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Professional Service Firms

A professional service firm (PSF) applies specialist technical knowledge to the creation of customized solutions to clients' problems. The term has traditionally been used to describe firms working within the formally regulated professions, such as law, accountancy, and architecture, but is often used more broadly to encompass firms such as management consultancies, advertising agencies, and investment banks.

Because the term profession is highly contested within the academic literature, so too by implication is the term professional service firm. However, such firms are generally agreed to be distinctive in three key respects. (1) Resource base—PSFs have relatively limited physical resources; their value derives primarily from their professional workers, specifically the technical knowledge, expertise, and experience they possess. The management of knowledge and knowledge workers is therefore fundamentally important to PSFs. (2) Organizational form—through the partnership form of governance, professionals in PSFs experience a higher degree of autonomy than they would typically enjoy in conventional bureaucratic structures; those PSFs that have adopted the corporate structure may still attempt to imitate elements of the partnership form. (3) Professional identity—firm members identify themselves as professionals and are united by a shared understanding of the concept of professionalism. This professional identity is often associated with the rhetoric of independence and exemplary ethics, but may be redefined within PSFs to focus on exceptional commitment to clients and quality of service.

Conceptual Overview

The management literature has traditionally focused on manufacturing, retail service, and technology-based firms. However, in the past couple of decades, PSFs have attracted considerable attention from management researchers as they have grown in scale and significance within developed economies (for example, there has been a 15-fold increase in articles about such firms in refereed academic journals since the early 1980s).

Scale and Significance of PSFs

The professional services sector has grown by more than 10% per annum over the past 25 years and currently generates more than US$1,000 billion in revenues globally. There has been a corresponding growth in the size of the firms within this sector, as many PSFs have followed their clients abroad and sought to become global. In the legal sector, U.K. firms have taken the lead in expanding internationally and now have extensive global networks, but they are dwarfed in scale by the accounting and consulting firms. The largest accounting firm, PricewaterhouseCoopers, currently employs 130,000 people in almost 150 countries, with a 2005 gross revenue of US$20 billion, making it larger than Fortune 500 companies such as Oracle, McDonald's, and Sears Holdings. The largest consulting firm, Accenture, is a Fortune 500 firm in its own right. The investment bank Goldman Sachs makes it into the top 100 of the Fortune rankings.

In parallel with this growth, PSFs have come to play an increasingly significant role in society as a whole. The high salaries they offer mean that they can attract a large proportion of business graduates (the majority of MBA students from top business schools join consulting and investment banking firms). Many global investment banks are now far larger than the clients they serve and have a profound impact on fads and fashions in financial products. Accountants no longer serve simply as watchdogs or even as specialist business advisors to their clients; as the Enron scandal demonstrated, they have become deeply embedded within client firms through long-term and broadly defined relationships. PSFs are also subsuming the activities of their clients into their own organizations as they become increasingly involved in outsourcing activities. Their influence extends to the way we are governed as well as the way we do business; PSFs have taken the lead in reshaping the public sector in many developed and developing economies and have become major funders of political campaigns.

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