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This study addresses issues related to the productivity measurement of firms using intangible input to produce intangible output. It examines the difficulties associated with the productivity measurement of such firms and suggests a measure that takes account of the unique attributes of the factors used in their production. This issue is examined with application to a professional service industry—management consulting—in which all inputs and outputs are intangibles.

Existing measures of productivity were designed to measure productivity in industries in which both input and output are tangible standardised quantities. They are inadequate for productivity measurement of professional services, where intangible and specialised factors of production are in use. This paper seeks to address the difficulties associated with the measurement of productivity of professional service firms and to propose a more adequate measure of productivity in these industries. This measure is tested on a sample of Swedish management consulting firms, and is assessed in relation to several performance indicators of these firms. The findings illustrate the inadequacy of the manufacturing‐based measurement procedures and demonstrate that a measure which acknowledges the unique characteristics of professional services correlates better with firms' performance. As this field of research is in its infancy, these findings are only suggested as indications for direction in which future research is needed.