Disruptive Innovation and the Professional Services Firm
Earlier this year I gave a keynote address to The Tax Institute’s Private Business Tax Retreat titled Focus on the T in Tax. My key message was one of optimism and abundance for Australian tax professionals: there is an opportunity for progressive firms to leverage their specific knowledge for improved commercial decision making and performance. The challenge is to build internal capability to operate in a new way.
The speech was supported by a research-informed report which I have reproduced below. It focuses on the Australian tax professional, however the messages are broadly applicable to the professional services industry. I hope it sparks a flame for those who need it.
Deloitte’s (2012) white paper Digital disruption — Short fuse, big bang? placed the professional services industry squarely in the short fuse, big bang category, indicating an imminent and significant impact on the business models of such entities. You will note that I refer to business model impacts: the effects of digital disruption are not just confined to the automation of jobs, but include a wide range of influences including changes in distribution channels, customer segments, cost structures, and customer relationship management techniques among many others.
Deloitte’s Digital Disruption Map
This paper considers the case of the modern Australian tax professional services firm. I provide an academic basis to frame the discussion, comment on some recent examples of digital disruption in the market, draw upon my exposure to Silicon Valley to provide insight on innovative strategic decision making, and show the ways in which my own organisation is preparing our youth to enter this modern marketplace. Finally, I make a case of optimism and abundance for the progressive tax professional.
The Deloitte report is well known in the industry, however five years on individual businesses continue to struggle with how best to deal with, or indeed take advantage of, the rapidly changing environment. In that time, we have seen progressive companies such as Xero increase in value from $700m to $2.5b and become a darling of the disrupted world while more traditional firms slowly lose market share to competitors of which they are largely unaware. While it is important to consider that each industry will have its own particular nuances which will affect the type and extent of disruption, the strategic risk is undoubted and deserving of a considered response.
Professor Clayton Christensen’s seminal work in disruptive innovation explores the ways in which disruptors enter and overtake industries, and analyses why incumbent businesses allow it to happen. At the core of disruption is a change in the attributes of a good or service which derive value for the consumer. More often than not, disruptive entrants gain market share based on offering a niche product to a poorly served segment of the market. This offering may not perform as well overall as those provided by incumbent businesses, however it may offer new or additional advantages including convenience, cost, or service. It is the hubris of the incumbent which leaves many existing businesses susceptible to competitive disadvantage.
Disruptive offerings typically succeed when they enable less skilled or less wealthy consumers to do what is previously reserved for those with the skills to perform the task or the money to employ those who do. In this case, the new customers accept a disruptive offering which might be perceived by incumbent competitors as inferior, as their alternative is not consuming at all. Alternatively, disruptive offerings may also succeed when they target a consumer at the lower end of the market who doesn’t need the full functionality of the incumbent product or service. Disruptors can offer partial solutions, typically at reduced costs and with a greater focus on quality and service. This situation is explored in great detail in Chris Anderson’s book The Long Tail.
The strategic challenge for incumbent businesses is that disruptors who gain a foothold in a niche point of entry have the potential to increasingly expand their product or service offering into the mainstream industry, often with a new set of attributes (including cost, speed, convenience, quality) which form a formidable competitive advantage in a rapidly changing marketplace. One only needs to look at the ways in which digital photography brought about the demise of Kodak, a focus on the user experience dethroned Nokia in the mobile phone industry, and the digitisation of music completely changed the distribution of value in the music entertainment industry. Advances in battery design and construction are poised to transform electric cars from the play things of Silicon Valley entrepreneurs into a mainstream transport option. Time and again incumbent businesses have fallen prey to disruptive competitors who begin life as a mere annoyance in a seemingly unimportant segment of the existing industry.
Let us explore some contemporary examples of disruption in the professional services industry. In May 2016 law firm Baker Hostetler, one of the largest in the United States of America, announced it was employing ROSS to handle its bankruptcy practice, displacing approximately fifty lawyers in the process. ROSS, built on IBM’s Watson platform, is an artificially intelligent attorney which is designed to read and understand language, create hypotheses, research legislation and case law, and generate responses to questions posed.
Initially deployed in the field of bankruptcy and insolvency due to its relative simplicity and structured nature as a segment in legal practice, ROSS automates the predominantly repetitive process of legal research performed by legally-trained human research staff, and iteratively improves through use. As the efficacy and efficiency of the ROSS service increases, so will its reach into other aspects of the legal profession. ROSS was not the brainchild of a progressive law firm: it emerged from a competition pitched to university students by IBM to foster novel uses of the Watson platform. The students leveraged their experience into a place in the Silicon Valley based Y Combinator business accelerator, and the rest is history.
Closer to home, we can consider the Australian example of Plenty Plus, a cloud-based platform providing AFSL compliant advice to the management of Self-Managed Superannuation Funds (SMSFs). Plenty Plus is poised to release a new product, aimed at automating the decision of whether and how a SMSF client should apply the Capital Gains Tax relief to assets within the fund. Undoubtedly this is a niche product with a limited set of applications, however this is exactly the manner in which disruptive technologies can enter markets, gain traction, and eventually expand into other areas. True to Geoffrey Moore’s technology adoption life cycle, many disruptive solutions will only ever sell to innovative customers, while some will “cross the chasm” and enter the mainstream market.
The Australian superannuation industry has seen significant adoption of digital solutions in the delivery of its service. Superannuation fund managers have adopted digital service delivery and improved internal processes through adoption and development of digital processes. In the SMSF industry we have seen the rise of companies such as Class Limited (ASX:CL1), which offers a digital platform for the management of SMSFs targeted at accountants and advisers to a reported 135,736 funds. This represents 22.4% of the estimated 593,000 Australian SMSFs. This is an astonishing rate of market penetration for a young firm which listed on the ASX in late 2015.
Returning to Deloitte’s digital disruption report, the above examples are targeted at the third of Deloitte’s suggested tactics to deal with disruption: recalibrating your firm’s cost structure. In each case digital automation is replacing human activity, reducing the labour component of the overall service cost base. Combined with recalibrating corporate structure and replenishing revenue streams, it provides a framework to guide strategic decision-making for leaders of firms under disruptive attack.
Framework to deal with disruption
This is but one of a range of documents providing advice on the tactics available to incumbent firms. Another notable example is the five steps to “reframe the future” described in Davenport and Kirby’s (2015) Beyond Automation article in the Harvard Business Review. The five steps provide advice on how to strategically respond to the changing competitive environment. Both of these frameworks assume the incumbent business has the capacity to enact such strategies, however this is rarely the case. Many incumbent businesses have entrenched culture, structures and systems which are built on successful practice in the past. A more fundamental consideration for modern professional services firms is how to build relevant internal capability to enact strategic change. I argue this is one of the single greatest challenges of existing firms.
It is commonly accepted that knowledge is becoming increasingly commoditised. Customers are more empowered than before with information about a business transaction, are more willing to be accountable for their own decisions rather than relying on the advice of institutions, and are progressively gaining more power in the marketplace. Additionally, we are seeing the emergence of a new breed of organisation: one explored by modern organisational philosopher Charles Handy in his book The Empty Raincoat. Knowledge workers are increasingly mobile, expecting flexible work arrangements and a supportive environment enabling them to perform at their best on a task they deem important.
Modern businesses must therefore rely less on being general knowledge experts and instead specialise in areas of relative advantage and collaborate with others to deliver a complete solution. In the field of human resources this is known as hiring T-shaped employees: those with deep expertise in a particular discipline and the ability to collaboratively work across functions to deliver outstanding performance. Progressive software firm Valve explicitly prioritises the hire of T-shaped employees, depicting the practice visually in their New Employee Handbook (the tongue-in-cheek example is for a game designer with particular expertise in the development of heavy weapons, but also capable of preparing sandwiches and Russian folk dancing). Modern organisations must think of themselves in the same way: they must become T-shaped organisations to thrive in today’s hyper-competitive economy.
Valve Software’s Ideal Employee
This is especially true for taxation professionals in Australia. The tax codes currently occupy significant real estate on the boardroom shelf and despite significant calls for tax reform, are unlikely to simplify in the foreseeable future. This complexity provides scope for skilled tax professionals to become specialists in particular areas of expertise, and to use that specialty to aid in decision-making for their clients. In order to deliver on the necessary second part of this equation, taxation professionals must build the internal capability to engage and collaborate with customers, suppliers, and even competitors to deliver a service of benefit to their clients.
McKinsey’s 7S framework is an excellent model to guide strategic thought on how to build new capability in a firm. Separated into hard (structure, strategy, systems) and soft (staff, style, skills, shared values) factors, the framework allows senior management to identify interrelated tactics which can effect change in organisational operations and performance. Over the past five years I have taken a particular interest in two broad categories within this framework: staff and systems. Sparked by delving deeply into the implications of a field of management called Stewardship Theory, I have developed a view of the attributes of a firm which drive innovative capability and performance.
The authors of the original Stewardship Theory paper — Jim Davis, David Schoorman, and Lex Donaldson — explore a set of psychological and situational factors which contribute to a concept they refer to as stewardship orientation. In essence, the implications are to hire the right people and provide the right environment. Of course, the strategic value is in understanding what is “right”.
Each year I lead a group of students on a study tour to Silicon Valley. The tour focuses on the cultural and systemic enablers of innovation, tasking students to absorb a curated set of academic and practitioner readings and synthesise them with their experiences on tour. We visit a range of organisations, from five-person startups like Cobalt Labs to firms like Omada Health and Nitro with two to three hundred staff, to the innovation giants like Google and Facebook and Salesforce. We also experience a range of innovative spaces, like Workshop Café which is redefining the concept of on-call work environments, and Rocketspace which has helped firms such as Uber, Hootsuite and Spotify to launch. We then move on to the institutions that support this ecosystem, taking a class at Stanford University, and experiencing the Computer History Museum.
Students learn by osmosis. Primed with academic readings, they absorb innovative culture and systems through their experiences on tour. A common realisation is that innovative organisations prioritise hiring the right people and providing the right environment. The war for talent is palpable, with desirable staff in high demand. Prior to Facebook’s IPO in mid-2012 it was reported Google was offering $500k cash bonuses to valuable staff to encourage them to stay. So what defines such valuable staff? Our exposure to the inner workings of innovative Silicon Valley firms confirms the T-Shaped model: in all cases we see highly skilled individuals in a particular discipline working in small, cross-functional, self-managed work teams.
Take the example of Joel Pobar, Director of Engineering (Performance) for Facebook. A highly-skilled software engineer at heart who project managed Facebook’s revolutionary HipHop Virtual Machine which transformed the performance of Facebook’s software stack, Joel has spread his capability into the management of teams and driving performance improvements. A current focus of his is the ways in which Bayesian Machine Learning can enable the achievement of his objectives. In order to explore this further, he has hired a Professor of Mathematics as his private tutor to teach him Bayesian statistics and the ways in which it can be embedded in artificial intelligence. For three hours on a Monday night Joel immerses himself in spreading the cross bar of his T, increasing his ability to incorporate this methodology into creative and critical problem solving for his employer.
Another example is Omada Health’s Chief Operating Officer Jocelyn Ding. Formerly Vice President of Google Enterprise, Jocelyn reflects that she joined Omada to be part of an organisation delivering on a purpose she held dear. Omada Health uses an online platform and a dedicated support team to assist employers and health plans to impact diabetes and heart disease in their employees and customers. Omada’s mission is to “inspire and enable people everywhere to live free of chronic disease” and it was this overarching purpose, along with several other supporting factors, which caused Jocelyn to step away from a senior position at Google to join a startup with less than $30m in venture capital backing (at the time).
Tristan Cameron, Global Sales Implementation Manager at Google, has extensive knowledge of VOIP applications however it is his ability to work across geographically-dislocated teams of varied experts to drive customer facing solutions which has stood him apart in his time at Google. In discussions with our students, Tristan has shared that his expertise is a requirement, but it is nowhere near as valuable as his ability to work in cross-functional teams. In an organisation of approximately 80,000 employees worldwide, Tristan works in a team of about ten individuals brought together to develop and implement a VOIP product for Google for Work.
I have listed but three examples of the numerous case studies we experience on tour. In all cases we see skilled people working passionately in small teams. The role of a specialist is less relevant for innovative capability: more important is a person’s ability to connect and combine his or her expertise with that of others in a collective effort to achieve organisational goals. Nowhere is this made clearer than on campus at the Googleplex in Mountain View. When designing the iconic Building 43 (the one with the big Google sign and the android robot out front in most pictures), Clive Wilkinson Architects drew upon research by global strategic design consultancy DEGW on the ways in which work was performed by Googlers (see below). Allowing teams to quickly form, collocate and relocate was a key consideration in the workspace design.
Workspace Design at Google
In this figure we can see a network of small teams working collectively on interrelated projects, collaborating with others when needed and delivering on tasks as required. For this kind of work practice to succeed you need not only employees who can work in this manner but an environment which supports them: the right environment.
Google prioritises flexibility and adaptability, concentration and collaboration, a work-life balance, and leveraged learning. It looks for these factors in the people it hires and provides space for them to be achieved in it workplaces. As much as collaborative work activities are espoused as the creative engines of innovative organisations, the ability to knuckle down and produce output is equally important and sometimes forgotten in the open plan workspace fad which has spread through modern organisations.
At Google, social zones such as kitchens and courtyards are interspersed with sharing cubes and huddle rooms allowing project teams of four or five smaller groups to collocate and share information while enabling more intimate break-out zones for particular tasks. The entire Googleplex is designed to appear as an extension of the university campus, making it as easy as possible for its new employees (typically university graduates) to transition to working life.
This attention to workspace design is not reserved for the tech giants in Silicon Valley: it pervades organisational activity in the region. Runway Coworking in San Francisco’s SoMa district, just next to Twitter’s headquarters, is a destination for early stage firms wishing to accelerate their growth by engaging in a community of like-minded individuals and firms. As we walked through the space we saw entrepreneurs engaged in their work, headphones on and heads in laptops, emerging from hours of dedicated work time to engage in morning tea at the adjacent kitchen and lounge, chatting casually with other startups and our students. There were meeting rooms with teams of eight delivering a presentation remotely to a distant audience on the large LCD panel on the wall, and an igloo where five people were strategising on how to approach their next client meeting for their enterprise software startup. An event space adorned one end of the facility.
The Igloo at Runway
Time and again the students saw workspace design reinforcing collaborative teamwork. Omada Health occupies an entire level of a building in the financial district, choosing to utilise the external windows for open space work zones for its different teams and reserving the inner space around the lifts for a range of differently sized meeting rooms. The firm’s mission takes pride of place at the main reception, and company values are represented as pieces of art spread around the office. At Twitter we spoke with a group of senior software engineers who bemoaned the “open plan revolution” and proudly stated their success in having little cubby holes provided for them to focus on their work. Such is the individual nature of workplace design: the space needs to reinforce the work to be performed and must reflect the mission of the organisation.
Bond University students at Omada Health with cofounder Adrian James
Given these insights into modern innovative work practices, we have implemented significant changes in the way in which we educate our students at Bond University, both in program design and learning environment. Our mission in the Bond Business School is to build tomorrow’s business leaders one by one, and in order to achieve this we have prioritised spreading the cross bar of the T while deepening the specialist knowledge delivered through our degree programs.
A stand out example of broadening our students’ capability to work in cross-functional work teams is the Bond Transformer, a combination of design thinking and lean startup methodologies designed to build creative problem solving skills while developing technical and commercialisation expertise. Every single student at Bond, regardless of Faculty or degree program, can enroll in the Transformer, providing a melting pot of different experiences and interests. Students work in self-selected and evolving teams, supported by a curated program of workshops, activities, events, online resources and access to industry experts, academics and mentors.
The Transformer is a three stage program split into Inspiration, Exploration and Transformation. During the Inspiration stage students explore their interests and passions, engaging their curiosity and arriving at a problem or issue with which they connect. The empathetic mind is valued: encouraging students to forego an egocentric view of the world and experience an issue from multiple perspectives. Exploration develops creative abilities in students, engaging them in developing creative potential solutions for their defined problem. Teams develop prototypes and iteratively test them with stakeholders, building potential products or services using a validated learning approach. Transformation involves the development of a plan to implement the validated solution, focusing on market entry, business model and risk assessment criteria. Commercial outcomes may ensue, but they are not the desired objective of the Transformer. Rather, we are looking to build entrepreneurial self-efficacy in our students and a capability to work across disciplines.
The Transformer runs out of a dedicated space designed to foster creative and collaborative work outcomes. It is modelled off what we have experienced on the Silicon Valley Study Tour and interviews I conducted at leading entrepreneurial university programs run at Stanford University, Kellogg School of Management at Northwestern University, Northeastern University and the University of Colorado at Boulder. Not surprisingly, it has a central social zone flanked by smaller meeting rooms, is connected to an outdoor courtyard and houses an event space at one end. The ubiquitous kitchen is present along with a range of technical enablers.
The Bond Business School additionally houses a Commercialisation Centre, a room specifically designed for collaborative teamwork. Six high trapezoid desks connect and combine in a multitude of different formations for flexible and active group work while the ping pong table separates into two eight-person tables for larger collaborative sessions. Four lounges sit in the corner for more informal activities while their red colour reminds students that it is an active work zone and not a place for rest.
The Bond Business Accelerator operates out of this learning environment, providing an intense commercialisation boot camp experience for students looking to start their own business while studying. Modelled off the programs run at Y Combinator, 500 Startups and the Brisbane-based River City Labs Accelerator powered by Muru-D, the Bond Business Accelerator is an opportunity for promising ideas identified through the Transformer to receive targeted attention aimed at commercial success. It focuses on building human capital, with commercial outcomes a welcome secondary result. The founders of multinational organisations such as tidal energy company Atlantis Resources (LON:ARL) and Melbourne-based on-trend product wholesaler and retailer Cygnett trace their roots to early versions of this program, while recent successes include Service.com.au and SiteSee, a drone-enabled remote mobile telecommunication tower management service, which progressed through the latest River City Labs Accelerator program.
Specific modes of work are accommodated through facilities such as the Macquarie Trading Room, a learning space incorporating forty Bloomberg terminals for 24/7 access to accredited students: the most of any university in Australia. The Upper Basement replicates a modern boutique advertising firm, allowing students to work in conditions akin to those they will experience in the workforce, while the fabrication laboratory includes 3D printers, laser cutters, routers and a 2.8m robotic arm.
Outdoor learning spaces are increasingly popular, enabling student outcomes which differ from a traditional classroom setting. Whether it is the serenity of the pine forest or the public auditorium setting of the ADCO Amphitheatre, educators can now match desired learning outcomes with a physical setting which enables, rather than detracts from, the educational process.
As a specific example, I teach the subject Entrepreneurship and Innovation to postgraduate students studying programs such as the MBA and Master of Accounting. During the course I change location based on the topic explored. Academic theories are explained in traditional classrooms, ideation techniques are experienced in the Commercialisation Centre, while outdoor spaces are used to freshen minds during intense discussions. Throughout the course we hear from serial entrepreneurs and corporate innovators in class, and I conduct a field trip to an innovative business in Burleigh Heads. These activities are designed to provide practical relevance to the academic theories explored through class sessions. At the completion of the field trip I take the students to Burleigh Headland and conduct the debrief session in the natural amphitheatre provided by the north side of the hill. Student feedback indicates the effect this can have on the learning experience:
“The spontaneity of changing the learning environment helped me immensely. I’m not sure why, maybe it’s just the way I learn but we had a couple sessions take place in different rooms and outside and for some reason that helped a lot of the materials stick in my head. I can recall where I learned certain materials rather than just having it all jumbled together. That might not make sense, but it helped me be able to separate theories and frameworks.”
Outdoor Learning Spaces
I have mentioned only a few of the ways in which different learning spaces are matched with desired learning outcomes at Bond University. The Sustainable Development building itself is an educational tool, with thirteen elements of sustainable building practice embedded in its design and used for student education. I could mention the Multimedia Learning Centre, the freshly opened Digital Hub, the Level Up Lab, and many more. The point is that the modern tertiary education experience is no longer confined to lecture halls and tutorial rooms. We are developing T-Shaped future employees and using innovations in program design, delivery and setting to achieve this.
I have described above the ways in which a University is responding to the challenges of disruption. It is with a mindset of optimism and abundance that we are defining our new role in the tertiary education space. The opportunity, therefore, is clear for taxation professionals. There is significant scope to take advantage of the changing marketplace by focusing on strategic knowledge advantages and leveraging them through a collaborative business model to deliver value to clients.
The challenge is to identify the areas of advantage and to build the organisational capability to collaboratively deliver it. The taxation of entities in our society is a given. Knowledge of the taxation system and how it applies is a valuable commodity, but only to the extent it can be used to deliver value to customers. Progressive firms will find ways in which to take advantage of this opportunity.
This paper supported a keynote address to the 2017 Tax Institute Private Business Tax Retreat and was originally published in the Retreat proceedings: Palazzo Versace, Gold Coast: 25 May 2017.
