Professional Service Organizations (PSO) often deal in Human Capital (i.e. they sell time), which creates pressure to manage quickly but not always effectively. Even as they advise business owners, leaders in a PSO neglect many of the same operational and financial issues in their own organizations. Before client service and profits begin to decline, PSO leaders must identify their operational inefficiencies and decide if they have the resources internally or externally to address them. A well-managed PSO anticipates change with the right key performance indicators — helping leaders look ahead instead of always over their shoulders.
Professional service organizations historically can be a scattered and distracting place. Imagine all of these intelligent individuals — lawyers, accountants, engineers or architects — selling their knowledge and time. As owner and employee numbers increase, the business model is prone to inconsistencies and neglect without an executive leadership team that focuses a percentage of time on running the business.
Some of the common operational inefficiencies we’ve seen in PSOs include:
- Aging accounts receivables
- Lack of tax planning
- Internal control and compliance issues
- Inadequate investment in technology (i.e outdated)
- Misalignment between marketing strategy and the business plan
- Reactive recruitment
One of the solutions in PSOs is to assign a partner or shareholder to certain areas of the business: technology, marketing, HR, recruitment, etc. However, lack of knowledge in these increasingly specialized areas can result in minor errors at best and legal issues at worst. Before going too far down that road, leaders need to take time and really assess the organization’s capacity to manage these areas of the business internally — or if outside expertise is necessary as well as valuable.
Top Business Challenges for PSOs
Distinguishing one professional service from another is dependent on the owners’ ability to communicate value. When you sell an intangible service or knowledge, value is hard to pin down. It requires market research on your target audiences, their service needs, how your competition communicates value and why your existing clients say they choose your organization. Failure to take a hard look at value makes it difficult to sell, let alone attract talent or manage service expectations.
And these are some of the top challenges for PSOs to sustain good margins and avoid commodity price pressure. Even before the recession, PSOs were looking at ways to perform projects with fewer on-site visits, more milestones built in, use of more subcontractors and the ability to efficiently deliver measurable results. Clients are more likely than in the past to put a cap on spending and demand tangible deliverables that match PSO fees.
According to an annual survey of top-performing PSOs across the US by SPI Research, the most profitable PSOs are more specialized in their service offerings and/or they concentrate on high-growth segments where they are often the market leader. A significant portion of business comes through referrals thanks to their market leading reputation, and they have created a transparent culture of communication that attracts clients and employees.
According to the 2016 SPI Research survey, top-performing PSOs averaged net profits of just over 20 percent while average firms reported net revenues of 14.9%. Interestingly, the top PSOs referenced in the survey are incorporating some level of technology consulting in their practices.
Technology Is Partial Solution
PSOs have two challenges when addressing technology needs: operational and client focused. A 2016 survey by Computer Economics showed that PSOs were more likely to budget for operational IT spending — upgrades of existing IT — than investment in new IT solutions through capital outlay. One possible explanation is the migration of many organizations to cloud technology.
When considering IT investment, it is important to look at internal as well as external investments. Demonstrating up-to-date technology is a primary recruiting tool because younger professionals prefer to work in organizations that leverage technology for efficiency (e.g. workflow, remote work, databases). The right technology investment can also help PSOs measure performance (e.g. CRM, web analytics, marketing automation, financial reporting).
In addition, technology is a selling point for clients in terms of delivering services cost-effectively, helping them translate historic data into smart business decisions and also forecast opportunities (e.g. portals, accounting software, point of sale systems, time and billing, enterprise systems).
However, new technology investment can only augment staffing, attract clients and increase revenue when it is aligned with the business strategy. Too many organizations invest in a software solution or peddle it to their clients without fully developing a strategy around its value — or providing staff training to use it effectively. Moreover, growth can delay timely investment in software or even cloud-based applications that can support efficient back-office functions.
Getting back to basics, PSOs must assess their vision and assign leaders to each area of the organization: finance, operations and marketing. Then they must name and prioritize their goals:
- Increase productivity
- Control cost
- Attract and retain talented people
- Solve complex business issues
- Provide outstanding client service
- Financial and tax compliance
- Managing technology and future investments to stay competitive
How should finance, operations and marketing align to support these goals?
Seek New Business Opportunities
One goal not mentioned yet is the development of new business opportunities. Successful PSOs are not only expanding services with existing clients, but also adding new clients. The most successful PSOs surveyed by SPI Research derived more than 20 percent of revenue from new clients. At the same time, they kept employee headcount growth lower than revenue growth through a larger sales pipeline and efficient resource management. While the slowest-growing organizations reported higher profitability, the danger was in neglecting new business opportunities in favor of short-term profits.
In a 2015 blog post, SPI Research cautioned PSOs from discounting, as survey respondents noted a prevalence of longer sales cycles and fewer winning proposals when the PSO offered price concessions. The promise of future work rarely made up for the loss in margin because clients that demanded discounting already perceived the service as a commodity.
Other ways of expanding business can happen by positioning the PSO as a leader in a particular industry vertical, thereby elevating the sophistication of the service or consulting offered. We have also seen PSO growth through M&A.
M&A activity in PSOs can include a “horizontal merger” in which firms within the same industry merge in order to add capacity and clients as well as expand geographically. PSOs can also explore product extension mergers by aligning or acquiring complimentary services such as an engineering firm adding general contractor services or a law firm adding collections services. Of course, such mergers must occur within the legal limits of the industries involved, and there are additional costs associated with M&A.
At Cornwell Jackson, our tax and business services teams have worked with clients for many years to optimize back-office functions, but also assist with business strategy and planning. We have supported PSOs in determining the best KPIs, the optimal level of staffing and timely introduction of accounting tools and processes that enhance their growth. For more information on how your PSO can face today’s growth challenges head-on with a qualified outsourced relationship, contact us.
Mike Rizkal, CPA is a partner in Cornwell Jackson’s Audit and Attest Service Group. In addition to providing advisory services to privately held, middle-market businesses, Mike oversees the firm’s ERISA practice, which includes annual audits of approximately 75 employee benefit plans. Contact him at firstname.lastname@example.org.