Dominic Houlder, Adjunct Professor of Strategy and Entrepreneurship at London Business School, is a consultant and adviser to numerous commercial and charitable organisations and publications worldwide. He was Group Strategy Director at Blue Circle Industries and a manager at Boston Consulting Group. Here, he talks with Georgina Peters about his next book, The New Professionals, which will be published in 2012.
You are currently researching what is happening to professional services firms with Peter Williamson. What challenges are they facing?
Professional services firms (PSFs) are those found in professions such as management consulting, finance, accountancy, law, media services, executive search, engineering and information technology. For many of these firms, it is not the recession that is the real challenge; many are weathering that well. What lies ahead, however, are much more fundamental business challenges, particularly the loss of faith in their ability to really make a worthwhile difference. The reality they face is that economic pressures are providing the motivation for consumers and clients to question whether they are getting value for money spent on the help received from such firms.
That seems like quite a change. Am I right to think that these firms have, in a way, been the standard bearers of success in developed economies?
PSFs did indeed experience remarkable success over the past two decades. According to HM Treasury, management consulting grew at a compound annual rate of 17 per cent in the UK from 2003-08. Other professional sectors have also outstripped national economic growth. Some of the dominant firms in this sector — such as Pricewaterhouse Coopers, Freshfields Bruckhaus Deringer, ADL, Publicis Groupe, Heidrick & Struggles, Arup and SAP — emerged as global powerhouses integrating a wide range of capabilities. Moreover, professional service firms have outshone many of their clients in key performance measures such as profitability, become magnets for the best talent and exerted influence far beyond their business domains. Indeed, they have become role models for every kind of business. But this model was not the one that marked their predecessors earlier in the 20th century, which was very different from what we see today.
So these firms have evolved over time, which should make changing again easier, shouldn’t it?
They certainly can gain perspective by looking back, and perhaps they can even adopt some of the things that made them so successful in the first place. For example, in the mid-20th century, the professional services sector consisted of highly fragmented, small firms that served just a few clients in local communities. They operated through strongly personalised relationships as trusted advisers to their clientele, offering full customisation of their services. Since then, with marked acceleration since 1990, consolidation took place across the sector, with dominant professional service firms achieving global scale and extending their scope to integrate a wide range of services. This was driven partly by the broader trend of globalisation: global clients needed a consistent global service in many cases. But allied to this was the supply side pressure for growth. To varying degrees, firms developed a pyramid structure with an increasingly broad base: so that senior talent could win rewards primarily on the basis of leverage — the margin on the work of the junior talent they employed — rather than on the basis of their own work. The flatter the pyramid, the greater the growth imperative: to create promotion possibilities for junior talent. This could give rise to some annoyance among clients who had begun to resent having little actual time with senior talent, the people whose expertise (and I emphasise, expensive expertise) was the reason that they hired these firms in the first place.
The road to future success
What can these firms do to maintain their influence — and profitability?
One option they have is to go with the flow and embrace competitive convergence and commoditisation. That is the path of industrialisation, something many of these firms’ clients have already followed. They have standardised processes and outsourced to achieve the most favourable competitive cost position. This has been the case, most notably, in the IT sector. The industrialisation logic may be inescapable across a range of service offerings elsewhere, with firm profitability depending on utilisation and leverage rather than billing rates. However, in the long run, wholesale industrialisation offers a bleak picture of major firms pursuing a downward spiral of cost arbitrage in soulless, de-professionalised factories.
What alternative paths do you see?
Smaller boutique and virtual firms are starting to challenge the large, integrated powerhouses at the more bespoke, more highly profitable end of the services spectrum. These include Eden McCallum in management consulting, Keystone in legal services, a wide array of ‘hot-shops’ in media and many start-up independent software vendors in the world of IT. Successful boutique firms like these tend to build intimate connections with clients, colleagues and with the broader community tied to their professional calling; this allows them to resist the tug towards industrialisation. In many cases, however, these boutiques are constrained by the small market niches that they occupy, which hold little appeal for major PSF powerhouses. But the question for the major players is how to retain their advantages of scale and scope while creating the connectivity at which some boutique players excel.
What will that take?
In order to continue to prosper and grow, top management of professional service firms may need to fundamentally rethink the business model that has served them so well in recent decades. More specifically, they may be required:
- To design and develop new, network-based business models that leverage an ecosystem of partners to grow future profitability
- Look for ways to dramatically reduce the overhead associated with complexity and coordination, and
- Uncover new sources of value that they can deliver.
Doing this will require them to find ways to foster individual entrepreneurialism while, at the same time, encouraging cooperation by members of the firm.
And beyond this, what else may they need to do?
They are also going to have to ensure that strong links are forged between those who thrive in the client’s world as advisers and those who thrive in the world of the firm. Moreover, they will somehow have to ease the tensions between the idealists who stand for their calling and the pragmatists who stand for the business. The goal of all this is to end up providing their clients with experts who are also advisers — advisers whom clients truly believe have a heartfelt interest in their success.