Professional Services: in the midst of an Opportunity

Albert Einstein once said “In the middle of every difficulty lies opportunity”. This has become more relevant in the post pandemic VUCA world of unprecedented digital transformation.

The recent technological progress is already redefining business and society at an accelerated pace. And so whether we agree or not, we are now at the cusp of a decisive transition into a digital economy.

The professional services (PS) industry is at an interesting intersection of transforming itself into a successful digital immigrant and also into a digital services partner for organizations on their road to transformation.

In the next few sections, I have listed down the apparent signals of disruption for this industry and also, a few digital growth strategies that in my opinion will have a multiplier effect.

A brief history of the Professional Services industry

To start with, it is necessary to understand the importance of professional services to the world. Here is a short primer :

Definition : Wikipedia says, professional services include accountants, engineers, doctors, lawyers, teachers, consultants etc. The Webster definition calls it a service that requires specialized knowledge and skill

Age: ~180 years old

Market Size : The global professional services market is expected to grow to $7 trillion by 2025 at a CAGR of ~8%

Macro-economic contribution : As per ILO, ~50% of the global workforce works in the services sector. As per the CIA factbook on India — ‘Services are the major source of economic growth, accounting for nearly two-thirds of India’s output but employing less than one-third of its labor force.’

David Maister’s ‘Key KPIs for Professional Services’ (1993)

Business Model : Generating value for a customer basis (i) Time and (ii) Skill Level. The Business Moat is based on relationships and specialist knowledge.

David Maister’s ‘Spectrum of Professional Services’ (1993)

Value Proposition : Delivering solutions (for clients) to complex and procedural business challenges using handpicked skills, technology enablers and a bespoke approach.

Present and Future Challenges for Professional Services (click to zoom)

Industry Challenges : As per a world economic forum report from 2017, ‘Professional Services appears to be approaching a tipping point’. Key challenges include staff retention, attracting new talent, engaging next generation of clients and gaining / maintaining competitive advantage (/moat).

The three consulting business models (Christian Sarkar)

Opportunity : World over companies are increasingly transforming towards asset-lite and knowledge based business models. The opportunity for the legacy firms is to create their niche either as solution shops (‘Grey Hair and Brains’) or facilitated networks or as SAAS firms (i.e. providing tech enabled value-added services).

Factors impacting sector performance : Key economic factors that impact include specific sectoral performance indicators, FDI, discretionary spending, workforce participation, social media adoption etc. While the success is tied in to the boom and bust cycles of the ‘served industries’, the future growth maybe ensured through fungibility, dis-aggregation of services and digital business models (such as freemium, marketplace etc.).

Ripe for ‘Digital Disruption’, You ask?

Professional services has been long under a threat of disruption:

As per a 2013 HBR article by Clayton Christensen — “the fundamental business model has not changed in more than 100 years … (however) the incumbent firms are seeing their competitive position eroded by technology, alternative staffing models, and other forces”.

Source : Forrester (2016)

In 2016, Forrester predicted that consulting will undergo substantial changes that will alter traditional revenue and delivery models. They published the following six themes that will define the Future State Of Consulting.

As per a 2019 research published by consultancy.org, the global consulting market is reorganizing itself through diversification into newer fields of professional services such as design thinking, advertising etc.

The disruptions in the industries / customers served have also had a deep downstream impact on professional services firms resulting in:

A relatively nascent service, Expert networks / micro-consulting is now a $1B+ business

1. Commoditization of services and faster adoption of value based pricing
2. Blurring boundaries between professional services and software services
3. Demand for unique solutions for black swan events and machine learning for repetitive jobs
4. Shift from pyramid teams to a diamond, consisting of senior leaders, subject matter experts, a mix of gig workers plus FTEs, and BOTs
5. Increasing demand for new sourcing models for highly skilled, specialized services and expert networks
6. Some professional services firms are reinventing themselves as SAAS / product companies that sell technology enabled solutions rather than just plain advice

Technology firms are embedding ‘experts’ into SAAS solutions. E.g. Microsoft Threat Experts come bundled with Office 365.

and there are more…

… loud and clear signals of disruption for professional services companies focused on value creation and protection, such as :

Four trends that affect innovation practices across all sectors (Source : OECD)

• As per the OECD Digital Economy Outlook 2020, Digital technologies have lowered information-related production costs and increased the “fluidity” of innovative products. Impact on PS: (i) Professional services firms are expected to be data aggregators and processors, (ii) Skills that were earlier limited to digital startups, such as product management, data monetization, pretotyping, design thinking etc. are now required in traditional setups as well.
• Pandemic expedited the ‘automation disruption’: As per a McKinsey study, technology could automate ~150 million FTE worth of knowledge work output. Impact on PS: Procedural jobs will be automated. Differentiation will be in form of deep functional experts who possess technology skills (i.e. a lethal mix of business and technology)
• The 4th industrial revolution is blurring the boundaries between physical, digital, and biological worlds. Impact on PS: there will be a digital twin for every professional service.

The Singularity 2045 — The Year Man Becomes Immortal (Source : Time Magazine)

Network effect is where the value emanates from what’s inside the network and not the periphery (Picture source : Wikipedia)

• Setting in of the Digital Economy, has made ‘knowledge’ a key economic resource, replacing traditional competitive advantage of labor, land, and capital (Tapscott and Drucker). Impact on PS: Professional services firms will have to create and tap into ‘knowledge networks and knowledge graphs’ to deliver value based on context from any part of the virtual and physical world.

Industries are being transformed at scale by the intangibles

• A 2018 HBR article cited a research about intangible investments becoming the main avenue of capital creation. Impact on PS: The same article prophesized that in the near future traditional accounting principles such as financial statements, will not work for digital organizations.

Tech companies are chipping away a traditional bank’s business model (Source : CBInsights)

• Technology led disaggregation of industries. Startups are using technology to introduce highly focused solutions to specific customer needs by breaking down layers of complex ‘industry stacks’ into ‘as a service’ (D2C / C2C). As an example, as per a recent PwC survey, 88% of incumbent financial institutions believe that part of their business will be lost to standalone fintech companies within the next five years. Impact on PS: Professional Services firms will have to shed fixed industry-mimicking structures and adapt fluid structures focused more on the nature of problems solved for the end consumers

Core sectors are transforming at a rapid pace (Picture Source : Bain and Company)

• There are several megatrends influencing core sectors to become more agile, flexible and democratic. Such trends are driven by rapid shifts in socioeconomic and environmental conditions along with customer behavior. Impact on PS: organizations that are striving hard to keep up with the pace of such changes are increasingly demanding professional service providers to be instantaneous, ubiquitous and always-ON

Traditional business models are being disrupted by an unprecedented focus on customer centricity (Picture source : Sales Management Association)

• As per multiple studies, majority of the GenZ and Millennial consumers are willing to pay more for improved experiences that have a positive impact on the community. So this goes on to say that digital transformation is more about people than technology. Impact on PS : Organizations continuously rethinking their business models are expecting professional services firms to reciprocate by becoming disruptive innovators (of themselves and as enablers of such).

Possible future growth strategies

Consider the following excerpts from mission statements of a few top professional services firms:

• Building a better working world
• To turn knowledge and information into value
• To provide an unrivalled level of service
• To help clients make distinctive, lasting, and substantial improvements
• To enable organizations to achieve sustainable advantage
• Bring right talent to every client issue, regardless of where the client is
• Deliver transformational outcomes for a demanding new digital world.

Now imagine, if these have to be delivered at scale, seamlessly, friction-less and to a whole new generation of digital natives. For doing so the professional services firms will have to consider alternative growth strategies. I have listed a few here, aligned to the following themes:

• Explainable AI / Cognitive Technologies, i.e. using deep tech to supplement human experts with additional capabilities to improve quality, increase access to knowledge and lower the cost-to-serve.
• Adapting Digital Business Models, in form of transforming go-to-market, redefining value proposition, repositioning services, fostering an ecosystem.
• People Empowerment by maintaining high employee engagement, reforming employee experience and adopting a flexible / agile workforce.

Barriers to adoption of such digital growth strategies could include (i) risks of the unknown due to lack of management foresight, (ii) risks related to cyber, data security and privacy, (iii) risk of competing priorities (principal-agent problem), (iv) risk of delayed ROI due to huge upfront investment and costs, (v) risk of innovation theater due to a misalignment between culture, process and mindset, and (vi) risk of organizational fault lines between digital natives and digital immigrants.

Critical success factors for such growth strategies would be (i) Clear understanding that future competition will be between ecosystems and not skill shops, (ii) Training machines to make ethical and unbiased decisions, (iii) Effective redressal of the rising skills gap, (iv) Ensuring equitable distribution of benefits from digitalization (between professional services / experts and their clients), (v) Client experience, omni-channel support and personalization.

In the end, the future of professional services is going to be extremely interesting to watch. The ethos of the industry that was built on interactions and connections, is now being tested under the new normal of the digital economy that is affixed tightly around community, the changing human behavior and sustenance of the nature that surrounds us.