Professional Services: a group of expert or skilled consultants that deliver advice, expertise, and/or solutions.
- Solution can be fully customized to customer’s needs (vs. an off-the-shelf or DIY solution)
- Customer can outsource non-core expertise to professional service firm, saving time, accelerating time-to-solution, and gaining focus
- Potential for highly trusted counsel which reduces anxiety when making critical decisions
- External stakeholders may not learn enough about internal challenges to give effective expertise or deliver a meaningful solution
- The bait and switch: a senior partner may sell the relationship, but then over-delegate to junior staff to deliver
- The mindset of the billable hour may result in firm over-billing or over-complication of key issues
- Over-reliance on external firms may result in failure to build core capability
- Hire vs. outsource total cost
- Time saved
- Can start a professional services business without raising capital if founders can initiate contracts based on expertise and relationships.
- Leverage of senior to junior staff creates opportunity for margin advantage
- Niche professional services firms can be effective without having to grow large
- Some professional services firms have been able to reinvest product in product, with founders maintaining ownership without the need for a capital raise
- Venture investors do not back professional services firms as they typically do not achieve the expected growth rates expected
- Expertise that runs the risk of being automated are at risk (lower level legal tasks, accounting)
- Customers of professional services firms can squeeze profitability because the business model is so transparent (hours times bill rate)
- Utilization rate
- Client retention rate
- Percent of new clients referred directly from existing clients
Organized around the type of problem to be solved
“The required shape of the organization (the relative mix of juniors, manager, and seniors) … should be determined by the skill requirements of its work,” -David Maister. A consultant for consultants, Maister describes the different shapes a professional services firm must take in order to deliver to different types of client need.
“Brains” Firms: Clients that require creative and innovative approaches to new, unknown problems, with unknown solutions, tend to seek out “brains for hire.” Most boutique brand agencies and smaller specialty legal and strategy consulting firms fit this description. Clients expect senior staff who investigate a new question each time, and deliver a customized, non-repeatable solution.
“Procedure” Firms: At the other end of the spectrum or clients that seek a procedure: to solve for a well-recognized and familiar type of problem. For example: hiring Accenture to implement a business intelligence system, or Deloitte to implement an Electronic Health Records system digital transformation. Procedure firms excel if they deliver more quickly, efficiently, and with a high likelihood of project completion and uptake. “You never get fired for hiring IBM” as the saying goes.
Limits to growth
The first greatest challenge is scale, and growth. Consultancies have inherent limits to growth. They cannot hire and train and grow at the exponential rates as seen in internet services firms. Firms that grow too quickly tend to skimp on training and knowledge management, and firm expertise and client experience tend to suffer.
Also the “up or out” model can be tough for new young associates at professional services firms, who are hired as “grinders” managed by “minders” who all report into the “finders” or partners that are responsible for rain making. In well run firms, staff development is a sophisticated endeavor and younger associates typically realize on their own that they will pursue a career outside of the firm.
The firm “counsels out” these employees and these staff then become potential clients. Yet the experience if not well managed can be a struggle for those that do not see a clear path to partnership, such as in “top heavy” law firms that are still struggling to recover from pre-recession highs.
Each wave of massive technology shifts has challenged the authority and cost effectiveness of every type of professional services firms, from strategy consultants to lawyers to design consultancies.
For law firms and accounting firms, the technology-driven routinization of work at the bottom of the associate pyramid has challenged the high bill rates and cost structure that clients are willing to pay.
At the high end of professional services, clients question the technology prowess of consultancies. The sheer success of companies like Uber, Tesla and Airbnb show that rapid innovation and high scale revenue growth is more likely to occur inside a startup than within a professional services firms. High growth Silicon Valley companies have built world class engineering and design teams in house, also challenging the need for technology and design consultancies in the industry.
Combining software licensing services with professional services
This is a long trend, initiated by IBM who branched into professional services to protect hardware and software licensing agreements. By becoming business consultants, they were able to define a business need for their proprietary technology.
In a reverse trend, established consultancies are building their own software and Software-as-a-Service businesses. to further entrench their businesses. With the rise of the promise of AI, data, IoT and blockchain, Deloitte, Accenture, and KPMG have all invested in business intelligence solutions. It can be difficult for a practiced professional services firm to define procedures so that they can be self-administered (or. delivered through professional consultants to a client). Additionally, the price points for software licenses, subscription fees, or data-driven services may pale in comparison to the higher ticket project fees generated by consultants, slowing down their interest in pursuing these potentially faster growth models.
Our prediction: Professional services firms will be around for a while, but notice that the largest tech-driven firms (Apple, Amazon, Google) do not rely on external firms to build their technology, so over the long run survivors will build technical and strategic expertise in-house, outsourcing lower value tasks.
- Do you have a well-differentiated value proposition distinct from the competition?
- Can any of the solution be routinized or automated, and what is your plan for incorporating or defending against displacement?
- Are you sure you want to start a professional services firm, and not a product or software firm?
- Define the long-range success for the firm: how will you hire and compensate loyal partners and employees?
- Is there a well differentiated value proposition?
- Is the customer segment consistent – are you anything to anybody or have you refined your expertise and solution to one job description?
- Do you solve and market a problem for which your customer is searching for a solution?
- Have you designed your services for renewal, and after your first engagement, how likely is the client to renew?
- What is the likelihood that your customers will refer new customers to you?
Key Professional Services Mechanisms to Test
KPIs in professional services firms are fairly well known within the industry, and attempts to move away from these metrics and management method have faced resistance. Ultimately professional services firms attempt to break the billable hours x time model, but are challenged to develop a new model outside of complete business model transformation.
Mechanism to test
Metrics to measure
Measuring each hour of a staff member doing work that is billed (client work) vs. other time (professional development, sales, knowledge sharing, administrative work)
Utilization – the number of working hours in a given time period x 100 / the number of available hours
Measuring the hours discretely devoted to paid client work
Realization – the number of hours spent on client work. For a successful learning organization, you don’t want this number to be higher than 90 percent because you want your staff sharing knowledge and developing their strengths.
Percent of current clients that remain as ongoing clients
Client success and referrals
Net promoter score – how likely are you to refer this services firm to a friend.
What percent of new client leads come from referrals from existing clients.
More on Professional Services
Managing the Professional Services Firm by David Meister, 1997. (book)
The Trouble with Consulting, by Rita Hunter McGrath, 2019.
Rethinking Professional Services in an Age of Disruption, Economic Intelligence Unit, 2018.
Digital Transformation Initiative Professional Services Industry, World Economic Forum by Accenture, 2017.
The Two Simple Drivers of Law Firm Profitability, Business Law Blog, 2015.
Growing Your Design Business, Jason Blumer, a List Apart, 2013
How to build a consulting business, Scott Steinberg, Inc.com, 2012
‘Up or out’ is part of industry culture, by Charles Batchelor, FT.com, 2011. (limited access)