Defining the Professional Services Market

By Jeanne Urich

Insights into the Professional Services Market

2016psmb_coverBased on 10 years of benchmarking the professional services industry, one of the top questions we are asked is how we define the professional services market and the demographics of the thousands of PS organizations that have participated in our research. Although the only company names we reveal each year are the best-of-the-best PS organizations, we want to share some interesting demographic information to show the impressive growth of the professional services market.

Professional Services Highlights in 2016

Based on input from 549 PS firms from around the world, year over year, PS revenue growth has exceeded 10 percent for the fifth year in a row. Strong job growth, with year-over-year headcount expanding by 7.8 percent, proves the vitality of the PS segment. The PS organizations in the 2016 PS Maturity™ benchmark employ more than 350,000 consultants who each produce an average of $198k in annual revenue. Collectively, these firms generated more than $69 billion in PS revenue. What’s more, these firms reported strong earnings growth, with average net profit moving up from 13.2 percent in 2014 to 15.5 percent in 2015.

On the horizon, PS headwinds appear to be picking up momentum. Major leading indicators such as the size of the sales pipeline, bid-to-win ratios and backlog all fell sharply in 2015. At the same time, voluntary and involuntary attrition has risen to the highest level since the recession. And as we have seen for the past nine years, the gap between the best-performing and worst-performing PSOs continues to widen. This year, the 300 (55 percent) lowest-performing firms generated merely 2.1 percent in net profit while the top 100 (20 percent) generated 23.5 percent in net profit.

Professional services industry by the numbers

We use the North American Industry Classification System (NAICS) to analyze the services market as Table 1 shows. The primary professional services designation is NAICS 54xx which defines PS sub-verticals as “Those in this subsector engage in business processes where human capital is the major input. These establishments provide the knowledge and skills of their employees, often on an assignment basis, where an individual or team is responsible for the delivery of high-value services to the client. The individual industries of this subsector are defined on the basis of the particular expertise, training and credentials of the services provider.”

Table 1: Vertical PS Markets — the North American Industry Classification System
table-1

Source: U.S. Census and Service Performance Insight, May 2016

Additional industry segments that generate substantial professional services revenue include software (NAICS 5112), data services (NAICS 5182) and employment services (NAICS 5613). Including these segments, the U.S. professional services industry generated approximately $2 trillion in revenue and employed 12.5 million U.S.-based workers. The U.S. market represents roughly 60 percent of global professional services revenue, which leads to a global revenue estimate of $3.4 trillion and provides employment for 20.8 million professional service workers. These figures exclude revenues and PS employees in telecommunications, financial services and healthcare services.

According to the 2015 U.S. Census, professional, scientific and technical services (NAICS 54xx) revenue was $1.56 trillion, up 4.7 percent from 2014. Across the services industries, the fastest-growing segments in 2015 were employment services (recruiting and staffing), management consulting and accounting. Two segments experienced market contraction from 2014 to 2015. These were specialized design services and architectural, engineering and related services.

Within professional services, the fastest-growing and most-vibrant segment is software and IT services. There are more than 100k software and IT services companies in the U.S., and more than 99 percent are small and medium-sized firms with fewer than 500 employees. This total includes software publishers, suppliers of custom computer programming services, computer systems design firms and facilities management companies. This segment of the PS industry draws on a highly educated and skilled U.S.-based workforce of nearly 2 million people.

Many of the concepts and uses of professional services described in this report also exist within product-driven organizations. As a result, we use the term “services-driven organization” or embedded service organization (ESO) to describe the rapidly expanding market for service organizations within product companies.

PS maturity benchmark vertical market demographics

The 2016 PS Maturity™ Benchmark is a comprehensive global study of the professional services industry based on 549 participating organizations representing more than 350k consultants.

Figure 1: Professional Service Vertical Market Distribution of the 2016 PS Maturity™ Benchmark Participants
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Source: Service Performance Insight, May 2016

Tables 2 and 3 further analyze the survey demographics by vertical market, highlighting the surveyed markets. According to this year’s survey, VARs experienced the greatest year-over-year PS revenue growth, closely followed by software as a service, or SaaS, PS organizations and IT consultancies. Overall, PS revenue grew 10.2 percent, slightly higher than last year’s 10 percent.

Based on completed surveys from 2,066 PS organizations over the past nine years, PS revenue growth for the past five years has averaged 10.9 percent. Over the same five-year period, these firms have increased PS headcount by 8.3 percent. Across the PS industry, annual revenue growth is always higher than PS headcount growth. This means firms become more productive as they scale up while the overall PS industry continues to ratchet up productivity.

Table 2: 2016 PS Maturity™ Benchmark Demographics by Vertical Market
table-2

Source: Service Performance Insight, May 2016

Hardware and networking represented the largest organizations, with a PS headcount of 1,469. Accounting firms reported the smallest average PS headcount at 152 accountants, with PS revenues averaging $24 million. Architectural and engineering firms reported the highest percentage of total revenue from PS at 90.8 percent. For other PS firms and VARs, professional services are a small component of their business. They reported the lowest percentage of total revenue.

SaaS organizations experienced the most mergers and acquisitions while staffing firms experienced the least. According to Equiteq, the consulting market experienced a strong uptick in merger and acquisition activity, with overall deal volume increasing by 13 percent from 2013 to 2014. Thirty-five percent of the more than 2,000 consulting acquisitions reported were under $5 million, and 70 percent were under $40 million. The vast majority of consulting firms are small, with revenues below $100 million.

Table 2: 2016 PS Maturity Benchmark Demographics by Vertical Market Continued
table-3

Source: Service Performance Insight, May 2016

What it takes to be a top PS firm

Going forward, leading-edge firms must continually reinvent themselves. They must always on the prowl for the next big thing while delivering exceptional projects to ensure a rich stream of repeat and referral business. Firms cannot stand still. They must continually stay ahead of the markets they serve while intentionally harvesting and repurposing current consulting assets to be able to deliver future projects better, faster — and, if need be, cheaper.

Get more information about the 2016 PS Maturity Benchmark and purchase it.