An article by Sebastian Hartmann, Stephan Kaufmann & Prof. Dr. Markus Kreutzer – September 2019
The ongoing paradigm shift in professional services – driven by demand changes, technology and a new competitive landscape – completely alters the long-standing, traditional management playbook for law firms, consulting, accounting, tax advisory and even marketing agencies and engineering services. The inherited recipes for growth and profitability are eroding as the input-oriented models (e.g. billable hours or days) of traditionally fuzzy knowledge-based services are being replaced by throughput- or output-based compensation for much more client focused and increasingly digital solutions. Leaders and managers in charge of professional service firms need to adjust their management playbook in order to remain relevant in the next generation of professional services. But where to begin?
The seemingly daunting answer: Everywhere.
But let us break down the management implications into a few key dimensions. The following management framework, which was originally published by Prof. Christoph Lechner and Prof. Markus Kreutzer (2007) for professional service firms (PSFs), has been refreshed for this purpose and provides an excellent lens. The updated dimensions now reflect the fact that the traditional characteristics (e.g. services are intangible, cannot be stored or pre-fabricated) are fading quickly. Based on qualitative and quantitative research, Prof. Markus Kreutzer, my colleague Stephan Kaufmann and I are currently working on outlining the key aspects of this change. This will provide leaders and managers with some first questions for developing their own views and new „play moves“:
A new and much broader competitive landscape reflects the widely increased continuum of possible and feasible strategic positionings for PSFs. The range of possibilities is driven by technology and much more digital business models, like smart managed services, knowledge-as-a-service, software-as-a-service or ecosystem strategies, like value networks and marketplaces. The emerging strategic options also create a new space for PSFs to differentiate themselves and develop competitive advantages along traditional and new value levers. So, ask yourself:
- What kind of firm do you want to be?
- How do your current and prospective clients and employees respond to this ambition?
- How does your firm stack up against others – as a whole or with respect to parts of your portfolio or even individual solutions?
Clients & Solutions:
Moving towards delivering results expressed as more tangible and sustainable solutions requires new management functions, like
product solution lifecycle, innovation and portfolio management as well as adjustments along the entire business architecture and client journey. Architecting, designing and leading a next generation professional service business is becoming much more explicit, digital and systematic – which means that it can be managed:
- Is your firm aware of the strategic environment and position of every solution with respect to targeted client segments?
- Which business models are emerging in your fields of play? Are you aware of new and emerging competitors or potential substitutes to your solutions?
- Who is taking care of continuously optimizing each and every solution in your firm’s portfolio across clients and engagements? Who is managing the portfolio strategically and how?
People & Culture:
New talent, skill profiles, roles, career and development paths are needed in order to deliver solutions reliably and with better scalability. Specific management capabilities need to be honed around the embedded technology and the up- and downstream extended value chain of professional services. Long-term perspectives are needed as the competitive resources expand from traditional front-line employees to technology, data and delivery models.
- Are you hiring and retaining the right talent for these new tasks?
- How is your firm shaping its culture to support the strategic ambition?
- What might be the right composition for your desired next generation leadership team in a few years? What kind of experiences – especially from other industries – may be helpful?
Organization & Ecosystem:
New business models and value chains typically require modifications to organizational structures, ownership models and the understanding and continuous management of the firm’s ecosystem. Managing this transformation, the stretch and contraction along different phases, should trigger organizational adjustments. The increasing use of technology and more diverse skills and talents is also likely to trigger an expanding supplier and 3rd-party provider portfolio – and the emergence of significant “direct spend” (= elements of client-focused solutions) in contrast to the traditional almost pure “indirect spend” (e.g. laptops, premises etc.). Together with the need for market-oriented partnerships and alliance, a conscious and strategic management of the firm’s ecosystem is turning into a key capability for the future.
- Has your firm’s structure already been adjusted to the dynamics and diversity of its specific environment?
- Are you combining traditional and new business models in ambidextrous organizational setups?
- Are you aware of all elements and opportunities in your ecosystem? Are you consciously employing specific management approaches and strategic directions for them?
- Do you have a procurement, alliance and ecosystem management function, which is working hand in hand with your business leadership?
IP, Data & Technology:
IP is becoming more and more tangible and does not just live in a firm’s “walking assets” any more. Solutions are carefully architected based on people, methods, data, insights and technology – with ever shorter lifecycles. Technology management approaches like DevOps are becoming a must-have – and the thirst for data grows in every function and every step along the client journey and every single solution’s delivery process.
- Have you prepared your technology service landscape to connect seamlessly and evolve together with your business needs and the solution portfolio?
- Are you architecting your solutions to exploit data-driven value?
- Is your firm using primary and alternative data sources to generate new sales insights and uncover new potential within your client base and beyond?
Financial management and other key support processes need to account for a more diverse set of business models, entailing new delivery models, different cost structures, measures of success and KPIs. Furthermore, the unprecedented levels of investments and the operational tail of technology investments changes the entire economics of professional service firms.
- How are you managing the changing cost structure?
- How are you funding the continuously increasing use of technology? Are you charging clients for your technology?
- Are you leveraging the concept of firm value for better access to capital, bridging partner age gaps and financing multi-year business cases of more digital and scalable solutions?
- How are you managing the economic transition within your partnership and across your firm (or network)?
As we jointly work through the paradigm shift for professional services, the implications and possible answers and levers emerge – and form the next generation management playbook for our industry. But the possibly even harder part: Letting go of the old ways of running a professional service firm. Let’s see whether “old dogs can learn new tricks” …
Interested in assessing your own firm’s maturity and readiness for the future of professional services? Take a quick assessment!
Looking forward to hear your thoughts!