is also low due to the fact that no time is spent on product
standardisation. As a result projects are mostly only staffed by one consultant (a service
commonly referred to as “body leasing”).

Scenario 1 Financials

Gross Margin I
8000

Gross Margin II
Thousand Euros

Revenue
4000
0

0 20 40 60 80 100 120

Months

Figure 15: Scenario 1 Financial Performance

The resulting Maister KPI’s are displayed in Figure 16: Overall utilisation is good
(over 80%), but leverage is low (around 20% of the maximum leverage) and both the
average consulting fee as the project leverage remain at 0% (of the maximum consulting
fee and project leverage respectively). Speaking in terms defined in (Maister, 1997, p.
32), the company is concentrating too much on the hygiene factors utilisation and margin
and not on the health factors consulting fees and leverage.

2.3.2 Scenario 2—Concentrate on the Customer

In this scenario management implements new policies concerning principals time alloca-
tion: principals now spend no time at all earning fees in projects, but concentrate 100%
of their time on client and contact maintenance. Their behaviour regarding product
development is left unchanged.
This change in policy is reflected in the actual time allocation behaviour as displayed
in Figure 17: Contact maintenance time is now stable at around 10%. As expected time
spent on writing proposal’s increases steadily, leading to new clients and more and more
time spent on client maintenance. This leads to new client’s and the resulting growth
means there is a yearly peak in time spent hiring new consultants. The growth also
means that less and less time is available for product development.

22
 2 The case study

Scenario 1 Maister KPIs

100
80

Project Leverage %
60
Percent

Average Consulting Fee %

Leverage %
40

Utilization %
20
0

0 20 40 60 80 100 120

Months

Figure 16: Scenario 1 Maister KPIs

Scenario 2 Time Allocation

100

Product Effort %
Project Effort %
Proposal Effort %
80

Contacting Effort %
Customer Maint. Effort %

Hiring Effort %
60
Percent

40
20
0

0 20 40 60 80 100 120

Months

Figure 17: Scenario 2 Time Allocation

23
 2 The case study

The resulting financial performance is displayed in Figure 18: Once the company settles
into a steady behaviour revenue grow’s steadily at around 15% per annum.

Scenario 2 Financials

Gross Margin I
15000

Gross Margin II
Thousand Euros

Revenue
5000
0

0 20 40 60 80 100 120

Months

Figure 18: Scenario 2 Financial Performance

The growth is also reflected in the Maister KPI’s: Utilisation is still good but now
slightly under 80% due to the fact principals do not earn fees themselves. Due to the
growth in consultants the leverage also increases because the number of principals remains
fixed. The leverage is still only at most 50% of maximum, showing the company still has
too many principals. The health factors project leverage and consulting fee still have not
been addressed by the new policies and they therefore both remain at 0%.

2.3.3 Scenario 3—Innovate and Standardise

In this scenario management decides to add new policies concerning the health factors
project leverage and consulting fees, ensure that principals now also spend time on cre-
ating marketing materials and standardising products. Little experience exists in the
field of product development and standardisation, so time is allocated according to the
relative efforts required by innovation, marketing and standardisation—innovation time
is set to 9%, marketing time is set to 30% and standardisation time is set to 61%.
Overall time allocation behaviour is similar to that of scenario 2—due to increased
project leverage the projects are delivered more rapidly, which means more proposals
need to be written overall, increasing the proposal writing time. The time allocation
behaviour is displayed in Figure 20
The resulting financial performance is displayed in Figure 21: Due to increased average
fees the revenue quickly jumps to a much higher level, but shrinks in year 3 and 4.
This is due to the fact that the time available for product development quickly dwindles
due to the increased time principals must spend writing proposals. So after an initial

24
 2 The case study

Scenario 2 Maister KPIs

100
80
60
Percent

40

Project Leverage %
Average Consulting Fee %
20

Leverage %
Utilization %
0

0 20 40 60 80 100 120

Months

Figure 19: Scenario 2 Maister KPIs

Scenario 3 Time Allocation

100

Product Effort %
Project Effort %
Proposal Effort %
80

Contacting Effort %
Customer Maint. Effort %

Hiring Effort %
60
Percent

40
20
0

0 20 40 60 80 100 120

Months

Figure 20: Scenario 3 Time Allocation

25
 3 Conclusions

Scenario 3 Financials

Gross Margin I
Gross Margin II
15000
Thousand Euros

Revenue
5000
0

0 20 40 60 80 100 120

Months

Figure 21: Scenario 3 Financial Performance

period of successful product development both the average fees and the project leverage
rapidly decline again, as displayed in Figure 22.

3 Conclusions
The prominent role the principal consultants play within the firm’s business model is
made clear by the model elaborated in the previous sections: The principals are key to
all of the business transactions relevant to value creation, and the way they allocate their
time to these transactions is critical to ongoing success.
The simulation scenarios demonstrate the impact the time allocation policies have on
the key performance indicators (Maister KPIs): The firm could generate even better
results (especially higher leverage and fees) by simply changing the way their principal
consultants allocate their time, without having to improve the underlying sales success
parameters:

• The firm’s current focus on high utilisation of principal consultants may seem
attractive in the short term, but it keeps the firm from growing in the long term: A
lot could be gained by refocusing effort from project delivery to project acquisition
and contact maintenance.

• It is important that principals spent time on service innovation, but currently they
concentrate to much on innovation and to little on the marketability (which brings
higher fees) and standardisation (which brings higher project leverage).

• While the service development model reflects the firm’s practice and is also grounded

26
 References

Scenario 3 Maister KPIs

100
80
60
Percent

40

Project Leverage %
Average Consulting Fee %
20

Leverage %
Utilization %
0

0 20 40 60 80 100 120

Months

Figure 22: Scenario 3 Maister KPIs

in literature, the positive effect service development may have on both average fees
and on project leverage is not—the firm should therefore set up a measurement
program to track both the time principals spend on product development and also
monitor the effect this may have on fees and leverage.

References
Bayer, S. and D. Gann (2006). Balancing work:bidding strategies and workload dynamics
in a project-based professional service organisation. System Dynamics Review 22, 185–
211.

Kunc, M. (2008). Achieving a balanced organisational structure in professional service

firms: some lessons from a modeling project. System Dynamics Review 24, 119–143.

Maister, D. H. (1997). Managing the Professional Service Firm (new ed.). Free Press
Paperbacks.

Miller, R., S. Heimann, T. Tuleja, and J. Coghlan (2005). The New Conceptual Sell-
ing: The Most Effective and Proven Method for Face-to-Face Sales Planning (Revised
Updated Edition ed.). Business Plus.

Miller, R., S. Heimann, T. Tuleja, and J. Marriot (2005). The New Strategic Selling:
The Unique Sales System Proven Successful by the World’s Best Companies (Paperback
(Revised Updated Edition ed.). Business Plus.

27
 References

Rode, N. (2001). Wissensmarketing - Strategische Entscheidungsoptionen für Anbieter

von Wissen. Gabler.

Warren, K. (1998). The Professional Services Microworld. Princes Risborough, UK:

Global Strategy Dynamics.

Young, L. (1961). Marketing the professional service firm. Wiley.

28