Big changes in Professional Services & their clientele - are you asking the right questions?

The business of selling and delivering services has been changing a lot lately but management and other practices may still be stuck in low gear. Here are three areas ripe for top executive discussion within a services organization (and other firms, too!).

Harvard Business Review had a great piece titled “What Professional Service Firms Must Do to Thrive”. If you’re wondering what you need to read to kickstart your day, start with this article.  A foundational aspect of this piece concerns the risks that service firms acquire as they chase new client work just to maintain chargeability. This is especially timely as service firms have had to alter their service mix, offerings and delivery models during the pandemic and now must assess where and what this has wrought them.

The authors have included a great table that delineates several kinds of services from ‘gray-hair’ services (eg : strategy or M&A consulting) to ‘commodity’ services among others. Each kind of service line has different margins, sales challenges, etc. That table and the text that accompanies it are alone worth the read.

Consultants who advise clients daily can sometimes be the least cosmopolitan and most oblivious to their own markets and market changes. For example, I recently encountered a sizeable services firm (with employee count of over 500 professionals) but the numbers of service lines they claimed to support was in the dozens. I told the CEO that his company was a jack of all trades and a master of none. The math alone suggested they couldn’t be great at much if they only averaged 12-30 people per offering.

Why did this firm do this? It boils down to account control and customer acquisition costs. Service firms never want to see a competitor get a toehold into one of their accounts. As a result, they’ll sell and promise anything just to keep out a competitor. This is a really bad strategy as a service firm can get dragged into low margin, high-cost deals that it lacks expertise or scale. It also distracts employees from their core skill sets/competencies.  And, when this project goes south, it will damage the brand of the service firm.

Service firm leaders will, nonetheless, defend this behavior as they believe it is far easier to sell follow-on work to an existing client than try to get net-new customers. This is another bad argument as it suggests something is amiss in either the firm’s marketing efforts or it lacks sufficient intellectual property or thought leadership materials to drive more work in the spaces it wants to be in.

The state of denial (and/or overconfidence) is all over the professional services space. The HBR piece had these tidbits:

Most PSF (professional services firm) leaders place their practices toward the premium end of the spectrum, regardless of where their margins suggest they belong. The mismatch becomes apparent when a practice leader says something like “I know we’re a terrific practice offering excellent service to our clients. Our clients, though, don’t appreciate the value we contribute and are exerting price pressure on us.

There are two reasons for such misalignment. One is pride that sometimes borders on arrogance. Professionals often overestimate the distinctiveness of their offerings. The other is that over time a practice drifts to the left on the spectrum. It may have started out as specialized but gets commoditized as competitors copy its offerings, clients internalize some elements of the service, technology helps diffuse knowledge, and people move, taking their expertise to other firms. What was rocket science yesterday becomes gray hair today, procedure tomorrow, and commodity the day after.

I can personally attest to the overestimation of one’s service offerings and you can see it too, during a services RFI/RFP process. Every firm has a rapid implementation, the best people, a proven methodology, etc. It’s all the same words and yet these firms insist on wasting everyone’s time with these over-worn statements that lack any real differentiation. If service firms only noticed that the prospects have found several competitors with identical offerings it might be eye-opening. When prospects can’t see any differentiation, then they’ll try to beat the providers down on their pricing. That’s the clue that your service offering has been commoditized.

I really recommend you read the HBR piece, in its entirety, and share it with colleagues. When you do, discuss:

• Which kind(s) of practice(s) do we have?
• Have any of these become commoditized?
• Do we have a plan to vacate low-margin commodity markets?
• Are we confusing the market with an umbrella brand that includes all kinds of different offerings (e.g., outsourcing and strategic consulting)?
• Are we as differentiated as we think we are?
• Is our marketing focused on (and delivering) net-new accounts? Why not?
• Do we overly incent our executives and sales pros to block competitors with out-of-scope offerings instead of getting net-new clients in our core strengths?
• Is our thought leadership/IP in differentiating?

The Project Economy

Try out this concept - if everything we ready know about agility, volatility, dynamism, change, etc. in modern, post-pandemic businesses is true, then why aren’t we doing more to understand the projects that facilitate these new products, new business models, etc.? Seriously, so much of what management science, business training and consulting is about relates to steady-state operations instead of the projects that change firms.

The Project Economy Has Arrived is an HBR article that has remained on the top of my desk the last few months as I just want to fully appreciate the thesis. Here’s the very beginning of this piece:

During the 20th century, operations (which involve the running of organizations) created tremendous value, and they did so through advances in efficiency and productivity. But for most of the current century, productivity growth in Western economies has been almost flat, despite the explosion of the internet, shorter product life cycles, and exponential advances in AI and robotics.

Meanwhile, projects (which involve the changing of organizations) are increasingly driving both short-term performance and long-term value creation—through more-frequent organizational transformations, faster development of new products, quicker adoption of new technologies, and so on. This is a global phenomenon.

This article points out that many people involved in projects are overly focused on inputs and outputs and not on outcomes and value. Much of the piece is focused on the latter. I’d agree and I’m always disappointed when clients ask me to drive an initiative and then I encounter ‘project managers’ who simply want to accumulate time reports and calculate some kind of estimate to complete. This is sad as I’m not convinced these project managers are even aware of what the team is supposed to deliver and how those deliverables will fundamentally change the firm.

I’m also chagrined at the way college business majors learn about projects. A recent family member just got an MBA and this graduate’s project learnings included:

• There are usually 1-2 people on a given project who don’t do any work or contribute. But, they will show up when the group gives their final presentation. In the real world, these ‘project team members’ don’t just get fired, they also don’t get a ‘participation trophy’.
• Creative approaches and ideas are often in short supply or are only proffered by 1-2 people. Few team members will strive to develop out-of-the-box or novel ideas/concepts/recommendations.
• Leadership can be lacking. The easy path is to follow the assignment’s direction/scope literally without once thinking what could be done that would be transformational, game-changing or competitively advantageous. Great project leaders, like the HBR article suggests, are trying to achieve some kind of great outcome not just blindly follow a methodology.

If projects are the future (and what will drive economic growth), then we need to do more than educate people on basic project management concepts (e.g., critical path). Those things are often techniques that help pinpoint which tasks have been completed or not. Those concepts don’t assess the quality of the outcomes that will be generated. That’s the real project training work that needs to be completed.

How can we do this?

I have one idea on how to achieve this:

• Clients/bosses hate it when you bring them problems and don’t have any suggested options to mitigate the issue. I’ve been on all sides of this phenomena and have made it a point that anyone who works for me must bring at least the germ of a potential solution to the table.
• These suggested solutions force project members to think about the outcome the firm wants/needs and what can be done to ensure that outcome remains viable. Alternatively, that thinking also permits ideation around other potential, possibly better outcomes.
• This thinking about outcomes is central to grooming people who can change a firm not just manage a piece of it.

As with the prior article, I really recommend you read this piece and share it with colleagues. When you do, discuss:

• Do we need to make a material career development shift in our firm? Are we overly valuing operators and managers and undervaluing those who are creating real change opportunities for our firm?
• How do get more of our people to think in terms of outcomes and value and not just in delivering a project on time and on budget?
• Should we be appropriating some best practices from great high-end consultancies?
• What should we be doing with great project leaders once their project is completed? Send them back to an operational role or give them more, bigger responsibilities?
• What happens when a great project leader burns through their political capital to achieve a great project outcome? How do we help them stay and prosper within the firm?

ESG and projects

Environmental, Social and Governance (ESG) reporting is white-hot right now. And, no surprise here, your favorite auditor and/or consultant wants to ‘help’ you with it.

Reporting requirements re: ESG have been growing in recent years. European firms, in particular, have seen reporting mandates move ever more down market. Now, in the United States, the Securities and Exchange Commission is laying out new requirements. According to TheCorporateCounsel:

The proposed amendments to the Commission’s rules would require that public companies include extensive quantitative and qualitative information about climate change in their annual reports and registration statements. The earliest that these disclosures would be required if adopted is in 2024 for the largest public companies. The rule proposals are wide ranging and would require that companies add new sections to their annual reports and registration statements that would provide details about climate change matters that are today often disclosed in separate communications outside of the SEC reporting system.

Most significantly, the SEC would require specific disclosure of a public company’s direct GHG emissions (Scope 1) and indirect GHG emissions (Scope 2), as well as indirect emissions form upstream and downstream activities (Scope 3), but in the case of Scope 3 emissions only if material or if the company has set a goal that includes Scope 3 emissions. Disclosures about Scope 3 emissions would be subject to a safe harbor for liability under the federal securities laws and would not be required from smaller reporting companies.

I’ve been involved in these efforts via clients in recent years. Companies can do a very manual, very basic bit of reporting to keep the regulators at bay, short-term, but real changes will require updated technology and tools to monitor what is occurring in real-time (not an end-of-year snapshot).

Service firms need to understand their own firm’s challenges in not only reporting matters like carbon usage but also how they’ll change their ways (and those of their clients) to be better stewards of our planet’s resources.

For service firms, this could be a real opportunity to get ahead of client demands and to showcase real thought leadership. Or, it could be a chance to say a lot of the common words and phrases your competitors use with little or no competitive differentiation or thought leadership. It’s decision time.

Other challenges

There are other challenges for service entities, too. These firms must address:

1. Ever more rapid service line obsolescence. Some service lines, like ERP implementations and business process outsourcing, must either be radically rethought or sold to service firms with the scale to make ever lower margin work profitable.
2. Newer service lines need lots of pastoral care. Specifically, is it time for your firm to quit funding more R&D and marketing funds to old service lines and shift these monies to markets with lots of runway before them (e.g., ESG, digital transformation, etc.)?
3. How they will mentor/build the next generation of service firm leaders? Given how much work is being completed virtually, how do newer workers learn:
   1. how to sell services
   2. manage customer expectations
   3. drive change effectively
   4. understand the totality of a client’s problems
   5. understand how all of the project’s piece parts come together in a well-architected way
   6. how to interact with senior client executives
4. Will your firm be a deep specialist or a generalist? Likewise, can you successfully have a high-cost, specialist brand for some service lines and a low-cost leader brand for more commodity offerings? Are you confusing clients/prospects?
5. How they will source new talent for the firm. Service organizations need people to scale. With the Great Resignation and other trends currently, what is your new strategy to grow?

My take

Now that we can travel again (that is if your flight doesn’t get cancelled), maybe it’s time to convene the leaders of your service organization for a strategy meeting. The purpose should be to re-assess one’s markets, market/competitive relevancy and direction. It’s time to take stock.

My old boss at Accenture constantly reminded us that we ‘need the courage to change in spite of our success’. He was right about that. And, now, with external change occurring so rapidly, we need to amend his words to this: ‘need the courage to change continuously in spite of our success’.

As for me, I’m just glad this old dog that can still learn new tricks...