Many of our Professional Service Organization (PSO) firms are forecasting for 2017. If you are not, you will be shortly! Forecasting doesn’t require a crystal ball, a furry groundhog or any mystical devices. Instead, modern PSO’s need the right tools and technologies to meet their forecasting needs.
There are typically three elements of services revenue forecasting that are required:
- High-level Services Forecasting
- Project Backlog-Based Forecasting
- Milestone-Based Forecasting
High-Level Services Forecasting
Some PSO’s will forecast their high-level services by factoring out the data elements in a modern Professional Services Automation (PSA) solution such as an aggregate of resources, average rate, target billability, PTO and then producing the results based off of simple math: Net Available to Bill x Average Rate. This produces the highest level of forecast for a practice.
Project Backlog-Based Forecasting
To produce project backlog based forecasting requires key elements in a PSA solution such as Roles, Team Members, Target Utilization, Selling Rates, Timeline, Hours and other data elements to produce a forecast. Modern PSA solutions, like Microsoft Dynamics PSA, tracks all of these factors and thus, upon booking team members to a project, it becomes simple math on a project, program or practice level to get your forecasting completed. This type of forecasting is for very heavy project dependent organizations where projects are the main driver of revenue.
Milestone forecasting is actually more difficult to project in some respects. With a Time & Materials heavy PSO, you can typically assume revenue will be fairly even over each month based upon a premise that people will be incented to keep busy. If a project pauses, then it is assumed that those available hours in a day will be consumed by other work. However, if a milestone is pushed out by a month, or a quarter, that milestone payment and revenue recognition will also get pushed. Yes, the work still gets filled in but big buckets of revenue get pushed by a quarter versus lots of little buckets of revenue. Thus, to manage this complexity, it is imperative that a PSO keep focused on the milestones that pull revenue into the present. This is only achievable by having a modern PSA solution.
Forecast vs. Actual
With these elements of services forecasting in mind, I think it is important to consider what an acceptable variance should be between forecast versus actual. For example, let’s say a practice (an established firm, with mature growth and a mature product/service mix doing quarterly services forecasting) in a PSO forecasts $600,000 in quarterly revenue and comes in at $500,000. What variance percentage would be deemed acceptable? 10% +/- or 20% or something else?
I reached out to Dave Hofferberth of Services Performance Insights and publisher of the SPI annual Professional Services Benchmark Report, for his thoughts. Dave’s responded they have not asked this question in the Benchmark Survey in several years, but provided a table of responses seen below.
“Obviously, it should be low, and the table shows the top 10% (of PSO’s) keep it around 10%,” Dave explained. “Variance is not good as you know. Selling not enough services is bad, but also selling too much is bad as well– you may not have enough resources to deliver.”
Thus, it is clearly just as important to forecast work accurately for a PSO because it drives headcount changes, talent acquisition, anticipates services consumption rates and changes, which may indicate the need for services innovation. Adequate staffing levels for a PSO has a direct correlation to customer satisfaction, delivery success and repeat business, as well as employee morale and decreased attrition.
In conclusion, forecasting predicts revenue, headcount, services consumption, customer satisfaction and overall project excellence. In order to that, you must have the best tools and technology to utilize. Tribridge can help you understand how to best use a PSA solution to forecast for your company, practice and projects.
Download our new eBook, The New Vision for Project Service Performance, to learn more about how a PSA solution can help you deliver predictable on-time, on-budget projects with process automation and data accuracy.