Diverse and complex, the global professional services industry is constantly evolving and growing. How to stay competitive in this fast changing environment? Innovate! Christopher Williams (NEOMA) and Sander van Triest (Amsterdam Business School) explored the key drivers of innovativeness in Professional Service Firms.

The global professional services industry is worth hundreds of billions of dollars per annum and continues to grow – in good times and bad. Professional Services Firms (PSFs) within this industry often need to innovate in order to tap into this growth, developing new types of offerings and finding new ways of working with clients. We set out to understand innovativeness in PSFs in our research, a topic that has not received sufficient attention by academics in the past.

Because PSFs compete through their practice areas, our approach was to view these practice areas as the key drivers of innovativeness in PSFs. It is the practice areas that need to evolve in order to stay relevant to their clients. In other words, PSFs need to consider how to make their practice areas more innovative if the overall firm is to compete in the long-run. The results of our research can offer some guidance on this.

What determines innovativeness in practice areas of PSFs?

Our main objective was to answer this question by comparing both internal and external drivers of innovativeness in PSF practice areas.

Internal drivers include:

• human capital (the levels of skills and training of the professional staff),
• the degree of autonomy the practice is given,
• and the extent to which they share knowledge internally.

External drivers include:

• the degree to which the practice area is dependent on client input,
• the extent to which professionals are physically ‘embedded’ with clients,
• and how flexible the practice – client relationship is as needs change.

The external side is all about client interaction and the relationship with clients. We found that the literature was mixed on answering our question from these internal and external perspectives – there was no clear consensus.

We also wanted to answer this question for a large sample size of practice areas, in order to utilise statistical tests on the data (rather than a case study, for instance). After a lot effort to collect the data over a number of years and locations, we arrived at a usable sample size of 218 practices in a range of different types of PSFs.

The results show strong support for the internal drivers and little support (and even contradictory evidence) for the external drivers. Having trained and skilled staff, having autonomy, and sharing knowledge internally are all factors that drive innovativeness in PSF practice areas. However, on the external side, being dependent on client input and being physically embedded in client locations actually have a negative effect on practice innovativeness. Flexibility in the practice – client relationship has no effect on innovativeness.

How to design the organisational system around a PSF practice area in order that its innovativeness can be enhanced?

PSFs can compete in the long-term by helping their individual practice areas become more innovative. Organisationally, this can be done by:

• Focusing on internal human capital within practice areas,
• Giving decision-making rights (i.e., autonomy) to the practice area,
• Encouraging the sharing of knowledge within the practice area, even when the professionals are working on different client projects.

At the same time, PSFs have to be sensitive to the fact that over-embedment with clients can actually have a negative impact on innovativeness of the practice area. Practice managers can watch out for tell-tale signs of over-embedment with clients; these may produce good revenues in the short-term, but can make the practice less competitive in the long-term.

We also do some additional analysis in the study, analysing the data according to different characteristics of practice areas. These additional results also show consistent support for the internal determinants of innovativeness in practice areas. In other words, the positive effects of human capital, autonomy and knowledge sharing all apply regardless of whether the practice area is accountancy focused or management consultancy focused, and regardless of whether it has large numbers of clients or a small client base, or whether the practice itself is large or small.

However, on the external side, the results show some complexities and nuances. Client facing dynamics are indeed important for innovativeness only in certain situations. These include when the practice does have relational flexibility with clients and has high numbers of clients or is either an accountancy practice (as opposed to a management consultancy one).

In summary, because the PSF industry is highly competitive – as well as being large, diverse and global – it is vitally important for firms within the industry to consider their level of innovativeness in order to compete. Our research shows that this can be done not necessarily at the firm level, but at the practice area level. Practices – even within the same firm – differ to the extent that they are innovative. Results reveal practices can be managed to make them more innovative and that this is best achieved through internal drivers. At the same time caution should be exercised with respect to how external client relationships may undermine innovativeness for a practice area, and ultimately, for the PSF.

Christopher Williams (NEOMA Business School) & Sander van Triest (Amsterdam Business School)

To go further: also read the research article: Williams, C. and Van Triest, S. (2021) ‘Innovativeness in the professional services industry: a practice level analysis’, European Management Review, DOI: 10.1111/emre.12450