What is the Professional Services Industry All About?

Professional services is 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 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.

Professional Services Overview

Professional services firms – such as IT professional services firms, marketing/PR firms, or legal or financial advisers – 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.

According to TSIA’s 2023 State of Professional Services report, services 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. What’s surprising is that Professional Services revenue growth averaged 34% in the 2H 2022 snapshot, representing a 44% increase over 2H 2020. This is remarkable revenue growth at a time when, by all expectations, PS revenue should be flat or declining as XaaS offers continue to dominate technology spending and as customers experience much simpler implementations and faster time to value, particularly in the technology industry. But not all the indications are encouraging; in some senses, the growth may not be healthy at all.

Client Trends and Factors Disrupting the Professional Services Industry

For professional services firms, it’s 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 — overall — 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 in the professional services industry 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 industry:

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

Knowledge as a service (KaaS) is a “managed service” model where firms in the professional services industry 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 is 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 automation.

For the professional services industry, 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 project. A client will now pay for the overall gains such as tax savings, ROIs, insurance claims, and so on.

This shift from a time-driven to a value-driven model allows professional services 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

Professional services firms that offer 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. Professional services 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:

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 professional services firms 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.

Professional Services Organizations May Not be Utilizing all Capabilities of Automation System

The professional services industry is changing rapidly, and the current economic environment is accelerating these changes. To stay up to date and competitive, firms will need to incorporate digital technologies in their strategies and processes. This will increase digital agility, make them better able to respond to the changes in customer demands and remain competitive.

However, a recent TSIA study found that many professional services organizations purchased their automation solution to solve a particular problem, usually resource management or forecasting, but don’t take advantage of the full capabilities available to them. It’s important to leverage the entire platform to create more visibility into your end-to-end Professional Services process.

Progressus is a Seamless Solution for Professional Services

Progressus is a seamless solution which sits on top of Microsoft Dynamics 365 Business Central to manage all professional services functionality that firms need to be successful. The cloud-based solution manages Project Accounting, Project Management, Project Resource Management, and Project Reporting for firms small to large.

Progressus, through user group forums, asks clients questions such as “what functionality is missing,” and “are you taking advantage of all the functionality within our system?” to increase usage and understanding of system capabilities.

To increase usage, Progressus offers a range of support and training options to assist customers in successfully implementing and using the software effectively. The Progressus bootcamp, a free online resource for all users, offers training materials for users that will get them up to speed on the software quickly.

Before implementation, Progressus works with its clients to ensure everyone has hands-on training opportunities to learn and get adjusted to the new solution. We also offer change management courses for user adoption.

Interested in learning more? Schedule a live demo session to learn more about Progressus.

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, and 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.

Progressus provides expert guidance and unique solutions that specifically support project-based organizations — at both the SMB and enterprise level. With Progressus, 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 Progressus can help Professional Service and Project Driven Firms reach their organization’s goals.