Michael Porter’s famous value chain did NOT have me at hello. I’ve never found it a particularly valuable tool in crafting professional service firm strategy. Most firms don’t talk about “Inbound and Outbound Logistics” or have “Procurement” as a major support function. Distinguishing between “Operations” and “Service” in a service business is just plain confusing.
In the spirit of further developing the theory of the professional service firm, here’s my go at a professional services value chain…
WAYS TO ADD VALUE
Firms can add to their profitability and competitiveness (my definition of adding value) in the following ways:
#1 Profiling and Pitching
- Brand and Network Building – branded premium providers command higher prices and attract top talent. Firms with better networks spend less on mass marketing and get more low-cost referrals.
- Client and Industry Insights – firms that really understand their client’s business and industry have better bid-win strike rates and a higher percentage of sole-sourced work.
- Selling and Pricing – firms that are adept at selling and pricing capture more value, discount less and win more.
#2 Resourcing and Communicating
- Process and Workflow Design – firms that have streamlined workflows use fewer resources for the same outputs. They generally have faster and more predictable response times and enjoy lower error rates.
- Resource Planning and Project Management – significantly higher margins can be realised by configuring the right combination of talent, tools and technology for each matter or project. More and more clients are choosing firms based on their ability to plan and project manage their work.
- Client Interaction and Co-creation – better client communication and engagement usually increases the chance of client satisfaction and value perceptions. These, in turn, improve client loyalty, pricing and billing outcomes.
#3 Delivering and Controlling
- Technical and Commercial Capability – firms that are perceived to provide better quality and more commercially relevant advice are usually able to command a price premium.
- Service Delivery, Quality Assurance (QA) and Billing – firms that are able to deliver efficiently, effectively and consistently usually outperform their peers. So too are those that bill and collect fairly and promptly.
- Team Engagement – firms that can motivate and inspire their staff will usually enjoy higher productivity, better quality work and less regrettable turnover.
#4 Connecting and Innovating
- Client Relationship Management – firms that have wider and deeper relationships with their key clients will usually enjoy lower business development cost, higher share-of-wallet and more predictable revenue flow.
- Client Education and Support – firms that support their clients through ongoing education and other activities relevant to their needs will enjoy better client relationships and loyalty. Informed purchasers often brief better, respect their providers and know what they don’t know.
- Service Innovation – firms that continue to evolve their service offering to address new market needs will retain current clients and attract new ones. Innovation that lowers costs will give firms more price-setting discretion.
USING THE MODEL
Where to invest
The value chain model can be used to assess where resources are currently deployed and where they should be. For example, most law firms put a lot of time and energy into just five areas: Brand and Network Building; Technical and Commercial Capability; Service Delivery, QA and Billing; Team Engagement and Client Relationship Management. This means that seven other value-adding areas are potentially sub-optimised. A more deliberate focus in each of these areas could add up to a significant improvement in profitability and competitiveness.
Where to innovate
Many professional service firms are looking to innovate and “digitise” their business. The model can be used to determine what elements of the value-chain should be the focus of change and investment. For example, rather than spreading themselves too thinly, a firm might want to focus their energy and dollars on getting closer to their key clients and enhancing client connectivity and engagement. This would mean an emphasis on Client Engagement and Co-creation, Client Relationship Management and Client Education and Support.
What should we make, buy or borrow
By analysing its value chain, a firm can decide which elements it should make, which it should buy, and which it should borrow. So, for example, one of my accounting firm clients has engaged a specialist lead generation company to help out with Sales and Pricing. They recognised that prospecting for new clients was a key weakness, and that re-training the firm’s partners would be like flogging a dead horse. They pay the consultancy $500 for each meeting they set up within defined ‘right client’ parameters.
How do we compare
The value chain model can be used for head-to-head competitor analysis. Further insights can be gained by examining each of the 12 areas, assessing where a firm is ahead, where it’s at par, or where it’s behind its key competitors. A firm can then use the model to decide its core strategy, that is, how it’s going to win and what capabilities will be needed for success. For example, if very few direct competitors are focusing on Resource Planning & Project Management, this might be a source of competitive advantage in the period ahead.
How do we organise
The final application area of the value chain model is to ensure there is oversight of each of the value-adding areas or categories. For example, a firm may elect to create a Resourcing and Communicating SWAT team, with a blend of Practice, IT, HR, Finance and BD executives, charged with identifying and making improvements.
I’ve stuck my neck out and come up with an alternative value chain model. What do you think?
Sorry, Michael. Nothing personal. Just business. Professional service firm business.