Professional Services industry continues growth but trends to impact future

26 June 2017 11 min. read
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The professional services industry has continued a steady rise, however slowing growth suggests global macro, technology and sector trends are due to impact on future increases, a new report has confirmed.

Based on an analysis of over 400 professionals services firms, the ‘2017 Professional Services Maturity Benchmark’ produced by Service Performance Insight (SPI) commissioned by Deltek seeks to understand the shifting challenges and changing make-up of the global consulting industry.

While the authors noted that every year brings change to the professional services industry, they cited a new wave of political unrest, protectionism, and global turmoil last year as meaning the people-based professional services industry is likely to be faced with juggling continuing upheavals. Firms are dealing with disruptions in healthcare, taxation and the ability to employ non-resident workers all while dealing with ongoing business model evolution.

Importantly as with technology-based consulting growing fastest, tech companies will likely be faced with unique challenges including adapting to new accounting standards, embracing hybrid business models with a myriad of billing options, and meeting new compliance requirements.

Revenue and headcount growth in professional services

According to Fergus Gilmore, Vice President and Managing Director Central Europe at Deltek, “While the backdrop for the professional services industry is quite bright, the challenges associated with sustaining and managing growth have never been more daunting.”

Revenue growth

The report findings highlight the global professional services industry is still experiencing strong growth. Headcount growth grew at a rate of 6.5% last year, as companies continued to expand operations to meet growing client needs, while revenue growth subsequently stood at an impressive 9%, however, both rates of increase were reduced from previous figures. Headcount growth reached a four-year low, having fallen from 7.8% in 2015, in what seems to be a downward trend from 2014’s 8.9%.

Revenue growth meanwhile slowed from 10.2% in 2015 to 9% in 2016. This is the first time since the recessionary year of 2010 that overall professional service (PS) sector revenue growth has dipped below 10%. Breaking the ominous result down geographically, after years of tepid growth, Europe appears to be making a recovery with improving revenues expanding from 6.5% in 2015 to 10.3% in 2016. These results mirror overall GDP growth with the Eurozone, outpacing the U.S. at 1.7% compared to 1.6% for the first time since 2008. Elsewhere, the prospects were less positive, with Asia-Pacific also experiencing a decline in revenue growth from 10.1% to 9.4%, while the Americas saw the worst decrease, capping a year of economic and social uncertainty with consulting revenue growth slowing from 11.7% to 8.6%.

While revenue growth shows signs of peaking though the numbers are too fresh to interpret deeply without a further year’s context. The decline in headcount growth, however, is clearly a consistent trend. One reason that headcount growth has slowed significantly is in large part due to a growing talent shortage. To combat the lack of skilled consultants, firms are using a host of creative recruiting and skill-building strategies to squeeze ever higher levels of efficiency from their workforce. This in turn drives productivity improvements as new systems and technological strategies drive down costs.

Growth in professional services - selected segments

As the global economy sluggishly grows at less than 2%, organisations in every industry are having to work harder to achieve higher productivity, without adding substantial expenditure to their budgets. Every year, professional services revenue growth exceeds headcount growth, meaning the industry as a whole is continually ratcheting up output in part thanks to automation and more intelligent internal systems and processes, which subsequently means fewer new additions to head-count are needed,” explained Gilmore.

IT consultants leading the way

This downward trend in headcount is not a uniform decrease however, and predictably in an industry increasingly focused on technology to drive down costs, IT-based consultancies headcounts were less phased by the overall trend. Organisations focused on the cloud, security, analytics and artificial intelligence all experienced significant growth then, with IT consultancies still down from 12.3% in 2015 but standing at 10.6%, while Software as a Service advisors also saw growth remain above ten points, at 12.7%, down from 15.8% last year. More traditional consulting segments of accounting, architecture and networking meanwhile saw consolidation and price pressure meant revenue growth declining to 7.1%, having fallen for two years straight from 2014’s 11.7%.

The authors advise professional services firms to look at their portfolio and services, to capitalise on fast growing tech segments. The boom in the digital transformation industry recently reached an estimated $23 billion, and the sector looks set to continue growing rapidly. “Now is the time for all PSOs to carefully evaluate their markets and market positioning to ensure they stay ahead of the curve and to seize emerging market opportunities before they become mainstream and commoditised,” Gilmore said.

Growth in professional servicesBillable hours and revenue per consultant

One real bright spot for the wider consultancy industry in 2016 was the fact that revenue per consultant improved to the highest level in four years, jumping by more than 4%, in part on the back of higher chargeability with more advisors staffed on projects allowing firms to charge their clients. The increase in revenue can also be attributed to decreased time spent on administration and non-billable client hours. Revenue per employee also improved meanwhile, driven by reduced levels of non-billable headcount combined with higher consultant productivity and reduced per capita discretionary spending.

“Many other leading indicators experienced significant improvement with project backlog, the size of the sales pipeline and the number of projects delivered on-time all making positive gains”, confirmed Gilmore.

Recent figures published by an analyst firm revealed that UK’s consulting market grew by 8.2% last year, from £6.02 billion to £6.79 billion. The report also found that the Big Four (Deloitte, EY, KPMG and PwC) outperformed the market, growing 11.5% to £2.55 billion – a position bolstered by a busy regulatory environment, especially in financial services, and a large presence in the booming digital transformation segment.

Revenue per consultant and employee in professional services

While these benchmarks also point towards exceptionally healthy, albeit slowing, growth in headcount and revenue for the professional services industry though, profits last year actually declined.

PS players saw overall net profits fall from 15.5% in 2015 to 14.2% in 2016. This could highlight that the pricing structures of larger firms are under pressure, as a result of increasing numbers of mid-tier competitors, or changing levels of client scrutiny on fees – with many UK SMEs in particular feeling short changed by external expertise they hired.

However, according to authors, the primary catalyst for lower professional services profit came from an unexpected source. Firms increased the percentage of top line revenue derived from subcontracting – using third-party resources to ramp up their own consulting teams on projects, which created substantial pass-through revenue. In the case of IT consultancies meanwhile, this pass-through was the result of the resale of hardware, software and other products.

Contrary to the aim of outsourcing then, the researchers stated, “This pass-through revenue had a negative impact on overall profit as these revenue sources produced less margin than direct labour margins.”

At the same time, non-billable travel and marketing expenses increased, further eroding net profit margins. Independent consultants meanwhile experienced a moderate decrease in profitability, moving from 13.6% to 11.5%, with IT and management consultancies both seeing a decline. Embedded SaaS, hardware and networking PSOs also reported a decline in profitability while enterprise software PSOs saw their contribution margin increase from 19.9% to 23.6%, making them the most profitable segment of the global PS industry.

Profit and billable hours in professional services

Cautious optimism

Looking ahead, Gilmore paints an optimistic picture as despite growing global uncertainty, the outlook for the landscape is relatively bright. “Unless the world goes into an unforeseen tail spin, 2017 should be a very good year in professional services.”

However, despite primarily good news and positive improvements in the size of the sales pipeline and project backlog, some issues demand consideration. Across the benchmarks studied, many of the client relationship metrics declined. Particularly the bid to win ratio which has fallen to its lowest level since 2012 signifies heightened competition along with declining scores for sales, marketing and solution development effectiveness. In a global market with new entrants springing up daily to challenge the status quo, all PSOs must improve their sales, marketing and solution development capabilities,” said Gilmore.

Caution is therefore urged, as along with these risks, the age-old issue of work-force attrition is on the rise, while an intense war for top talent means skilled employees are increasingly leaving their current employers to move to greener pastures. “Now more than ever before, professional services organisations must establish their brand and culture as a great place to work so they can attract and retain the skilled resources they need to grow revenues and delight their customers”, Gilmore warned.

To help leaders in the professional services industry remain competitive in the changing landscape, Deltek has produced a range of best practice reports on winning bids, managing, delivering and measuring projects and developing professional services talent. The reports can be downloaded from the firm’s special PS project lifecycle page.

Related: Trends and challenges in the management consulting industry.