Innovativeness in the professional services industry: A practice level analysis

Professional services firms (PSFs) are characterised by high external client interaction as well as by high levels of internal knowledge intensity. However, the literature is remarkably mixed on the question of how these characteristics impact innovativeness in this industry. While client interaction and demand may induce innovation, clients may be looking for tried-and-tested solutions to their problems from professional service providers. Similarly, while professionals' knowledge and expertise is required for new service development, their specialisation does not necessarily lead them to be innovative. We analyse both externally-oriented and internally-oriented mechanisms to understand PSF innovativeness, conducting our analysis at the level of practice areas in PSFs. Using a survey of 218 practice areas, we only find support for the internally-oriented mechanisms and not external ones. It is a combination of human capital, the sharing of knowledge internally, and allocating decision rights to the professional staff that drives innovativeness in PSF practice areas.