We all know that consistency, standardization, and repeatability will undeniably increase profitability for your service organization. Improved service delivery is the most direct route to acquire and retain customers; and improved efficiency reduces costs and increases margins.
Any Professional Services Organization (PSO) of reasonable capacity needs a PMO to effectively and efficiently achieve its organizational goals. Then why do so many PSOs hesitate to dedicate the budget and time needed to build an impactful PMO?
PMOs are misunderstood creatures. Many PSO directors are unable to convey or even recognize the value of a PMO, leaving the development and maintenance of standards and methodologies as an afterthought when existing project managers have the time. The truth is it takes an organizational and financial commitment to institutionalize project delivery excellence. Studies show there is a strong relationship between the existence of a PMO and project success. An effective PMO will:
- Establish and manage project delivery methodology and supporting tools
- Produce project reviews and audits
- Provide direct support for project managers on complex projects
- Support and offer resolutions to ‘at risk’ projects
- Monitor and facilitate knowledge development and training for project managers
The Benefits of Having a PMO
There is unquestionable evidence that the existence of a PMO results in improved project success. Based on data provided by the Technology Services Industry Association (TSIA), existence of a PMO has a significant impact on the two most critical project measures: budget and schedule as reflected in the graphs below.
While this data represents the results of 2014, TSIA has gathered this data from many PSOs over the years and the results have remained consistent. Project performance is substantially improved when supported by a PMO.
PMO Return on Investment
Now that we have established the value of introducing an effective PMO to your services organization, let’s take a look at the impact to your bottom line.
On the investment side, we will use the rule of thumb for PMO staff levels of between 0.5% – 1.0%, or a 100 to 1 ratio, of the delivery staff. (The PMO would lean toward the higher end if your organization operates globally.) The cost of a resource can vary by region, but we will assume an average loaded cost of $120k per year for experienced project managers. So, a 100 staff PSO would require a cost of $120k per year, a 500 staff PSO $600k per year.
To calculate return let’s focus primarily on improved project margin performance. First, let’s establish the value of our project portfolio. Using the assumption of revenue per billable staff at $225,000 per year, a 100 person staff should generate $22,500,000 of delivery revenue annually, all other things being equal (including partner usage).
Next, the data shows that 14% of projects are improved (from being over budget to being under) with the presence of a PMO, so we know PMOs have a positive impact on project margin. We have to make some assumptions on what that improvement is. To do this, RTMC’s PMO ROI table calculates ROI based on a range of 1% – 5% of margin improvement, representing a low, medium and high range of improvement.
The table offers some very compelling rational to invest in a PMO environment. Even in the most conservative improvement results, the PMO more than pays for itself.
The bottom line is PMOs are worth the investment. Having one signals to your organization, your company and your customers that you take delivery excellence seriously. In addition to creating this culture, PMOs deliver measurable value through better project execution (on time, on budget). For a PSO with 500 billable staff, a 3% improvement in project margin can result in over $2.75M to the bottom line. If you do not have a PMO, create one. If you have an ineffective one, double down and make it better!