The Professional Services Value Chain Re-cut
We recently released an article titled ‘The Professional Services Value Chain’ where we discussed the value chain of the professional services and the application of the theory of the conservation of attractive profits. As a reminder, the theory of the conservation of attractive profits states:
“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.”
At the time, we were happy about the article. Now, a little older and a little wiser, we have realised that it was wrong. In summary, back in September last year, we argued, that for:
“The pre-digital value chain, attractive profits for the professions are realised through the integration of human capital and intellectual property (IP), which enables them to deliver differentiated human based professional services; to date a lucrative proposition. The interesting part about the pre-digital value chain is the modular and commoditised technology element, which isn’t controlled by the company but supports and optimises the integrated elements
Further, the vast majority of the value for clients is created through the integration of human capital and IP — i.e. who can attract the best people and who has the best IP and related reputation. Technology, which can be accessed by anyone (think Microsoft Office) provides no differentiation, is a commodity, and as such not owned or sought after.”
It should be noted that for the pre-digital value chain, attractive profits are still realised through the integration of human capital and intellectual property (IP). The issue that became plain though is that although technology is certainly an important part of the professions, it is just a tool, an enabler, and something that is used across all industries and impacts all aspects of the value chain to some degree. It is not in-itself an activity within the value chain. This doesn’t mean that technology isn’t affecting the value chain, on the contrary, it is the primary force causing the shift in all value chains.
After realising our mistake, we spent a number of hours deliberating over what should be the final activity within the professions value chain. At this point, it’s important to point out that we have abstracted the value chain to a high level to keep things simple. So then what is the final activity?
Well, at the end of the day, the professions are there to provide advice or some form of assurance. This advice or assurance comes in the form of a deliverable the client can then use. Furthermore, this deliverable is trusted, especially when provided from a top-tier or reputable firm like KPMG, Deloitte, EY 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, as per our original article, human capital and IP are becoming decoupled. As we discussed in the first instance, there are a few things that have triggered this decoupling (which still stand):
“The combination of human capital and IP no longer provides a competitive advantage as the market trends toward all competitors offering similar services;
- technology has significantly improved — think cloud computing, artificial intelligence and mobile, leading to both automation and augmentation;
- 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;
- the modern client expects digital solutions to meet their needs; and
- data has become incredibly powerful in enabling rapid feedback cycles, decision-making and product development.”
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, building software solutions (technology is 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(s) (think new solutions in the digital and legal spaces) — seeking to provide entirely new value to the client.
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. Lastly, as we discussed in the previous piece:
“… IP shifts from pure knowledge, much of it qualitative, to proprietary data, both qualitative and quantitative, which is extremely valuable and fuels the most successful companies of today.”
All of this means that 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 hard coded into software solutions (the deliverable) that leverage huge and unique data sets.
That said, 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 (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 professions becomes an incredibly exciting space to work in, even if you don’t have a background in tech.
Lastly, relationships will (most likely) 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 sign-up software solutions, leveraging baked in IP, dominating the middle to lower end of the spectrum.
So that’s our update — let’s hope we got it right this time.
As always, embrace the chase.
Co-authored by Anthony Stevens and Louis Strauss
