Source: CoffeeStencil
MY 50th BLOG POST…
What’s your firm’s PLAN B?
PLAN B addresses the scenario of your firm primarily selling talent, to selling a combination of talent, technology and data. It means moving from the pyramid to the rocket business model (read this BCG report if you don’t know I’m talking about). It’s about the digitisation of professional practice.
These 10 questions may be helpful in crafting your PLAN B:
#1 How big do we need to get?
Economies of scale have not traditionally been a key success factor in talent-heavy professional services. One shining example of this is Wachtel Lipton Rosen & Katz, which is one of the world’s most successful law firms despite being a relatively small single-office partnership.
With the addition of technology and data to the mix, there may be specific advantages that larger firms may have over smaller rivals, including…
- deeper pockets, that is, the ability to wear the risks of technology-related R&D, software and start-up acquisitions;
- bigger footprints, that is, the ability to deploy new technology in more relationships and in more markets; and
- more data, that is, the ability to develop better analysis, insights and products.
Small may be more nimble and cosy, but if you can’t afford the new bright shiny toys clients might stop playing with you.
#2 What’s our dividend policy?
Be they partnerships or incorporated entities, many traditional professional service firms tend to do more handing-out than hoarding when it comes to profits.
The “cash burn” phase of new technology acquisition is generally much longer than that of new talent. It took Amazon over 20 years to turn a profit. Firms need to re-align their dividend policy and balance sheets to suit their business models. Without patient capital, firms won’t be able to invest in or acquire the new tools necessary to compete.
#3 How do we (re)structure ourselves?
The rocket model raises a range of interesting organisational design issues:
- Do we keep the suits and skivvies separate or together?
- How do we structurally protect the core traditional business, while we invest in creating the new?
- Is there a structural solution to the problem of improving the digital literacy and experience of everyone in the firm?
- Do we structure our new firm primarily around practices, processes, products or technologies?
- Do we separate sales from delivery?
- How far do we locate the laboratory from the surgery?
#4 Who can become a partner in our firm?
Most firms see “multi-disciplinary” as adding more work types or professional disciplines. With the onset of the rocket model, this definition might need to widen to include designers, technologists, project managers, marketers and sales engineers. It is interesting to note that Herbert Smith Freehills (HSF) recently appointed the head of their ALT business as an HSF partner.
#5 What do we measure?
David Maister’s profit formula (Leverage X Hourly Rate X Utilisation X Margin) has been the foundation of measurement (and therefore reward), practice management and pricing for the past four decades. The key assumption in this model is that the core asset being leverage is human capital. With new tech-based assets and products, firms will need to radically transform what and how they measure things. To illustrate, if a firm sells compliance systems and AI tools via a subscription model, tracking staff utilisation will not only be meaningless, but dangerous.
#6 How do we price?
Time-based pricing will be less prevalent in a talent + data + technology world. New pricing models will be required to set, communicate and capture value. This will include things like user license fees, subscriptions and incentivised retainers. What constitutes a “fair price” will become more complex, and need to factor in development costs and risks, IP fungibility, the scale and scope of application, and duration of benefit.
#7 Who are we competing with?
In 1960, Ted Levitt published a brilliant HBR article called Marketing Myopia. He cited the example of US railway companies going out of business because they defined themselves as competing in the railway rather than in the transport industry. In a world, where the client solution includes a combination of talent + technology + data, your biggest competitor may not be the lookalike firm three floors up, but rather the software vendor who is using your firm to iron out bugs before attempting global domination going directly to your clients.
#8 Which clients do we say ‘no’ to?
There is a general trend towards more co-created integrated solutions between firms and their clients. In this environment, firms may be forced to choose target clients, not on size, scope or sector, but rather on systems sophistication and complementarity. One could imagine a very progressive firm not being able to service clients who were technology laggards. Platforms and standards could equally determine relative client attractiveness.
#9 How do we adapt our talent pipeline?
The pyramid model creates a “tournament” where a large group of aspirants start at the bottom and are encouraged to beat their peers on the way up. The rocket model potentially changes the game with far fewer recruited at the bottom and a philosophy of retention rather than competition. It also challenges the apprenticeship system of learning and development.
On the plus-side, the rocket model opens up a number of new career pathways and facilitates a more diverse talent pool.
At more senior levels, the prerequisites for partner promotion might need to shift to include digital literacy, project management and solution integration. Partners need to be able to supervise people who are not like them. They also need to be able to align clients’ needs with the firm’s full talent + technology + data offering and be confident in selling it.
#10 What kind of culture do we want to become?
Many professional service firms have technical excellence as the dominant cultural norm. In the end, it’s scarce specialist knowledge, advice and skill that clients are willing to pay for. In changing the business model, firms need to question the kind of culture they’d like to become and what constitutes “cultural fit”. The new culture could be anchored around things like…
- the client experience,
- the client relationship,
- navigating change,
- digital literacy,
- experimentation/innovation,
- collaboration, or
- operational excellence.
Your next strategy workshop
Rather than focussing on reviewing or tweaking PLAN A in your next strategy workshop, run an “alternative futures” session and flesh-out your PLAN B. As stewards of the firm, you owe it to your partners to have thought through these possible futures and your contingency plans. An expert independent facilitator would add considerably to the discussion. Call +61 417 305 880 to speak to one.
account planning, Audit, business, business development, change management, client relationships, culture, growth, innovation, internal collaboration, key account management, marketing, pricing, strategy management
Transitioning your low-profit clients, aka saying 4Q to the Q4s
In Articles, Commentary on 11 May 2018 at 1:21 pm“Manage customers for profit, not just sales”, recommended Harvard’s Benson Shapiro in his famous HBR article way back in 1997. Three decades later, many law and accounting firms still haven’t got the message. Yes, revenue growth is really important in firms with high fixed-costs, but paying lip-service to client profitability is a major missed opportunity.
The Client Profit Matrix
Shapiro and his friends offered a useful tool to map your firm’s client portfolio. On the vertical dimension is relative price and on the horizontal is relative cost-to-serve, as illustrated below.
The Q1 Hi Price Hi Cost segment has those clients purchasing new-to-the-world offerings which require senior practitioner input and bespoke processes. It also includes those clients requesting full-service ‘turnkey’ solutions.
The Q2 Hi Price Low Cost segment includes those clients that think the best of you and that really value your services. Q2 also includes uninformed purchasers and unchallenging price-takers.
The Q3 Low Price and Low Cost segment are the bargain-hunters, no-frills and commodity buyers.
Q4 Low Price High Cost include those high-revenue (often labelled “strategic”) clients who leverage their bargaining power and demand value-adds, special services and reporting. It also includes the soul-destroying clients that require an inordinate amount of handholding. The third group, the ‘tail’, are very small clients that barely cover the costs of account establishment and maintenance.
The Power Axis and the Value Axis
Over time, Q4 clients are not sustainable. A special effort needs to made to move these clients closer to the value axis, the blue line in the chart where value is shared roughly equally in the exchange between the firm and the client.
The red line in the matrix is called the power axis. The part of the line in Q2 is where the firm has relative power over its client and bottom right Q4 where the client has more power than the firm.
Transitioning Q4 Clients
There are five broad strategies dealing with Q4 clients:
1. Reduce cost-to-serve – offer similar client benefits but deliver them at a much lower cost. This approach might include a combination of redesigning delivery processes, switching to lower cost resources, automation and cost-transfer i.e. get the client to do more. The banks’ strategy of shifting basic transactional banking services from retail branches to the web and smartphones is a brilliant example of this.
2. Service augmentation – create new higher value products and services and charge more for them. Part of this approach is to develop a deep understanding of which specific elements of value are important and tailor the offer accordingly (see this post for more). Branded technology companies are particularly adept at charging their customers premium prices for new models and inventions.
3. Unbundling – demarcating different product-markets along the value axis and negotiating different prices for each. The Big 4 accounting and consulting firms are quite adept at charging eye-watering hourly rates for their top corporate tax advisors while charging the same clients low fixed fees for commoditised compliance services.
4. Renegotiating – approaching the client with an open-book and requesting the relationship to be reset with a pricing and cost structure that’s fairer and more sustainable. There are many examples where new ‘co-created’ solutions yield better outcomes for both client and firm, but also strong incentives for long-term efficiency gains and innovation. The Perkins Cole-Adobe model is one recent example of this.
5. Say goodbye – if all else fails saying, “4Q” to Q4 clients is the best option. Retaining a value-destroying client over time is clearly not in the firm’s interest and walking away is the bravest and smartest thing to do. Gifting soul-destroying clients to your competitors can make you stronger and them weaker. There may be opportunities to transfer Tail clients to other providers better suited to meet their needs, in return for ‘right’ client referrals.
Client life cycles and migration paths
The Client Profit Matrix can also be a useful analytical tool to track client migration paths over time. One theory is that a typical client relationship will go from Q1 ==> Q2 ==> Q3 ==> Q4. At the early stages of a relationship, costs and price are higher as the parties get to know each other. As the relationship matures and other firms start to contest the client’s spend, prices start to drop. Over time, cost-to-serve rises as more bells and whistles are added.
Clearly, service innovation and better value communication are essential in slowing down this maturation cycle and keeping clients in the top-left of the matrix for longer.
The underlying intent of a ‘loss-leader’ strategy is to go quickly from Q3 ==> Q2 or Q1. It is interesting to track how many of the clients, in fact, make that move and what facilitates this migration. One recent example of this comes from Allens-Linklaters who acquired Canva via its low-cost, low-price online Accelerate platform. They recently reported helping Canva to grow to a $1 Billion market valuation.
Doing a longitudinal heat map of the Client Profit Matrix can be a very useful tool to track your firm’s overall strategic health. In the graphic below, one can clearly see the firm is losing ground and becoming weaker over time.
Call to action
Have a go at mapping your firm’s client portfolio. It will reveal your entrenched Q4s and force an honest strategic discussion as to which of the five transitioning strategies to pursue.
Share this:
Like this: