Updated: January 6, 2014
Industry Intelligence from First Research, a division of Hoover's (a D&B company)
Corporate Spending Sharply Affects Revenue - Many corporate customers cut outside expenses or delay major projects when profits are low. The revenue of many professional firms dropped during the late 2000s recession; particularly hard-hit were advertising, engineering, and IT services firms. Corporate customers depend on some professional services and view others as discretionary.
Greater Liability for Professional Advice - Because of the greater involvement of professional firms in the operations of corporate customers, firms face greater risk of blame or liability if their advice proves faulty. Customers are quicker to blame advisers, and regulators are more likely to impose penalties. Accountants and lawyers, in particular, are subject to discipline from licensing authorities if professional standards are violated.
Other Business Challenges
Customer Concentration - Many small professional firms get a big percentage of revenue from a few large customers. Despite often having longstanding relationships, customers may cancel or postpone projects for reasons unrelated to the quality of a firm's service. These large customers can demand lower prices, hurting profitability, or may shift business to another firm, severely affecting revenue.
Dependence on Key Employees - Small and midsized firms may depend heavily on a few senior employees to produce a large share of revenue. Professionals with a well-known expertise often take clients with them when they leave a firm. Many smaller firms rely on just a few managers to find new business.
Uneven Workload, Cash Flow - Because much work in the industry is on a project basis, work demands can be very uneven, especially for smaller firms. Cash flow is also uneven, even for firms with continuous work, because the bulk of payments may be made upon a project's completion. Small firms can't usually afford to cut their work force when activity is slow.
Future Business Relies Heavily on Reputation - Name recognition and reputation are important in highly competitive professional services sectors. Just as a good reputation can help a company acquire new business, damage to a reputation can result in the loss of existing and potential clients, and hurt employee recruitment and retention. Any damage to a firm's reputation can be very costly to repair.
Industry Concentration - Many professional firms specialize in providing services to companies in a particular industry, such as real estate, manufacturing, or technology, and are disproportionately hurt if that industry is in a downturn. Large firms often serve a range of industries, but midsized firms have often grown by expanding within an industry and are particularly vulnerable.