Major Challenges Facing the Professional Services Industry Today

From constant technological flux to the lingering effects of the pandemic, today’s professional services firms are navigating a storm of challenges. They’re tackling digital transformation head-on, plotting their post-pandemic course correction, and rebuilding client connections in this new reality. But these aren’t the only hurdles they face. Complex projects, geographically scattered teams, and the intangible nature of their services all add unique layers of difficulty.

Let’s dive deeper into the most pressing issues confronting these firms and explore strategies to help them weather the storm.

1. Making Data-Driven Decisions in Real-Time

Remember the “data-driven” craze of the 2010s? Back then, it felt like having a ton of data was the magic key to success. Today, things are different. Every company, big or small, has access to mountains of information and fancy AI tools that promise to make sense of it all. But here’s the catch: even with all this data and fancy tech, becoming a truly “data-driven” business is still a tough nut to crack.

Beyond Basic Reports: Transforming Data into Actionable Insights

Firms often face operational challenges that eat into profit margins and disappoint their customers. According to Forbes research, “To give you an idea of the abysmal success rate of most projects, only 40% of projects at IBM meet the company’s three key goals – schedule, budget, and quality.”

One reason is that most firms have access to the same tools and insights. Internally, relying on basic reports means you’re only looking at information your competitors already know about – which let’s face it, won’t net you any sort of advantage. On the customer-facing side, pulling a canned report and presenting it to clients isn’t a good look. If they can find the same information themselves – minus the steep hourly rates – they’re not likely to stick with your firm for long.

Increased competition and pressure to move fast make matters worse. For example, a financial services firm might find itself forced to fight off tech-driven competitors before they’ve even addressed internal data inconsistencies and communication barriers. This pressure to react quickly often leads firms to misallocate resources, prioritizing immediate threats over long-term solutions. The consequence? A dwindling budget for tackling the core problems leaving them vulnerable to falling further behind competitors with no path to recovery.

2. Resource Management & Utilization

For project-driven organizations, such as consulting, technology services, architecture and engineering, and software publisher firms, resources are the most important element when it comes to ensuring growth, profitability, and longevity.

Successful firms must zoom out and focus on the big picture — making decisions about the direction of the company by weighing a long list of competing variables.

Those variables include the current backlog, upcoming projects, available resources and skills, client demand, the list goes on.

As such it isn’t surprising that firms face significant challenges in this area — including effectively staffing projects, logging hours and expenses, and gaining real-time visibility into resource utilization and availability.

Tracking billable hours is also critical for maximizing revenue and profit margins — and it’s directly linked to utilization. What’s more, something as simple as employees forgetting to log billable hours or submit reports on time can undermine profitability.

Time Tracking Tightrope: Capturing Billable Hours and Maximizing Revenue

Tracking utilization against actual billings allows project managers to identify discrepancies between what was forecasted — and what work was actually performed. When businesses are able to track billing and utilization— by individual contributor, project, and the entire portfolio, they have an opportunity to drive improvements at every level.

So, without a reliable means of tracking billable hours in real-time, firms miss out on critical data points that can impact everything from budgeting and work assignments to forecasting, planning, and investments in future growth.

3. Predicting Cash Flow & Planning for Ongoing Demand

Predicting cash flow, planning for the future, and achieving the visibility required to accurately predict future demand (and allocate resources accordingly) all represent serious challenges for professional services firms.

For example, ensuring accurate costing for projects upfront has always been challenging. Firms need to ensure that they set pricing at a rate that’s attractive enough to win deals but also ensure that the project will generate a profit for the firm once all is said and done.

The problem is that as the project progresses, unexpected expenses accumulate—often for reasons that no one saw coming. As a result, projects often require additional resources or time before they reach the finish line.

Then, you’ve got factors like long billing cycles, late payments, and complex billing structures—all of which have a big impact on cash flow. This is especially true for firms that serve niche industries like healthcare, as things like insurance claims and compliance costs can further squeeze profit margins.

Most problems point back to the inherent unpredictability of this space. For example, clients’ budgets can scale up and down, often without notice – so it can be hard to predict when you’ll experience downtime or hit capacity limits.

Another common problem is inconsistency in the sales funnel. That inconsistency could be caused by over-specialization, limited service offerings, an inexperienced sales team, or a team lacking the resources and support they need to succeed.

However, inefficient processes, bad strategy, and the inability to leverage real-time insights are also to blame.

4. Rising to New Client Expectations

While rising customer expectations are a challenge across industries, professional services firms face a unique hurdle. Their entire business model revolves around fulfilling client needs. In the past, fostering relationships often relied on in-person interactions and one-on-one meetings.

However, today’s clients prioritize value. Many operate with tighter budgets or budgets that fluctuate based on needs, moving away from traditional fixed retainers. This puts immense pressure on professional services firms to develop offerings that maximize client outcomes.

There’s also the added challenge of making intangible knowledge-based services feel more real. This means that firms need to tie services to real data and metrics that align with clients’ most pressing goals. For example, instead of focusing on win rates and billable hours, success is now measured against things like customer success and annual recurring revenue (ARR).

Broken Promises, Broken Trust: The Peril of Missed Deadlines and Unrealistic Expectations

In addition to the challenges linked to changing customer expectations, professional services firms struggle to manage complex projects. That, in turn, leads to missed deadlines, diminished quality, and unexpected expenses and prevents firms from creating the unified experiences customers expect.

With so many milestones, stakeholders, and moving pieces that need to come together to execute any given project, it’s really hard for firms to make promises they can keep. That, of course, impacts retention rates, revenue, and your reputation. It also puts your sales team in a tough spot when they can’t provide accurate quotes or deliver the promises outlined in the SLA.

In cases where you’re selling services linked to a specific product (think Microsoft partners that sell consulting services and Microsoft products), organizations need to create offers directly linked to the core value of those products. But many times, the sales team isn’t able to position service offerings in context with the products they’re selling. So, there, you’re looking at a missed opportunity to generate more revenue by helping customers get more out of their relationship with your firm.

Ultimately, these issues stem from fragmentation, poor visibility, and an inability to leverage data to drive client outcomes.

5. Recruiting, Hiring, & Retaining Top Talent

Finally, the professional services sector has been hit hard by the dreaded skills shortage. But — like everything else on this list — the challenge is exacerbated by the unique nature of the space. Skills and expertise are the product.

A recent Source Global Research report notes that the gap between what firms want to do and what they can do is getting wider. Nearly 40% say they don’t have enough people with the right skills to tackle existing work, while 26% say they don’t have the capacity to take on new work.

The report also found that the pandemic has made clients appreciate the value of true expertise — as experts have played a key role in helping say, diagnose problems, map out new strategies, and navigate COVID-induced pivots. While that new awareness represents an opportunity for service-based firms, it also means junior staff have fewer opportunities to learn on the job.

Retention mostly boils down to treating people well, compensating them fairly, providing them with opportunities to develop new skills and tackle new challenges. Now, with surging demand for talented workers it can be hard to hang on to people – but firms need to do the hard work of creating an environment that people won’t want to leave.

One recent Reddit thread underscores the impact that “small” oversights can have on morale – learning that new hires are making more than you three years is bound to have an impact on job satisfaction and performance. Sure, you can say market conditions dictate starting wages (and they should) but make sure that you’re adjusting for inflation, cost of living increases, etc. for everyone.

Beyond Credentials: Finding the Right Fit for Your Team

Over time, investing in building a positive brand and business environment serves as an inbound recruiting tool. You will need to make sure you attract the right people – otherwise, you’re dealing with a ton of waste. But — the right people may not always be the most experienced subject matter experts or graduates from elite programs. Many firms are dropping credential requirements and looking outside of the usual channels for candidates.

Like so many industries today, the need to develop new skills remains a significant challenge for professional services firms. As demand for new technologies and competencies ramps up, so too does the pressure to keep up with those changes.

Building a Winning Culture

The challenge is that you can’t always find people with the skills you need at the moment. Nor can you hire new people every time there’s a big change in the market. Instead, it’s about building (and retaining) a workforce that evolves with your customers and the market. Instead of focusing on traditional measures of expertise, look for people with AI or data science experience — as well as people with the curiosity and drive to keep learning and improving.

Frequently Ask Questions

#1 – What is the future of professional services?

The trends that are transforming the Professional Services industry are:

Generative AI (GAI), and RPA:

GAI in the form of digital assistants is transforming the way we work and interact with data. AI models that come alongside workers to prompt and provide deep data-driven insight during the performance of specific tasks is enhancing productivity, accuracy and value of workloads. An example of AI in action would be suggestions made by a digital assistant on the optimum mix of resources required to complete a project task based on historical data such as skills, availability, contribution margin etc.

Robotic Process Automation (RPA) has been increasingly adopted by services firms such as Accounting/Tax firms to extract data from standard tax forms into work files for further analysis/reporting.

Virtual offices 

In the past, clients tended to hire firms who had a local presence. However, with increasing globalization, impact of the COVID epidemic and shortage of skilled resources, clients are adapting to virtual teams who are physically dispersed as are their own resources.

Virtual offices and remote work have become an integral part of the work culture and environment.

Virtual teams 

A widespread shortage of skilled resources and a remote work culture that is now reluctant to go away, PS firms are embracing virtual teams. Not only are resources in these teams physically remote from each other, they are also a mix of full-time, part-time and subcontract workers.

The use of advanced collaboration tools make the virtual team model possible.

#2 – How do you measure utilization?

In the professional services industry, the clock is always ticking when it comes to profitability. Your resources are your most valuable asset, and maximizing their utilization rate is a key driver of profitability. When we hear the word ‘utilization,’ we typically think about a metric that measures resource billability, i.e., how much are they billing? The formula for calculating utilization varies by firm and industry. Utilization KPIs are calculated using operational data from your project management and accounting system. Is it just a percentage of billable hours over available hours? There is much more involved in optimizing utilization and profitability.

Influencing factors, which can be found in unstructured data and intangibles, and impact utilization, are not always readily available nor can they be readily quantified. Here are a few examples:

Prior relevant work experience:

Staffing an engagement with resources who have delivered similar work in past projects will enhance productivity and reduce risks of poor quality, rework, and budget overruns. Increased productivity reduces time to deliver, which may appear counter-intuitive for a services firm that thrives on maximizing billable hours. However, faster completion of projects increases the number of engagements a firm can deliver in a given period aka engagement turnover. Completing 10 engagements in say six months is better than completing 6 over the same period. Why? A traditional services firm’s revenue split is 60% from existing customers, 40% from new customers. Increasing the number of customers directly increases longer-term revenue contribution.

Service delivery methodology:

How you deliver your services directly impacts customer satisfaction, work efficiency, project success, write-offs, utilization, and ultimately profitability. Methodology defines scope, approach, timelines, quality reviews, project management, and governance. Getting one or more of these factors wrong will impact profitability.

ETC Management:

Forecasting ‘Estimate-to-Complete’ is an essential aspect of project management. Monitoring your burn rate (how fast you are consuming budget), budget vs. actual to determine change order options, and Earned Value Management (EVM) are some of the critical elements in maximizing utilization and profitability.

Final Thoughts

The professional services landscape has always been challenging. And between rising client expectations, an increasingly competitive business environment, and the pressure to keep pace with the rapid rate of change, it’s unlikely that project-based work will become easier anytime soon—if ever.

That said, navigating this challenging landscape doesn’t need to be overwhelming. With the right tools and the right partner, firms have a rare opportunity to position themselves for future wins and lasting success.

Velosio’s modern cloud solutions help project-based teams streamline operations, improve visibility, and gain the control they need to maximize profitability.

Learn how Velosio can help mitigate Professional Service challenges for Project Driven Firms.