Beware the commoditization trap - how can professional services differentiate in the new normal?

Profile picture for user Brian Siefkes By Brian Siefkes October 15, 2021 Audio mode
Summary:
Your business has changed – your clients have likely changed, too. Brian Siefkes of Sage Intacct explores the critical role of finance in avoiding the commoditization pitfall.

Financial pitfall, mistake or failure, risk management, businessman looking into deep hole of banking percentage sign pit © eamesBot - Shutterstock
(© eamesBot - Shutterstock)

Like virtually all major business sectors, the broad and diverse professional services industry is emerging from one of the most challenging economic periods in history. Whether it’s a specialized practice that addresses unique issues, a consultancy managing a complex project, or a firm that helps clients successfully address common business challenges, professional services firms have had to navigate a perilous path during the COVID-19 pandemic. For nearly two years, they’ve had to slash costs and accelerate their push to self-service – a strategy that made sense as clients halted travel and kept their distance (literally and figuratively). But as COVID-19 restrictions recede, professional services firms must undertake a difficult self-assessment: What brought you here may not get you there.

The commendable focus on reducing cost-to-service requires lean relationship strategies (such as online self-help tools instead of on-site service and tech support). This pivot has been essential to surviving in the pandemic – as well as a willingness to expand the scope of services and accept jobs that previously fell outside their “sweet spot.”

However, today, now that businesses and people are increasingly settling into a “new normal” that involves many of the pre-pandemic hallmarks of business (such as in-person meetings and a gradual return to offices) those same firms are increasingly at risk of losing their ability to differentiate themselves. That leaves them vulnerable to losing clients to lower-cost competitors in a crowded, commoditized market, because once you embrace a lean model, it can be difficult to preserve your margins by returning your expenses to pre-pandemic levels.

Your market has changed – but how?

As services firms contemplate their next moves, they’re eager to reestablish their expertise, their market focus, and their personalized and customized services. But they’re also hoping to retain the favorable elements of the “Service as a Service” model that has positioned them well to endure unfavorable economic conditions. The best place to start is by reaffirming your in-depth knowledge of what your clients want. After all, your business has changed – your clients have likely changed, too. Whether it’s through informal conversations or some more structured research, get some answers to key questions:

  • What’s your niche today? Don’t assume it’s the same as before.
  • Is it time to retrench to your sweet spot?
  • Should you roll back your self-service/client-directed initiatives that served you so well? What ones do you keep and what ones do you jettison?
  • How has your talent base changed?
  • Can you blend a subscription-based business model with traditional professional services? If so, what’s the right mix?

Avoiding the commoditization pitfall – finance’s critical role

Beyond the qualitative and/or quantitative research you conduct with customers and prospects, your financial numbers – and the insights they contain – can play a crucial role in helping you understand customers and developing a strategy to bring your business forward.

  • Analyze revenues – Start by tracking your revenue streams in greater detail, because that revenue mix has likely shifted significantly in the past two years. Which service lines are now most popular and which are most profitable? Which customers generate the most profit? What are the trends built into your forecasting models?
  • Take a long look at expenses – You can’t make strategic decisions without a detailed breakdown and thorough understanding of your costs – regions, service lines, customer types, and more. While every services firm is vigilant about expenses in the COVID-19 era, it’s essential to continually evaluate those implied choices. With its low cost base, the lean self-help/self-service model is an almost irresistible option to maintain, but over the long run can hamper your ability to form customer relationships and can erase your firm’s differentiated advantage.
  • Increase your competitiveness – No business model develops in a vacuum. How are your competitors adapting to changing business and economic conditions – and how are customers responding?
  • Make hard choices – In the post-pandemic era, it may make sense to eliminate services that no longer generate the volume or margin your firm needs. And, while “any business is good business” was the rule of thumb during the pandemic, you might now identify customers that don’t make sense for your transformed business as you re-emerge.

Finance’s role isn’t to set the strategy – but it should provide all the necessary information to decision-makers and strategy-setters to make the best choices to reshape the business. The market has changed – don’t get caught gliding into a “new normal” with a pandemic-forged business model emphasizing lower costs and self-service that no longer makes sense.

Finding the game-changing insights

These questions and analyses aren’t merely theoretical exercises – they can deliver measurable and meaningful impact. Take, for instance, Halloran Consulting Group, an 85-person Boston firm that supports life sciences firms in clinical development, regulatory compliance, and QA. Following a complete overhaul of its financial infrastructure, the firm achieved new visibility and speed with time entry, billing and invoicing, project reporting, and metrics as well as a sharper focus on profitability. The game-changing insights led to important gains:

  • Project profitability rose 12%.
  • Billable utilization jumped from 50% to 68%.
  • Project write-offs dropped from three percent to nearly zero.
  • Cash flow improved by $1 million per month.

What’s more, this financial flexibility freed the firm to explore strategic opportunities – specifically blended billing rates where senior consultants earn higher rates than junior staff. A review of the previous year’s billings found that a switch to blended billing could yield an additional $4 million in profit.

More importantly, the firm can put the right people on the right projects at the right rates to improve client satisfaction – and avoid the dreaded trap of commoditization.

These lessons are obviously not limited to life sciences consulting. New opportunities are just one differentiated service away. But those gains can’t be achieved without a different type of financial visibility, and the right KPIs to provide the sign posts along the way.