Understanding the Professional Services Value Chain in the Digital Age

By Louis Strauss & Anthony Stevens

In order to understand the value chain of the professional services, you need to understand the theory of the conservation of attractive profits.

This theory, introduced by Clayton Christensen in his 2003 book, The Innovator’s Solution, is defined as follows:

‘When attractive profits disappear at one stage in the value chain because a product becomes modular and commoditised, the opportunity to earn attractive profits with proprietary products will usually emerge at an adjacent stage.’

This theory accurately describes the disruption of the taxi industry by Uber, the content and media production industry by Netflix, and the hotel industry by Airbnb.

All of these companies deliver digital value chains, as opposed to pre-digital value chains.

The professions have been slower to adopt digital value chains. The pre-digital value chain of the professions focuses on the integration of human capital and intellectual property. In other words, who can attract the best people, and who has the best IP and related reputation. Traditionally, this is how the professions have earned attractive profits.

That being said, there is one final activity within the professions value chain...

Trust

Ultimately, the professions are designed to provide advice or some form of assurance. This comes in the form of a deliverable, which the client can then use. Furthermore, this deliverable is trusted, especially when provided from a top-tier or reputable firm like Clifford Chance, KPMG, Deloitte, Ashurst, DLA Piper or PwC.

In our view, then, the last activity in the professional services value chain is ‘trusted deliverable’:

Now, if we take a look at the value chain post-digital, we can see human capital and IP are becoming decoupled. A few things have triggered this:

1. Technology has significantly improved. Think cloud computing, artificial intelligence and mobile, leading to both automation and augmentation.
2. Technology has dramatically decreased in price, meaning the barriers to entry are substantially lower, and new software delivery methods can be used to decrease delivery risk.
3. The modern client expects on-demand, digital solutions to meet their needs.
4. Data has become incredibly powerful in enabling rapid feedback cycles, decision making and product development.

Providing entirely new value to clients

As traditional offerings become homogeneous in nature, the trusted deliverable becomes commoditised, with margins decreasing year on year. So to seek out new revenue streams (and to stay relevant) in our new digital economy, firms are now integrating IP and trusted deliverables, and building software solutions (with technology as the enabler).

This has led to firms creating a whole suite of unique and differentiated solutions, with a strong focus outside of their traditional offering or offerings (think of the new solutions available in the digital and legal spaces) – seeking to provide entirely new value to the client.

Using data to meet clients’ expectations 

It is also vital to understand the role data is playing here. The pre-digital trusted deliverable is static and normally delivered in hard copy. Think slide decks and letters of advice, all driven by thought leadership, much of it qualitative.

Clients now expect quantifiable solutions backed by data, and demand dynamic ‘deliverables’, where they can track and measure themselves in real time. They also want solutions that help automate away low-value, highly repetitive jobs.

The rise and value of proprietary data sets

As IP shifts from pure knowledge (much of qualitative) to proprietary data, which is both qualitative and quantitative, proprietary data sets become extremely valuable to provide further differentiation.

Because software and the demand for data have fuelled the change of the professional services value chain, firms are spending big money in an attempt to stockpile new technology and new data sets.

Granted, these purchases are coupled with human capital, but human capital has become easily attainable (commoditised) and less important when it comes to delivery, as new value (and profit) is found when a company’s IP is hardcoded into software solutions (the deliverable) that leverage huge and unique data sets.

The impact on professional services

When one door closes, another opens, with the role of the consultant expert changing rather than disappearing. Instead of creating endless (and in many cases, repetitive) deliverables (in the form of presentations and reports), the expert finds themselves working directly with the tech teams, designing, building and managing these new solutions.

With so many new technologies in the mix, such as artificial intelligence and blockchain, the professional services sector becomes an incredibly exciting space to work in, even if you don’t have a background in tech.

Lastly, relationships will always play an important role in the professions, but this will shift to higher value work where the budgets are bigger and the solutions are more bespoke, with self-signup software solutions, leveraging baked-in IP, dominating the middle to lower end of the spectrum.

Here’s what you should do

While organisations can get caught up in the fads and cycles of technology, it’s important to remember that technology is only the enabler – it’s how you apply it that counts. So rather than thinking technology first and application second, the key is to truly understand how value is created within your sector.

What you may find is that the point where your company sits on the value chain is no longer a significant contributor to the overall value created for your end customer. Hence your company is no longer earning ‘attractive profits’. Or, your entire value chain no longer provides significant value relative to a competitor.

The remedy is to take a customer-centric approach by first understanding what your customer truly values. In other words, what are they really paying for?

Then ask yourself: Where on the value chain is this value created? How can I position my company to create this value and capture ‘attractive profits’?

The last step is to optimise the delivery of whatever your customers value, through the application of people and technology, in turn creating the optimal experience.

As always, embrace the chase.