What is a Professional Service organization?
Unlike a manufacturing business that produces tangible products, a Professional Services firm creates value by rendering a service. The consultants or employees therefore become the resource of the business. The specialized skills and expertise of the firm is offered to the clients at an agreed price through the consultants.
The service delivery is often structured in the form of projects. The specific requirements of each project, whether for the same client or different clients, is scoped and a price determined before the project starts.
Examples of Professional Services firms include those working in the areas of Accounting , Management and Consulting, Law, Architecture, Engineering and Construction (AEC), Advertising and Marketing, etc.
Different types of Professional Services firms
Broadly, there are two types of Professional Services: Independent and Embedded.
Embedded Professional Services are a part of a larger business and they serve the internal needs of the business. For example, when a product company is in need of certain services and a division is created within the business to service that need, it is an Embedded Professional Services. These are typically cost centers, and the measure of success of this division is based on the KPIs and the satisfaction of internal stakeholders.
Independent Professional Services firms offer their expertise to external clients for a profit. As the term suggests, they are independent and not subservient to any other division of the firm.
What are the characteristics of a Professional Services firm?
The characteristics of Professional Services firm vary depending on the vertical and in some cases specific business. The characteristics of a law firm, for instance, are different from an AEC firm. However, there are a few broad similarities in the industry and some of these are:
Focus on people
Professional Services firms sell the expertise of their employees. They have to demonstrate to the client that they have the capability to deliver the knowledge or consultation-based services required by their clients. This is also the reason why one of the biggest drivers of this industry is the relationships that these consultants are able to build with their respective clients.
Since people are at the center of everything that the Professional Services firm does, there is a huge demand to hire the right talent. The struggles of finding, training, and retaining top talent is one of the key characteristics of this industry.
Pricing is a skill
Unlike a manufacturing firm where it is relatively easier to determine the cost of manufacturing a product, it is slightly more complex to estimate the cost of delivering a service in the Professional Services industry. The consultants need to create the scope of work and estimate the time it will take to complete the project.
Accurate pricing and the consequent margins depend on the accuracy of the above two components. If you miss certain elements in the scope or make a wrong estimation on how long it will take to complete the work, the margins will be affected.
There are two types of pricing that Professional Services firms follow. The time and work pricing where consultants estimate the work and then bill the clients on the number of hours that they actually work on the project. The other option is the fixed price, where the consultants not only estimate the time and effort needed but also take on the additional risk of delivering the project within an agreed upon price for the whole project, instead of billing the client on the number of hours spent on the project.
The metric to watch is the billable hours
The one metric that Professional Services firms need to watch is the billable hours. This shows the number of hours the consultants have generated revenue for the business.
If for any reason the number of non-billable hours increases, the profitability of the business goes down. On the other hand, if the billable hours are increasing at a rapid pace and the number of consultants remain the same, there is scope of the employees working too hard and facing burnout.
The way Professional Services firms track billable hours is by using specific software to track time spent by consultants on various projects, training, and other activities. A growing business with improved structures and processes will use a Professional Services Automation (PSA) tool to drive efficiency, automate workflows, and increase profitability.
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