Home > Articles > Software Development & Management

Three R's: Profitability Levers for Professional Services

Thomas Lah outlines the primary levers that must be managed for your Professional Services business unit to reach acceptable profitability levels: Revenue, References, and Repeatability.
Like this article? We recommend

Within a product technology company, the Professional Services (PS) business unit is often one of the most poorly performing organizations in terms of financial objectives. The PS business struggles with achieving target gross margins and bottom line profitability. The many reasons for this poor performance range from internal alignment to compensation practices. In this article, however, I want to focus on the primary levers that must be managed for PS to reach acceptable profitability levels.

In any business based on profit and loss (P&L), the ultimate strategy is quite straightforward: Make more than you spend. The Professional Services business inside a product company is no different. There may be a spectrum of acceptable profitability based on how much product the services pull through, but at the end of the day the Professional Services business unit is usually required to carry its own water. How best to do that? What are the key levers you can use to drive a profitable professional services business?

An old business saying states there are only two ways to improve profitability in a business: You either raise the bridge (increase prices) or lower the water level (reduce costs). This simple universal business law clearly applies to a professional services organization. Specifically, the growth and success of a professional services organization is driven by three critical variables:

  • Revenue
  • References
  • Repeatability

Revenue and references raise the bridge; repeatability helps lower the water. Every activity should be targeted at improving one of these three variables. If you're not improving in these three areas, you're probably not improving the health of your business. That is why I refer to this as the iron triangle of PS profitability (see Figure 1). Without the concepts of this triangle firmly in place, it's very difficult for the professional services business unit to be profitable. Break this iron triangle, and you dramatically reduce your chance for success.

Figure 1Figure 1 PS triangle of profitability.


Revenue is obviously the first and foremost variable that a consulting organization must manage. It seems simple, but of course it isn't. There are many components to the revenue variable that must be understood and managed.

Revenue Types

There are three types of revenue for a Professional Services business (see Figure 2):

  • Direct revenue comes from billing out your direct consulting resources.

  • Pass-through revenue comes from passing through the products and services of other companies.

  • Reusable IP revenue is generated whenever your service organization is able to take the deliverables from one engagement and reuse them to generate more revenue.

    Figure 2Figure 2 Revenue types.

With pass-through revenue, you simply "pass through" the expertise that belongs to others. Direct revenue provides better gross margins (20–40%) than pass-through revenues (10–20%) because the end customer will allow you to charge only so much "uplift" for managing other companies. Typically, you can't tack on more than 15% when selling someone else's services. With direct revenue, you deliver the goods yourself and receive the entire margin associated with the service. Here's another benefit of direct revenue: When you're driving direct revenue, your employees deliver solutions themselves and build valuable expertise for which customers will pay a premium. These direct revenue activities allow you to build valuable intellectual property and reuse it. Which brings us to reusable IP revenue, the most attractive revenue of all. Reusable IP can bring gross margins anywhere from 50–100%, based on how much your service staff needs to fine-tune the deliverables from customer to customer.

Revenue Mix

The term revenue mix refers to the combination of direct revenue, pass-through revenue, and reusable IP revenue generated by an organization. The more direct revenue and reusable IP revenue you have in your mix, the better your gross margins. To prove this point, let's consider two firms that have different revenue mixes. Firm A has a revenue mix of 30/70/0. That is, 30% of their revenue comes from direct revenue, 70% comes from pass-through revenue, and 0% comes from any type of reusable IP. Firm B has a slightly different revenue mix of 60/30/10. In Firm B, 60% of revenues come from direct revenue, 30% from pass-through revenue, and 10% from high-margin reusable IP. Table 1 shows the impact this mix has on overall gross margins. Due to the healthier revenue mix, Firm B benefits with a gross margin 12.5 points better than Firm A!

Table 1 Revenue Mix


Firm A

Firm B

Annual revenue (millions)



Direct revenue



Pass-through revenue



Reusable IP revenue



Average margin on pass-through services



Average margin on direct services



Average margin on reusable IP



Average Gross Margin Percentage



Revenue Growth Rate

Revenue growth is typically a desirable objective. Almost every business has the objective to grow the top line. But with professional services, a cost is associated with aggressive revenue growth. The faster you grow your revenue, the lower your profitability will be. This correlation occurs for two reasons:

  • First of all, to grow direct revenue you need to hire consultants. When you hire new employees, a ramp-up is involved: New employees need training, onsite mentoring, and so on. With all this activity, your billable hours decline, which cuts into profitability.

  • The second reason relates to the revenue mix. Large growth rates in professional services revenues are usually fueled by driving large amounts of pass-through revenues. As described earlier, a revenue mix that's heavily loaded in pass-through will not result in high gross margins.

Figure 3 demonstrates how profitability and revenue growth curves could look over a four-year time horizon for a new professional services firm.

Figure 3Figure 3 Growth versus profitability.

InformIT Promotional Mailings & Special Offers

I would like to receive exclusive offers and hear about products from InformIT and its family of brands. I can unsubscribe at any time.


Pearson Education, Inc., 221 River Street, Hoboken, New Jersey 07030, (Pearson) presents this site to provide information about products and services that can be purchased through this site.

This privacy notice provides an overview of our commitment to privacy and describes how we collect, protect, use and share personal information collected through this site. Please note that other Pearson websites and online products and services have their own separate privacy policies.

Collection and Use of Information

To conduct business and deliver products and services, Pearson collects and uses personal information in several ways in connection with this site, including:

Questions and Inquiries

For inquiries and questions, we collect the inquiry or question, together with name, contact details (email address, phone number and mailing address) and any other additional information voluntarily submitted to us through a Contact Us form or an email. We use this information to address the inquiry and respond to the question.

Online Store

For orders and purchases placed through our online store on this site, we collect order details, name, institution name and address (if applicable), email address, phone number, shipping and billing addresses, credit/debit card information, shipping options and any instructions. We use this information to complete transactions, fulfill orders, communicate with individuals placing orders or visiting the online store, and for related purposes.


Pearson may offer opportunities to provide feedback or participate in surveys, including surveys evaluating Pearson products, services or sites. Participation is voluntary. Pearson collects information requested in the survey questions and uses the information to evaluate, support, maintain and improve products, services or sites, develop new products and services, conduct educational research and for other purposes specified in the survey.

Contests and Drawings

Occasionally, we may sponsor a contest or drawing. Participation is optional. Pearson collects name, contact information and other information specified on the entry form for the contest or drawing to conduct the contest or drawing. Pearson may collect additional personal information from the winners of a contest or drawing in order to award the prize and for tax reporting purposes, as required by law.


If you have elected to receive email newsletters or promotional mailings and special offers but want to unsubscribe, simply email information@informit.com.

Service Announcements

On rare occasions it is necessary to send out a strictly service related announcement. For instance, if our service is temporarily suspended for maintenance we might send users an email. Generally, users may not opt-out of these communications, though they can deactivate their account information. However, these communications are not promotional in nature.

Customer Service

We communicate with users on a regular basis to provide requested services and in regard to issues relating to their account we reply via email or phone in accordance with the users' wishes when a user submits their information through our Contact Us form.

Other Collection and Use of Information

Application and System Logs

Pearson automatically collects log data to help ensure the delivery, availability and security of this site. Log data may include technical information about how a user or visitor connected to this site, such as browser type, type of computer/device, operating system, internet service provider and IP address. We use this information for support purposes and to monitor the health of the site, identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents and appropriately scale computing resources.

Web Analytics

Pearson may use third party web trend analytical services, including Google Analytics, to collect visitor information, such as IP addresses, browser types, referring pages, pages visited and time spent on a particular site. While these analytical services collect and report information on an anonymous basis, they may use cookies to gather web trend information. The information gathered may enable Pearson (but not the third party web trend services) to link information with application and system log data. Pearson uses this information for system administration and to identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents, appropriately scale computing resources and otherwise support and deliver this site and its services.

Cookies and Related Technologies

This site uses cookies and similar technologies to personalize content, measure traffic patterns, control security, track use and access of information on this site, and provide interest-based messages and advertising. Users can manage and block the use of cookies through their browser. Disabling or blocking certain cookies may limit the functionality of this site.

Do Not Track

This site currently does not respond to Do Not Track signals.


Pearson uses appropriate physical, administrative and technical security measures to protect personal information from unauthorized access, use and disclosure.


This site is not directed to children under the age of 13.


Pearson may send or direct marketing communications to users, provided that

  • Pearson will not use personal information collected or processed as a K-12 school service provider for the purpose of directed or targeted advertising.
  • Such marketing is consistent with applicable law and Pearson's legal obligations.
  • Pearson will not knowingly direct or send marketing communications to an individual who has expressed a preference not to receive marketing.
  • Where required by applicable law, express or implied consent to marketing exists and has not been withdrawn.

Pearson may provide personal information to a third party service provider on a restricted basis to provide marketing solely on behalf of Pearson or an affiliate or customer for whom Pearson is a service provider. Marketing preferences may be changed at any time.

Correcting/Updating Personal Information

If a user's personally identifiable information changes (such as your postal address or email address), we provide a way to correct or update that user's personal data provided to us. This can be done on the Account page. If a user no longer desires our service and desires to delete his or her account, please contact us at customer-service@informit.com and we will process the deletion of a user's account.


Users can always make an informed choice as to whether they should proceed with certain services offered by InformIT. If you choose to remove yourself from our mailing list(s) simply visit the following page and uncheck any communication you no longer want to receive: www.informit.com/u.aspx.

Sale of Personal Information

Pearson does not rent or sell personal information in exchange for any payment of money.

While Pearson does not sell personal information, as defined in Nevada law, Nevada residents may email a request for no sale of their personal information to NevadaDesignatedRequest@pearson.com.

Supplemental Privacy Statement for California Residents

California residents should read our Supplemental privacy statement for California residents in conjunction with this Privacy Notice. The Supplemental privacy statement for California residents explains Pearson's commitment to comply with California law and applies to personal information of California residents collected in connection with this site and the Services.

Sharing and Disclosure

Pearson may disclose personal information, as follows:

  • As required by law.
  • With the consent of the individual (or their parent, if the individual is a minor)
  • In response to a subpoena, court order or legal process, to the extent permitted or required by law
  • To protect the security and safety of individuals, data, assets and systems, consistent with applicable law
  • In connection the sale, joint venture or other transfer of some or all of its company or assets, subject to the provisions of this Privacy Notice
  • To investigate or address actual or suspected fraud or other illegal activities
  • To exercise its legal rights, including enforcement of the Terms of Use for this site or another contract
  • To affiliated Pearson companies and other companies and organizations who perform work for Pearson and are obligated to protect the privacy of personal information consistent with this Privacy Notice
  • To a school, organization, company or government agency, where Pearson collects or processes the personal information in a school setting or on behalf of such organization, company or government agency.


This web site contains links to other sites. Please be aware that we are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of each and every web site that collects Personal Information. This privacy statement applies solely to information collected by this web site.

Requests and Contact

Please contact us about this Privacy Notice or if you have any requests or questions relating to the privacy of your personal information.

Changes to this Privacy Notice

We may revise this Privacy Notice through an updated posting. We will identify the effective date of the revision in the posting. Often, updates are made to provide greater clarity or to comply with changes in regulatory requirements. If the updates involve material changes to the collection, protection, use or disclosure of Personal Information, Pearson will provide notice of the change through a conspicuous notice on this site or other appropriate way. Continued use of the site after the effective date of a posted revision evidences acceptance. Please contact us if you have questions or concerns about the Privacy Notice or any objection to any revisions.

Last Update: November 17, 2020