Idea in Brief
The Problem
Although high-end professional services firms are knowledge-intensive businesses that can charge premium prices, they traditionally struggle to realize the same returns as product or platform firms such as Adobe and Google.
Why It Happens
Traditionally, professional services firms have been able to grow only by selling more of their services. That means adding more people, which adds significantly to costs and keeps revenue growth linear.
The Solution
Smart professional services firms are automating aspects of their work, essentially developing products that can be combined with employees’ expertise to deliver better service at lower cost. The firms improve revenue by shifting away from billable hours to a fee for each customer transaction and finally to outcome-based pricing.
High-end professional services firms that cater to corporate clients have a clear upside: Because they provide specialized expertise, their offerings can be very lucrative. But there’s a less obvious downside: If a consulting firm, say, or a law practice wants to double its revenue, it has to double its staff of consultants or attorneys. Consultancies, law firms, ad agencies, and other professional services firms struggle to nudge their gross margins above 40% as they achieve scale. Contrast that with product companies like Google and Adobe, which don’t have to deal with the same cost structure and which enjoy gross margins of 60% to 90%.