Five unique characteristics of professional service firms …

Own a professional service business?
Photo Credit: Bindaas Madhavi via Compfight cc

I have written this series of guides – from which these blog extracts are taken – specifically for the owner-managers of professional service businesses. Such firms are primarily business-to-business ventures and involve the marketing, selling and dispensing of a ‘professional service’. The definition is, however, broad and covers a panoply of service types – from business consulting, accounting, law, advertising, web design, architecture, engineering, recruitment, financial services, marketing, public relations, research and so on. Generally speaking, if you harness the talents of skilled, knowledgeable individuals to provide advice and support to other businesses then you fit the descriptive … and it is really important you acknowledge the unique characteristics of professional service firms … how such organisations typically operate and value create. Understanding these characteristics is certainly essential for anyone preparing to entrepreneur in this sector:

1. People-based

Suffice to say, if it were not already obvious to you, that professional services businesses are fundamentally about people. They need to be managed to attract, develop and retain the best staff, and associates, you can find in the market. Growing a professional service business also involves an understanding of the concept of a ‘leverage structure’ (ratio of junior to senior staff) and how this directly relates to your firm’s profitability.

2. Management Quality

Closely linked to the first point, the aspect of management quality is magnified in the professional services business. Professionals – by their nature educated, intelligent self-starters – will not hang around for long if the leaders are sub-standard. Similarly, this aspect will be scrutinised by any potential acquirer. It is not just, however, about the qualities of the people in the top roles. In future extracts you will learn how your embedded practices, organisation and toolsets all impact on your firm’s management quality.

3. The Marketing Challenge

Whilst a professional service might, at one level, seem an easy proposition to message to those who have the requisite need (e.g. ‘We build websites’, ‘we can audit your annual accounts’, ‘we design buildings’ etc), at another, competitive level you will have a significant challenge. How do you organise your service offerings? How do you differentiate from your competitors? How do you communicate the benefits of your service approach and style or the type of people you employ? This is a very different challenge to that faced by a product based marketer. ‘Cracking the marketing nut’ will be key to growing value in your firm – as you will get to learn later on.

4. The Selling Challenge

Similarly, selling professional services is very different to retail selling or productised business-to-business (B2B) as, for example, with software licensing. A key feature of this difference is a fundamental one that – in the main – those that provide the service are best placed/able to sell it. Unlike in other businesses that employ generic salespeople (and then give them training in the product), in a professional service business, the challenge is rather to train your doers (consultants, engineers, designers etc) to be able to sell also. Indeed, the most critical, value-determining challenge you are likely to face is that of turning this capability from an esoteric skill undertaken by a select few to a systematic, shared one. Only then will your business truly have value. I examine this aspect in some detail in Guide 08.

5. Pricing

The pricing of professional services is also a science (and art) of its own. Similar to any business, multiple factors will influence the pricing strategy – market need, competition, service model, the brand premium you command etc. What is unique is that there tends to be a lot more flexibility available to the professional services firm in this regard; each tender competition essentially presents an opportunity to renew your pricing strategy/model/rate. You will have the choice of fixed price, outcome-based risk-reward or the conventional time and materials model. How much do you discount to win a new client or to keep utilisation levels high? Unlike unsold stock, an un-billed hour can never be recovered. There are a number of unique dynamics at play here that we will need to explore later.

In next week’s blog, I will address an aspirant entrepreneur on the topic of ‘Appetite for Work.’