Professional Services Industry Professionals Collaborating Around a Table

Professional Services Industry Overview

In this article, we’ll explain what professional services are. Explain where the industry is right now – and what that means for you.

Professional Services Industry Professionals Collaborating Around a Table

Table of Content

    The “professional services” sector is certainly no monolith.

    It’s an expansive space spanning several industries – consulting firms, software publishers, IT service providers, even manufacturers and distributors that offer post-sale services — each with its own set of challenges, regulations, and opportunities.

    And even within individual categories, you’ll find a diverse cross-section of SMBs, multinational enterprises, boutique firms, and even solo freelancers – plus a wide range of business models and organizational structures. The point is, there’s a ton of variation in this space.

    That said, professional services firms (PSFs) have some important things in common. They provide customized, knowledge-based services to their clients. And —rather than selling physical products, they deal in less tangible resources like time, insights, and expertise – billed either by hour or by project.

    And it’s those common links that inform tech investments, transformation strategies, and how firms respond to the disruptive forces that define the modern business landscape.

    In this article, we’ll provide a high-level overview of where the professional services industry is right now – and what current conditions mean for project-based organizations.

    Where the Professional Services Industry Stands Today

    Professional services firms are at an inflection point. New competitors, a rapidly evolving tech landscape, and the looming presence of uncertainty were already forcing firms to redefine legacy business models and processes. And then COVID hit and kicked things into high gear.

    According to TSIA’s 2021 State of Professional Services report, services remain at the core of professional services orgs across the spectrum. Which means, individual team members themselves are the ones driving growth, engagement, and ultimately, profits. Of course, this isn’t new information. But — researchers emphasize that the pandemic — along with other disruptive forces — has exacerbated pre-existing challenges.

    For example, the rise of self-service analytics tools has made it possible for companies to capture actionable insights themselves and use that information to drive improvements.

    There’s also this massive influx in competition. New players are entering the market in droves, as new technologies lower barriers to entry. So oftentimes, tech-savvy replaces old fashioned experience and 1:1 relationship-building.

    What’s more, both new entrants and digitally-mature incumbents are embracing alternative business structures like subscription-based billing and value-driven partnerships — making it harder for firms to compete without making significant changes to their entire strategy.

    According to a joint report from Bloomberg and Workday, 70% of CFOs expect their firm will need to overhaul existing processes to build more resilience into core business models — whether that’s streamlining operations or catching up with new, more agile competitors.

    It’s also getting harder to meet client expectations and win new business – even though demand remains strong as clients rely more on experts to help them navigate their post-COVID comeback. RingCentral data suggests that the professional services market — on the whole — is growing at a CAGR of 9.1% — and stands to hit the $8B mark by the end of this year.

    However – customers are changing the way they work with firms and what they expect from those engagements. People (understandably) want, need, and expect different things than they did back in 2019 and firms will need to align with new expectations to win in this new market.

    A recent FT report expects budgets will face more scrutiny, and as a result, clients will be more selective about who they work with. Analysts predict that reputation and brand will take on a renewed importance and engagements will be measured against outcomes. In other words, the opportunities are there, but the stakes are suddenly much higher.

    New Business Models and Strategies Help Firms Compete in a New Economy

    Already, firms are realigning with new norms and seeking out new opportunities to reinvent themselves for a new era. A recent SAP-Oxford survey identified three key models emerging in the professional services space:

    1. Talent Marketplaces

    Talent marketplaces connect organization with on-demand talent like independent consultants or experts with skills outside of their core business model. Gartner describes this concept as a platform-based system that supports an “internal gig economy.” The benefit there is, firms can tap into hard-to-find skills as needed and scale resources up or down in response to demand — essentially, allowing them to embrace a more agile approach to running the business.

    2. Knowledge as a Service

    (KaaS). Knowledge as a service is a “managed service” model where firms offer proprietary data, prescriptive insights, and guidance, to clients in real-time through a web-based platform.

    For example, there’s McKinsey’s Power Solutions, a suite of cloud-based tools and analytics that clients can embed into their existing stack. This approach, which McKinsey describes as “asset-based consulting” allows clients to access expert insights outside of the traditional, project-based engagement model.

    There’s also Cisco’s Business Critical Services, which provides clients with access to a dedicated IT expert who can provide guidance and advice around things like cloud migrations, cybersecurity, or AI/ML automations.

    For professional services firms, KaaS unlocks a new revenue stream and allows them to “productize” and package expertise in a SaaS-like subscription model. Unlike traditional projects — which typically take place over a fixed duration, KaaS offers a predictable, ongoing revenue stream that improves cash flow and creates more resilience.

    3. Outcome-Based Models

    Firms are increasingly opting for a value-driven revenue model that will bill the client based on the benefits and profits they make during the course of the project. A client will now pay for the overall gains such as tax savings, ROIs, insurance claims, and so on.

    This shift from time-driven to the value-driven model allows PS firms to get more clients and increase their profitability. They’re also engaging customers in new, value-driven ways. For example, consulting firm BCG partners with customers to jointly launch new ventures.

    Finally, it’s important to understand that embracing new business models and innovative service offerings also requires firms to embrace new technologies, processes, and ways of working.

    Firms Must Balance Transformation With Client Expectations

    New types of professional services offerings like outcome-based business billing or KaaS solutions could change the way clients use consultancy services – or why they seek them out in the first place.

    Decisions about what services to offer and how to deliver them must align with client needs, branding, and financial objectives.

    A 2021 HBR piece explains that firms can’t rely on a top-down transformation strategy like most companies because both its clients and its talent pool are continuously evolving — and tightly linked.

    The ability to deliver high-impact outcomes hinges on the skills and expertise of a firm’s professionals, which in turn, determines which clients a firm can serve and how they position their brand in the marketplace. Clients impact hiring choices, how skillsets evolve, and ultimately, the trajectory of the practice.

    The article notes that professional services practices typically fall on a spectrum that ranks services by sophistication:

    The Professional Service Spectrum.This exhibit arrays the four kinds of practices on a spectrum of sophistication that starts with commodity practices on the low end and ends with rocket science practices on the high end. It lists the varying client needs, selling propositions, organizational capabilities, and professional skills associated with each type, and what kind of margins, rates, utilization, and leverage drives profit for each type. Commodity Practices. Client need: Solving routine, often simple problems. Selling proposition: Low cost. Organizational capabilities: Efficient delivery processes. Professionals’ skills: Focused execution against specific requirements. Margin: low. Rate: low. Utilization: high. Leverage: high. Procedure Practices. Client need: Implementing a complex project with several interrelated parts. Selling proposition: Systematic and comprehensive approach. Organizational capabilities: Methodologies, Knowledge management. Professionals’ skills: Following procedures rigorously and comprehensively. Margin: moderately low. Rate: moderately low. Utilization: moderately high. Leverage: moderately high. Gray Hair Practices. Client need: Deciding on a major, ill-defined issue with which the client has little experience. Selling proposition: Track record of dealing with similar problems. Organizational capabilities: Rigorous empirical analysis, Learning from experience, Knowledge management. Professionals’ skills: Converting specific knowledge to judgment that’s applicable in other settings. Margin: moderately high. Rate: moderately high. Utilization: moderately low. Leverage: moderately low. Rocket Science Practices. Client need: Addressing a unique and difficult problem with major consequences for the client. Selling proposition: Ability to solve complex challenges. Organizational capabilities: Rigorous empirical analysis, State-of-the-art theory. Professionals’ skills: Applying theoretical and empirical tools to devise innovative solutions. Margin: high. Rate: high. Utilization: low. Leverage: low.
    Sources from: https://hbr.org/2021/03/what-professional-service-firms-must-do-to-thrive

    So, at one end you have “commodity” services, which solve basic or routine problems quickly, at a relatively low cost. On the other side, there’s “rocket science” services – which solve complex challenges for clients. They demand more resources, take more time, and are more difficult to execute. But – they also drive a significant share of a firm’s profits.

    HBR researchers have found that while many firms offer more than one type of service, top-performers tend to focus on a specific type. That way, clients know what to expect from a firm. Think — what types of services they provide and how those services will help them achieve a specific goal.

    So, as you start to explore different business models, you’ll want to make sure there’s a consistent thread that aligns with your firm’s brand and your clients’ needs and expectations.
    For example, if you’re rolling out a KaaS solution, those offerings should reflect the expertise and value offered in your traditional, project-based engagements.

    Rising client expectations, along with pressure from new competitors, and changing technologies are changing PSFs in profound ways. Firms must work harder to convince clients their work is worth the investment.

    Focusing on demonstrating deep knowledge, specialized expertise, and innovative value-driven solutions is key. As are factors like price, relationship-building, and the ability to leverage AI and automation tools to carve out a competitive advantage.

    Expectations will continue to evolve, and service offerings will change to meet that new standard. So, the takeaway here is, understanding that big changes aren’t a one-and-done investment that will last for decades. Firms should expect to continuously monitor and improve their strategy – incorporating client feedback as it comes in.

    Final Thoughts

    Current conditions are forcing professional services firms to make big changes in how they work, serve clients, and make strategic decisions about the future of their business. Some changes – like the COVID-induced embrace of remote collaboration, rising customer expectations, and the need to rethink business models and service offerings apply across the board. Others are industry-specific.

    That said, embracing AI, automation, and really committing to becoming a data-driven business are key when it comes to rising to new demands — regardless of size, sector, or who you serve.

    Velosio provides expert guidance and unique solutions that specifically support project-based organizations — at both the SMB and enterprise-level. Clients receive the advanced features and insights they need to gain a competitive advantage, streamline operations, and consistently deliver quality work (and customer experiences).

    Learn how Velosio can help Professional Service and Project Driven Firms reach their organizations goals.

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