More Magic, Less Logic: Time to Turn Your Business Model Upside Down

Many professional service firms derive a majority of their revenue from low-value services. These are the very offerings that are the most price-sensitive, making them the least profitable sources of income. This, along with the archaic concept of the hourly rate, explains the steady decline in profitability among firms ranging from advertising agencies to engineering consultancies.

The work of professional service firms can broadly be described as “Magic” (the higher-value strategic work) and “Logic” (the lower-value executional work). Magic work lives upstream, Logic is downstream. Both classes of work are important, but the value associated with Logic work is much lower in the minds of clients. The work of execution and implementation is viewed as largely commoditized; the type of work client companies feel they might be able to do themselves, or outsourced or offshored to other types of organizations in lower cost centers.

A constantly moving line of demarcation

In large multinational advertising agencies, Logic work is usually the domain of separate production hubs, which are optimized for these types of services. The holding company Publicis expects its agencies to assign Logic work to its Prodigious unit. Prodigious is staffed and structured for high-volume advertising production work, which often involves the creation of hundreds of versions, sizes, and translations of advertising campaign elements that are distributed around the world.

When the lines between Magic and Logic are clearly drawn, this model can work quite effectively. The problem is that these lines are constantly blurring, thanks to rapidly evolving technology that makes Magic increasingly look and feel like Logic.

Today, armed with the latest Mac and the Adobe software suite, an art director in an advertising agency can complete an ad all by herself from start to finish, without ever having to hand off to a production team. Why? Not because it makes economic sense, but because technology makes it possible.

It’s the same reason senior professionals now set their own meetings, type their own reports, and design their own PowerPoint presentations. From a financial perspective, it’s nonsensical to have a person earning $250,000 in salary searching for the right stock photo for a PowerPoint slide. Lower-paid professionals could — and should — be doing this type of work. Not because it’s beneath the dignity of a senior executive to be doing “production” work but because this person should be employing his or her brainpower on the Magic side of the business.

Higher technology = lower productivity?

This misallocation of resources explains the curious decline of productivity in professional enterprises of all kinds. One would think technology would allow the most experienced people in the firm to focus more consistently on the areas where they add the most value, but in fact the opposite has occurred.

The key problem solvers in the firm now devote the majority of their time not to solving important problems for their clients, but to mundane tasks that could easily be done by others. They delude themselves into thinking it’s just faster or easier to do the Logic work themselves. And because technology-enabled Logic work is now done so easily, most professionals end up doing more of this type of work than they should.

To reverse this trend, gather your leadership team and plot the firm’s services on a spectrum of Magic to Logic. On the far left side of this spectrum are the high-value services that your clients cannot do for themselves. On the far right-hand side are the widely-available Logic competencies that, again, may represent a large portion of your revenues but virtually none of your profits. In most firms, pure Logic work earns almost no margin at all.

Doing “something” instead of “everything”

Strategically, you must optimize your firm for one or the other — Magic or Logic. You cannot simultaneously be optimized for both, as these are mutually exclusive business models. This isn’t to to say you can’t offer any Logic services at all; it’s just that you must be exceptionally selective about them. Today, the most notable professional service organizations have turned their revenue models upside down. They have largely exited the Logic business in favor of cultivating a reputation for high-value problem-solving.

Firms are subject to the constant pull toward downstream services because of the flawed idea that they must match the competencies of other firms. The perpetual temptation is to list every conceivable competency based on the misguided belief that prospective clients are hiring your organization for “everything” instead of “something.” It’s the rare firm that understands that there’s no such thing as “full service.”

The state of the art in business strategy is to reimagine what you do not as “services,” but rather as solution sets — a suite of benefit-centric programs designed to solve important business problems. Trade your bullet-point list of common capabilities (Logic) for a carefully curated collection of solution sets that showcase the Magic that’s unique to your firm.

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Tim Williams?leads Ignition Consulting Group, an international consultancy that advises?professional service firms in the areas of business strategy and revenue models.?Tim is the author of several books, including "Positioning for Professionals: How Professional Knowledge Firms Can Differentiate Their Way to Success."

X: @TimWilliamsICG