How Does Your Professional Service Firm Stack Up?
Understanding and knowing current benchmarks is a great way to measure your firm’s success against industry standards. They give you a way to identify areas in which you excel and where attention and resources may be needed. Benchmarks can be used to create a comparative analytics report detailing KPIs relevant to your firm. This article highlights benchmarks for three specific subgroups within the professional service industry: architecture firms, law firms, and marketing consulting agencies.
Professional Service Firms – Industry Benchmarks
Architecture FIRMS
- The architecture industry is anticipated to experience continuous revenue growth in 2022 after experiencing a sharp decline in 2020. The economic decline brought on by the pandemic led to a steep drop in nonresidential construction in 2020 and 2021, which is a disproportionate influencing factor for industry demand. Declining construction was the result of social distancing restrictions, but also a highly uncertain economic environment in which unemployment spiked, and consumer confidence and spending dropped.
- Profits are expected to account for 10.4% of revenue in 2022. This is after a five-year decline, which can primarily be traced to the 2020 drop in profit from the pandemic.
- Wages represent the largest cost component in the industry due to the skilled labor requirements. Total industry labor costs are expected to account for 36% of industry revenue. Industry wages as a share of revenue decreased in the past five years, falling from 37.7% in 2017, mainly due to increased investments in technologies such as computer-aided design and increases in other costs, which helped temper growth wage costs over the past five years.
Law Firms
- Certain services are countercyclical, therefore benefiting from the economic turmoil in 2020. For example, bankruptcy and unemployment legal services increased due to heightened business failures and unemployment. Most significantly, an increase in demand for M&A and private equity deals in 2020 drove revenue growth for the industry’s top firms.
- Revenue for law firms industry was negatively affected by the pandemic in 2020 as businesses were forced to temporarily close and business and consumer spending fell. In 2022, however, revenue is expected to increase an estimated 1.9%. Demand from businesses is expected to increase in 2022, particularly for smaller businesses that were negatively financially affected by the coronavirus pandemic in 2020. Additionally, demand from large corporate clients has remained strong throughout the crisis.
- This year’s profits are expected to be 21.4% of revenue. Industry profit remained stable overall during the five-year period as declines in revenue have been offset by reduced costs as a result of remote work by law firms. In 2022, the industry as a whole is expected to benefit from broad-based economic growth and resumption in spending by downstream businesses and households.
- Wage expenses are estimated to make up 37.6% of industry revenue in 2020. Similar to most industries in the professional services sector, wage costs represent the largest cost to industry operators. Attorneys are highly educated and knowledgeable, and lawyers often specialize in a specific legal practice, such as securities law, which requires further experience and expertise. Work in this field also requires personal service and face-to-face contact with clients, and operators compete to attract top talent to their firms. Wages have remained stable as a share of industry revenue over the past five years.
- Rent accounts for 7.8% of revenue. Many law firms lease office space and larger firms often incur higher rental costs because they are located in high-traffic areas.
Marketing Consulting Agencies
- Marketing consultants have benefited from overall growth in corporate profits over the previous five years. An increasing segment of revenue comes from internet advertising due to an overall increase in internet availability and usage. This is due to the more specifically targeted nature of the advertising.
- Profits had risen slightly in the past five years, from 8.7% in 2014 to 8.9% in 2019. Profitability is expected to improve drastically as the overall economy recovers from the pandemic
- Wages make up a large percentage of revenue due to the need for highly educated employees adept at client engagement and service skills. The continuing advancement of the skill sets of these employees will enable them to command higher wages.
- Purchases made up a small part of revenue at 2.9% in 2021. These costs are typically for purchasing software and office-related products. Additionally, subcontracting professional services can also be a significant item in this category.
Questions about Benchmarking Your Professional Service Firm?
Every professional service firm is unique, and the above statistics will not apply to all. The metrics should be used as a guideline. Smith Schafer is an ongoing source to help you grow your business with strategies to increase profits, maintain cash flow, identify opportunities, and much more! Click to contact a Smith Schafer professional.
Statistics and information were provided from IBISWorld Reports.
