Are your bill rates competitive?

Are your bill rates competitive?

FinancialForce
Jo Birtle

Professional services organization (PSO) executives continue to ask about bill rates. They need this information to understand how their organization is positioned from a pricing perspective relative to the market, and to make decisions on how much more or less they should charge, depending on their own and their clients’ perception of the business value they provide.  They need bill rate information to push back on their sales and finance counterparts when asked for price concessions or PS margin improvement. 

Pricing information also provides insight into the health of the overall service market and a gauge for market expansion or contraction.  And finally, pricing is one of the most visible and controllable levers service organizations have when seeking to improve profitability.

In the past three years, as the market suffered from global economic doldrums, PSOs experienced significant bill rate pressure causing many firms to discount heavily and make price concessions to win business.  In 2010 and through the first half of 2011 the economy appears to be growing again; although slowly, and bill rates have begun to rise.  

Until the recent debt crisis caused a new round of recessionary fears, the greatest challenge reported from 30 client phone interviews has been managing growth.  After two years of layoffs, headcount cuts and salary freezes, many firms are hiring again but are finding few qualified resources.  Firms are reinvigorating their recruiting pipelines and reinvesting in new-hire training and ramping programs.

Increasingly, firms are expanding their recruiting horizons to include recent college graduates, home-based consultants, subcontractors and offshore and near-shore resources.  The war for talent is driving increased resource management and pricing complexity, which means firms must constantly re-evaluate their pricing and staffing strategies.

SPI Research recently published a new report the “2011 Professional Services Global Pricing Report” (http://www.spiresearch.com/reports/rpt11PSPS.htm), which surveyed over 200 firms from around the world representing nearly 12,000 consultants.  The report analyzes bill rates by job title, geography and PS vertical to show published and realized rates around the globe. The following sections highlight some of the key findings of the report. 

Published versus realized rates

This study compares PSOs’ published bill rates versus realized bill rates.  In other words, the actual hourly bill rate firms receive.  In general, realized rates are approximately 80 to 90 percent of published list rates.  The difference between published and realized rates reflects both discounts and written-off consulting hours.

The report examines four primary job categories (management, project management, business consulting, and technical consulting), with three corresponding experience levels per job family.  For the 12 job titles SPI Research analyzed in this report, technical consultants achieved the highest percentage of realized rates with a realized rate of 90 percent of the published rate.  Interestingly, SPI Research found the greatest disparity between published and realized rates was associated with the most senior level positions in each job category.  In other words, the most senior resources in any job category commanded the highest list rates but also reported the highest levels of discounting.  Key questions around lower price realization are: Is the high level of discounting due to an excessively high target bill rate? Or is there more room for discounting because of a higher list rate? Or is it hard to establish incremental value for more senior resources?  SPI Research suspects the answer is based on a combination of these factors. 

Service Performance Insight Founder and Managing Director, R. David Hofferberth, P.E., has over 25 years experience in information technology (IT) serving as an industry analyst, product director and consultant. Hofferberth’s research is focused on the services economy, and in particular, on white-collar productivity issues and the technologies that help people perform at their highest capacity.

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