Canada's $49 billion professional services industry faces transformation

TORONTO, ON, September 24, 2007

Despite strong growth, profitability and optimism, the professional services industry is facing new pressures in the current age of increased client demands, business consolidations and competition for skilled executives.  According to a report released today by Grant Thornton LLP, changes to the fundamental models of management that have endured for decades will be required to survive and thrive over the long run.

The professional lives of Canada's lawyers, architects and engineers at private firms have long been dictated by accumulating billable hours and the ambition of being named one of the firm's partners. But the Grant Thornton Professional Services Insights 2007 report suggests that these firms take a second look at their traditional business models, in terms of how they service their clients and accommodate changing internal workplace values. The dynamic high-stakes professional services industry is being transformed by changing client demands and new demands from the talent pools of consultants who are key to the knowledge-intensive services that drive the industry.

Grant Thornton Professional Services Insights 2007 reveals an industry that, while highly sensitized to competitive threats and fundamental weaknesses, is unprepared to fully mitigate these challenges or transform strengths into opportunities. Law, architectural, and engineering firms were the focus of the Grant Thornton LLP report.

According to Statistics Canada, this industry represents $49 billion of the Canadian gross domestic product, and directly employs 1.2 million Canadians. This knowledge-based industry also includes advertising & marketing, accounting, tax preparation, bookkeeping, and computer systems design firms, as well as the related services of these disciplines. This key strategic business industry is one of the most influential in the Canadian economy responsible for providing ongoing business, technical and management counsel to every other industry in Canada, giving it an undeniable level of influence on the key decisions that shape Canada’s economy.

Recent growth in this industry has outpaced others, in April 2007 posting a 3.5% year-over-year gain in GDP compared to 3.0% for service-producing industries and 2.1% overall. "Professional services firms are a great success story in the Canadian economy, with strong growth and profitability. Ninety-one percent of those surveyed are predicting to have consistent or increased revenues this year," said Doug Moore, Partner, Professional Services National Leader, Grant Thornton. "However, we're concerned that this present success is masking some rapidly approaching challenges."

In commenting on the report, Mr. Moore noted several trends that will shake up the industry's business-as-usual way of operating. "When different companies consolidate, or come under foreign control, it means a smaller pool of existing and potential clients for these firms, and we're seeing a lot of business consolidation and foreign purchase in Canada these days."

"Secondly," he continued, "the needs of their clients are changing. They're demanding more specialized services from the firms they employ. Greater specialization means more competition for the limited pool of practitioners with these skills, and these firms are already having trouble recruiting and retaining employees. The Grant Thornton survey found that 90% of the respondents agree that recruiting skilled employees is a problem for their industry, and 82% believe that it is a specific problem for their company.  However, under the present business model, the only way for these firms to increase revenue is to have more people accumulating more billable hours."

"Finally, the values and culture of younger employees has begun to present challenges. They might not be interested in chasing after a partnership as long as they are being paid well and stimulated by their work, but that kind of thinking is at odds with the traditional culture at these firms, particularly legal practices. The iconic corner office for senior partners in the high-powered world of professional services will be vacated as a new generation of talent ushers in a 'firm-first' approach to replace the current 'me-first' approach in the sector. This will fundamentally change how client relationships are built."

Mr. Moore said that the firms studied in the report are beginning to realize the drawbacks of these traditional structures. “Companies with a business model based on individual partner-client relationships, an 'eat-what-you-kill' model, can be vulnerable when a prominent partner leaves the business. A broader team-based model characterized by a firm-client relationship will need to be adopted by professional services firms to respond to the broader needs faced by clients and the new career demands of next-generation practitioners. The report identified a trend toward this type of thinking at architecture and engineering firms, but less so among law firms."

The report also noted that architectural and engineering firms are more likely than law firms to expand their non-partner/non-principal practitioner base (37% vs. 26%) or to expand into new product or service offerings (35% vs. 24%).

"Another unique aspect of professional services firms is that they are much more locally focused in their operations than businesses in general," Mr. Moore explained. "On average, among mid-sized firms, 62% of revenues are derived from clients based in the same city. Just as other industries have become more attuned to the global market, professional service firms should be looking for opportunities outside their traditional areas. And while there are often regulatory hurdles to be overcome if a professional consultant wants to operate in a different part of the country, things like alliances and mergers & acquisitions can give one's firm a bigger reach. We've noted this trend specifically among Atlantic Canada's bigger law firms, for example."

"These business-model changes also extend into payment methods with the client, as well," Mr. Moore explained.  "There are alternate revenue models such as shared risk & reward, value-oriented pricing, contingency fees and retainers/prepaid service plans with their clients, all of which can better insulate firms from business slow-downs and irregular cash flow."

Mr. Moore concluded, "The importance of this industry isn't just limited to its immediate employees and managers.  Professional service firms are responsible for vital advice, counsel and innovation that Canada's industries rely upon.  Canada's professional services firms are facing a culture of change. Heads of these companies should immediately begin thinking about what the impending future holds for their businesses, and create management plans that will support that vision.”

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2007 Grant Thornton Survey of Professional Services Firms

The proprietary research contained in the 2007 Grant Thornton Survey of Professional Services Firms is the result of survey interviews conducted by telephone in the spring of 2007. Stakeholders at 201 mid-sized professional services firms responded to questions on a range of topics relating to current market pressures, as well as tactics and strategies to cope with change and stimulate growth.

Of the organizations surveyed, 100 were law firms, 35 were architectural/design firms, and 66 were engineering/design firms. Respondents were based in Western Canada (BC-MB), Ontario and Atlantic Canada.

Respondents consisted of stakeholders with authority or first-hand knowledge of firm decision-making on strategic and operational issues such as staffing and growth. Respondents included a balanced mix of partners and non-partners.

For the purposes of this survey, the criteria for “mid-sized” firms varied according to industrial specialization, in accordance with information provided by Statistics Canada and the Federation of Law Societies of Canada:

• Law firms could have offices in up to four provinces and a minimum of 10 and maximum of 100 professionals on staff.
• Engineering/design firms could have offices in up to four provinces and a minimum of ten employees, including at least two engineers who are partners/principals.
• Architectural/design firms must have a minimum of five employees, including at least two architects who are partners/principals.

About Grant Thornton in Canada

Grant Thornton LLP is a leading Canadian accounting and business advisory firm providing tax, specialist advisory, audit and assurance services to private and public mid-sized organizations. Together with the Quebec firm Raymond Chabot Grant Thornton, Grant Thornton has more than 3,100 people in offices across Canada. Grant Thornton LLP is a Canadian member of Grant Thornton International Ltd, whose member firms have over 585 offices worldwide and are represented in over 100 countries.