Professional Services

If you’ve considered selling your expertise, or making money from selling the expertise of your organization, the professional services business model is a place to start. Accountants, advertising agencies, public relations experts, executive recruiters, lawyers, business and technology consultants make money through one primary model: charging money for the time spent by their professional staff to deliver expertise.

When it Works Well:

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. Maister is a consultant for consultants, and 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.

Staff leverage ratios:

The concept of the leverage model drives all professional services firms – the ratio of senior to mid level to junior staff.

Brains firms are flatter organizations, often smaller and highly specialized, and they excel when they provide differentiated thought leadership and are known as the “smartest people in the industry” to solve a problem. There are only senior staff who are creative and innovative in their approach, and any junior staff serves in an apprentice capacity. These firms can been deeply profitable by charging high bill rates per hour.

Procedure firms are hierarchical, with many more associates to mid-level engagement managers, and partners at the top. Tasks can be routinized and delegated ahead of time and stored in a knowledge and training system. Staff ratios of juniors to seniors drives the ultimate profitability of these firms.

Challenges to the Professional Services Model:

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.

Technology transformation

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.

The business model mechanisms to test:

The primary metric a professional services firm: utilization – the percentage of time the staff is employed doing firm-related work. Some firms ask every employee to submit a weekly timesheet describing their time spent down to the hour, or in law firms down to the 15 minute increment. Other firms get to these metrics by analyzing total revenues for projects and dividing by the time the staff spends.

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{4b0c188ae8604bf014d8bc27c7c65bbf455b55139b6ec077c9ec57d60479b1a7} because you want your staff sharing knowledge and developing their strengths.

AKA “Billability”

Client retention 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.

Emerging Trends in Professional Services

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. Deloitte, Accenture, and KPMG have all invested in business intelligence solutions and focused on key vertical such as healthcare analytics. It can be difficult for a practices 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.

Deeper Dives on the Professional Services Firm Model 

Managing the Professional Services Firm by David Meister, 1997. (book)

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)

What do you think about the Professional Services model? Do you work in a company that has tried this approach? Do you have other resources or company suggestions we should source? Share your comments or suggest another business model to add to our library.

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