Canada's $49 billion professional services industry faces transformation



    Grant Thornton LLP suggests it is time law, engineering and architecture
    firms rethink their business models

    TORONTO, Oct. 2 /CNW/ - 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, Vancouver. "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. Grant Thornton 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."

    Note to editors

    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, which has over 585 offices worldwide and is
represented in over 100 countries.





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(902) 488-5155


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