Professional Services Vertical Applications Market Report 2009-2014

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This applications market sizing report examines the 2009 performance of the top 10 applications vendors in the professional services vertical, which is made up of firms involved in the delivery of specialized services including accounting, architecture, engineering, information technology, legal, staffing, tax and audit, as well as other business services such as advertising and public relations.

As the general business climate begins to improve, professional services organizations have experienced increased booking, albeit still below the pre-recession levels. Many companies have boosted their spending with accounting, legal, tax and audit firms in order to meet a growing array of governance, risk and compliance requirements.

In other cases, demand for specialized services has picked up with architecture and engineering firms cashing in on government-funded projects to create new or replace existing infrastructure.

IT services will also become a growth engine in the vertical as companies accelerate investment in Cloud-based services to augment or replace their on-premise systems.

Top line and Bottom line

On the top line, the professional services vertical is showing some signs of life as the business cycle begins to trend upward. However the fragmented nature of the vertical highlights the fact that certain segments such as architecture and engineering firms that are direct beneficiaries of government stimulus funds in fast-growing countries in Asia and Latin America will fare well.

Staffing firms such as Kelly Services have reported double-digit revenue growth in their operations in Americas and Asia Pacific in recent quarters after posting a 22% drop in sales in 2009.

Business in legal services remains sluggish. Clifford Chance LLP, one of the world’s largest law firms with 3,200 lawyers in 20 countries, continued to post a 5% revenue decline to £1.1 billion for its fiscal 2010 ended April 20, following a similar drop for its fiscal 2009.

The professional services vertical will continue to experience sweeping consolidation in order to take advantage of the economy of scale and increased demand for global delivery of specialized services.

While applications vendors could seize the opportunity to help standardize the back to front-office functions of their customers, the strategy may not resonate with professional services organizations that take an autonomous approach in running their far-flung operations because of their insistence of keeping location-specific workflow and IT system intact. WPP, the world’s largest marketing services company, is an example of that.

The bottom line remains that the professional services vertical is all about hiring and retaining talents that are increasingly mobile and migratory because of the fluidity of the knowledge economy made possible by globalization and open exchange of ideas and transferable skills. That makes the job of applications vendors focusing on specific segments like legal and engineering more important than ever, while defending their niche by addressing the present and future needs of their customers through continuous innovation and uninterrupted delivery domain-specific content and analytical insights that are hard to replicate.

Market overview

The market for applications for the professional services vertical was flat in 2009 as end users ranging from lawyers to engineering firms took the cue from their customers with multiple rounds of belt-tightening in order to stave off the effects of the recession.

For much of 2009, the market was largely supported by maintenance revenues that had been built up over the previous years. License and subscription revenues were growing at single-digit at best.

In fact Intuit saw a reduction in the number of its professional accountant purchases by 1,000 during its fiscal 2009 because of the downturn even though it managed to post an 8% rise in revenues. For its latest fiscal year ended in July 2010, unit sales dropped 2,000 while revenues from these professionals rose 13% because of higher prices.

Meanwhile large deals were quickly replaced by small transactions, while the number of net new customers was slipping. It also came on the heels of accelerated customer churns with on-demand channel vying to become a viable alternative to on-premise implementations.

For example, Salesforce has been making major inroads into the professional services vertical because of the intrinsic value of customer relationship management applications to an array of services companies from software developers to accounting firms.

In fact, Salesforce has become a metaphor for many professional services companies to realize the untapped potential of the Internet, allowing them to be agile and disruptive, while exploiting a new generation of tools for widespread distribution of their goods and services through customer and partner collaboration.

The same applies to NetSuite, which has been beefing up its ERP, eCommerce and CRM offerings for the on-demand audience. In 2009 NetSuite acquired QuickArrow for its professional services automation offerings, following its earlier purchase of OpenAir.

Other vendors have also fired up their acquisition engine to fuel their growth. Deltek, for example, acquired Maconomy for its ERP applications designed for marketing and advertising firms in July 2010, while Thomson-Reuters created a business unit dedicated to governance, risk and compliance following a series of acquisitions. The purchases included TaxStream for income tax provisioning, Abacus Enterprise for tax management, GoSystem Audit for auditing tools, Paisley for Governance Risk and Compliance, and more recently Sabrix for sales tax management and Complinet for GRC.

The shift toward the on-demand model, coupled with the consolidation trend, is expected to transform the business model of vendors selling into the professional services vertical with not just operations and customer information management applications, but also a whole array of tools for online community creation as in the case of the Intuit Partner Platform for QuickBooks extensions from Intuit partners, or social media for the enterprise as in the case of Chatter from Salesforce.com.

Implications of the Great Recession of 2008-2009

One of the perverse impacts of the recession has to do with the steep cuts that companies have made to their inhouse legal, accounting and human resources departments, making it impractical or even impossible to handle increased workload with the return of a more favorable business climate.

The growing acceptance of using outside service providers to handle such tasks has been a boon for those that handle accounting, customer service, IT, legal and staffing tasks either on a project by project basis or taking over the complete end to end business process on behalf of their clients.

Some of these service providers, including many in the business process outsourcing space, have been struggling lately, raising fears that demand for their services may lag behind that of the overall professional services vertical because of the general reluctance of BPO clients – especially those that receive government subsidies during the peak of the recession – to eliminate internal positions in order to keep their image intact.

While IT service providers such as Accenture have reported strong financial results and sunnier growth outlook, others such as Genpact and even Oracle Financial Services Software Ltd., formerly iFlex Solutions, have resorted to layoffs to sustain their BPO operations over the past year.

Since June 2009 Oracle Financial Services has eliminated 1,703 employees, including a 30% cut to the headcount of its BPO unit, which primarily serves financial services companies like Citigroup handling their back-office functions. The BPO unit of Oracle Financial Services Software Ltd. saw a 25% revenue decline for its third quarter of 2010.

It’s fair to assume that the impact of the recession on the professional services vertical will be uneven at best, perhaps leaving some of the largest and the most established organizations in better shape than ever. As a result it will take longer for small and midsized professional services organizations to regain their footing, thus prolonging the recovery for applications vendors that focus on this segment.

Customers

While the WPP’s stance on leaving its local operations and IT systems is unique because of the outsized presence of the advertising firm, most professional services organizations are coming to terms with the importance of enterprise-wide standardization.

For example, Ciber, a mid-sized IT consulting firm and systems integrator, recently announced its plan to hire a new chief information officer whose first task is to streamline in-house ERP and redundant systems. For the time being, Ciber, which has made a number of acquisitions in recent years including Canon Technology Solutions and Iteamic Private Ltd. in 2009, runs SAP ERP for its business in Europe, while also using PeopleSoft Enterprise from Oracle for its US operations.

Even vendors focusing on professional services vertical such as Wolters Kluwer has been rolling out an enterprise HCM system from Oracle to manage its far-flung operations, which have more than 19,000 employees around the world.

That trend is expected to become more pervasive among IT consulting firms. For example, IDS Scheer was picked up by Software AG in 2009, while NTT Data bought Intelligroup in July 2010.

It is fair to assume that the recurring theme among customers in the professional service vertical will be on how different internal and external systems can stay compatible at a time when Cloud-based solutions loom large in the context of IT transformation.

That in itself could pose serious opportunities and risks for vendors that target the professional services vertical, formulating new strategies that could serve as a template for them to go after other verticals that will face the same dilemma of having to choose between on-premise and on-demand solutions in the coming years.

Top 10 Applications Vendors In Vertical

The following table lists the 2009 shares of the top 10 applications vendors in the professional services vertical and their 2008 to 2009 applications revenues(license, maintenance and subscription) from the vertical.

Vendor2009 Share(%)2009 Applications Revenues From  Professional Services($M)2008 Applications Revenues From Professional Services ($M)
Microsoft15.1%719669
Oracle15.0%715679
SAP12.9%617598
Intuit9.0%429416
Sage8.4%402398
Thomson5.1%242227
Wolters Kluwer4.7%225224
Deltek3.9%184193
UNIT42.8%132122
Salesforce.com2.4%116108
Subtotal79.3%37813634
Other20.7%9841168
Total100.0%47654802

Vendors To Watch

One of the major developments is the invisible hand of Microsoft, which has been particularly active in shoring up the product portfolios of vendors that focus on the professional services vertical by OEMing its vast catalog of software technologies from SharePoint to analytics.

The latest is the 2010 deal to help Lexis-Nexis develop a new suite of practice and financial management applications based on the Microsoft Dynamics AX platform for legal customers especially those that have been accessing the LexisNexis content offerings in Europe.

Microsoft also provides the technology framework for applications being developed by Client Profiles, another major ISV focusing on the legal marketplace, and Thomson Elite, a division of Thomson-Reuters, that sells into major law firms. The invisible hand of Microsoft could become a sensitive issue as these partners continue to expand by stressing their unique brand equity and product differentiation, a value proposition that could become harder to come by.

The same applies to the heightened tension between Thomson-Reuters and Wolters Kluwer, which have been facing off each other in a number of segments from accounting to legal and from GRC to industry-specific content financial services.

Outlook

On the upside, the professional services vertical seems to be on the mend as demand for expert services begins to gather speed especially in emerging markets where such services are considered a premium.

The onslaught of cloud-based services and on-demand offerings that include the latest social media tools will also help vendors such as Salesforce.com and NetSuite to gain traction within the vertical.

These new products – some of which are available free of charge – could have major ramifications on how professional services organizations are going to be running their operations, but also on the way they manage their customers and partners.

On the downside, one of the most challenging segments within the vertical is going to be staffing firms, which could see further shakeout given the bleak job recovery picture in developed markets such as the United States.

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Professional Services Vertical Applications Market Report 2009-2014

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