Creating a professional services pricing model

A friend of mine came looking for some general feedback about how people approach billing for professional services. They were selling to enterprise clients, mostly in financial services and insurance, and were starting to see more and more of their time and resources spent on integrations, configuring and delivering hardware, and offering ongoing support past the sale.

I’ve helped spin up a handful of hardware/software PS teams. Some general guidance on this is below:

  1. Structure your pricing against 3-4x fully-burdened cost. Rates may be different per employee role. Think hourly rates, hours per project, etc. Here’s a personal example of pricing:
    1. In a past life, I showed up as a fully burdened cost of ~$140k. I was billed out at $225-275/hr in a direct model.
    2. Napkin math on $140,000 against 2080 business hours per year is $67, times 3 and we’re at $200 an hour. 
    3. But you aren’t getting 100% billable utilization, you’re getting more like 60-80% depending on the business. A lot of law firms follow an 80% billable time model, meaning partners need to spend 80% of their time on billable activities.
    4. 80% of 2080 is ~1660, $140k/1660 is ~$84, times 3 is $250…
    5. Thus we’re back to our range of $225-275/hr.
  2. In Enterprise IT, it’s common to see a 3x rate for a direct model and 4x for a channel distribution model. The latter is due to margin pressure and additional risk.
  3. Whether project management billables are based on an hourly rate, included in the overall rate card, or charged as a percentage of each project is largely up to you; note the “percentage of project” option is one I’ve seen more in the construction industry than anywhere else.

For deeper reading on professional services billing, I strongly recommend reading SPI’s annual “Professional Services Maturity Benchmark” reports. These give an outstanding level of detail on all-things professional services: business models, metrics, packaging, pricing, talent, financial metrics and modeling, and more. It’ll give you a lot to work with in terms of strategic planning and reverse-engineering your models, metrics, budgeting, etc.

About the Benchmark:

In 2007, SPI Research developed the PS Maturity Model™ as a strategic planning and management framework. It is now the industry-leading performance improvement tool used by over 15,000 service and project-oriented organizations to chart their course to service excellence. The PS Maturity™ model helps executives compare and analyze their own performance so they can build consensus around the actions to take, and where to start, while quantifying the benefits of change. Analyzing the benchmark data by vertical market, geographic region and organization size gives PS executives an accurate comparison to their peers and the market at large. Over 3,000 firms have completed SPI’s benchmarking surveys over the past ten years.

You can find the 2019 report at https://www.kimbleapps.com/resources/2019-professional-services-maturity-benchmark-download/

If you want to compare against the 2018 report, you can find that at https://www.kimbleapps.com/resources/professional-services-maturity-benchmark-download/

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