Buoyant professional services firms are hiring people in advance of project wins

13 August 2018 Consultancy.uk 10 min. read
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Large professional services firms saw their revenue grow by 8% last year. Despite a small drop in fee income growth, executives in the industry are buoyant, and for the first time since the outbreak of the crisis they are hiring people in advance of filling their order book suggesting that they firmly believe that the only way is up for the sector.

In an in-depth 280 page report sponsored by Deltek, SPI Research conducted an analysis of the key trends and developments in the professional services industry. The researchers surveyed executives/partners from 456 professional services organisations, which generated a combined revenue of over $25 billion last year, and employ over 158,000 professionals.

Last year, professional service (PS) industry growth continued, however overall revenue growth has slowed from 10.2% in 2015 to 8% in 2017. This is the second time since the recession that overall PS sector revenue growth has dipped below 10%. This is largely due to a sluggish 2016, which the sector is still working to recover from.

Revenue and headcount growth in professional services

According to the study, having seen a slight fall in growth in 2016, most segments of the PS sector still witnessed a moderate rebound in 2017 – but it was not enough for the overall professional services market to surpass 2015’s levels of performance. While all but one segment (engineering consulting) fit this pattern, only one bounced back to the extent that it grew quicker than in 2015. Unsurprisingly, perhaps, this was the IT consulting arena, which declined from 12.4% to 10.6% growth in 2016.

A bullish 2017 saw the segment post 12.5% growth, a rate only surpassed by SaaS consultancies, as use of Software-as-a-Service (SaaS) based services in the HR technology model continued its steady increase in recent years, as companies explore ways in which to reduce costs and access new innovation in the space.

This uneven sector performance was further emphasised when considering the profitability of organisations. Those focused on the cloud, security, IOT, analytics and artificial intelligence experienced significant growth, and the most recently available data shows that they were subsequently the most profitable segments, while more traditional areas of accounting, architecture and networking witnessed a period of consolidation rather than accelerated growth, thanks in part to price pressure.

Growth in the professional services industry

Software firms and SaaS consultancies were the most profitable areas for the professional services industry in 2016 – at 23.6% and 19.4% respectively, while software firms were the only group to see that figure rise on the previous year’s figures of 19%. This placed the segment 12.1 percentage points higher than management consulting. While SaaS consultancies still performed well, meanwhile, the segment saw the largest drop in profitability of the study – of more than 6% – having wrested at 25.7% just 12 months before. The growth of SaaS revenues in the year since suggests these figures will likely improve in next year’s analysis, however.

Professional Services growth by region

Part of the professional services scene’s slower growth from 2015 to 2017 has been that the world’s largest mature market of this kind, North America, has not been able to maintain its impressive 11.7% growth level of 2015. Similarly to Asia Pacific, which has also shifted back from double-digit growth over that period, North America’s revenue growth fell to sit at 7.5% in 2017.

Revenue growth in professional services (by region)

The drop in the two large markets has to some extent been counterbalanced by a meteoric rise in growth across the EMEA region. However, having registered just 6.5% growth in 2015, the market in Europe, the Middle East and Africa has seized on various key opportunities to enhance revenues to the tune of 12.6% in 2017, following years of lukewarm growth. While Brexit continues to drive an appetite for outsourcing in the West of Europe, the continent has also become a hub of technological development, playing into the strongest performing elements of the professional services market at this moment.

Despite the challenging year for revenue growth in the global market, when examining a broad overview of overall professional services sector net profit, the analysis reveals a climb to the highest ever reported ceiling of 16.8%. Buoyed by cloud consulting net profits of 26.2%, more and more service providers added cloud consulting competencies to tap into the booming market. As a result, backlog grew from 45.6% to 46.2% while consultant billable utilisation increased from 70.4% to 71.5%. Higher utilisation, combined with a richer percentage of billable headcount (75.5% in 2017 versus 74.6% in 2016), were the primary catalysts for profit improvements.

Revenue per consultant and employee in professional services

One of the main factors behind this improvement, according to the researchers, is that consultants are becoming smarter in the way they use their time. Workforce productivity is up in the segment, while professional services organisations have reduced the time spent by professionals on frustrating administrative tasks, such as logging time and business expenses or writing and continually updating project status reports. Seemingly endless resource scheduling meetings have also been scaled back, while entering and reentering reams of data into finance and accounting systems has been streamlined. This freed up staff to concentrate on work which yielded billable hours – now at its highest rate since 2012.

Additionally, firms have worked to improve their work/life balance, meaning staff have more energy and improved morale when approaching projects. One of the key policies of this new approach is a willingness to allow staff work from home days. Instead of getting on an airplane at the crack of dawn on a Monday morning and returning tired and exhausted on a Friday night, many professionals can now take time to work from the comfort of their home. These attitude adjustments were largely enabled by the adoption of various digital technologies, including professional services specific business applications and virtual consulting delivery, which reduced the burden and cost of travel. The received wisdom is that a happy and healthy employee is also a productive one, and true to form, workforce productivity improved in 2017 as did profit.

Growing competition

As with markets across the industrial spectrum, innovative technology being readily available for declining prices has seen a boom in competition in the professional services sector. Signs of increasing competitive pressures were evidenced by a decline in the size of the sales pipeline from 189% to 174%; while the win ratio decreased from 48.5% to 48%. Though the glut of competition to some extent accounts for the rise in job creation in the sector, many long-term market incumbents have also become involved in the surge of new hires.

Profit and billable hours in professional services

Professional services job creation rose to a new high of 9.3%, and it is less connected to voluntary and involuntary attrition than in previous years, as such exits declined to 12.4% from a peak in 2016 of 13.5%. One of the driving forces behind the continued hiring campaign is that skilled millennial workers are required to replace retiring baby boomers, especially in world’s largest economies where populations are ageing rapidly. This has led to many private companies becoming concerned of an impending skills shortage, and has seen numerous organisations state that the talent pool is shrinking. The professional services sector seems to have combatted this effectively, however, using a host of creative recruiting and skill-building strategies to squeeze ever higher levels of productivity from their incoming workforce.

This change only partly accounts for why the consulting job market is white-hot at present. The recruitment drives have often come at the expense of revenue per consultant, as professionals have had to spend time and energy sourcing new staff. The decline in revenue per consultant from $205,000 $196,000 and revenue per employee from $163,000 to $159,000 would previously have put firms off of such a concerted effort to draw new talent in. In fact, according to the analysts at SPI, headcount growth has never exceeded revenue growth before, indicating firms are feeling confident enough in the future to hire in advance of bids?something indicative of major expectations for growth in 2018.

Profit in the professional services industry

Fergus Gilmore, Managing Director at Deltek commented on the results: “In 2017, the perennial challenge of talent management has risen to the top of the list, closely followed by the on-going issue of achieving revenue and margin targets. These challenges still persist in 2018, to remain competitive, professional services organisations must intensely focus on creating a continuous learning environment with meaningful work. Great places to work are characterised by the investments they make in their cultures and employees.”

For more details on trends in the professional services industry and the report’s findings, download the 2018 SPI Benchmark study.