Predict
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Predict

Spinning towards a New Reality for Professional Services

by Sebastian Hartmann & Shamus Rae

Something stirs underneath the surface of professional services. Last year, KPMG surveyed hundreds of leaders and managers across professional services firms globally on their use of technology and the signs for change. A significant 48% reported they expected major or radical change across their business and offered services within the next three years. A percentage that is incredibly telling for an industry with high growth and profitability, yet very little change to its traditional business model over previous decades. So, what is driving the change?

Over the past couple of years, the culmination of several developments have created an imminent tipping point for consulting, legal, tax, accounting, and related professional services. The most notable of these being:

1. Changing client behaviour

2. Maturity of key technologies

3. Regulatory pressure

4. Business model evolution

Firstly, the clients of professional services firms have developed increasingly sophisticated outcome, scoping and price discussions and negotiations with their providers. After many years of perfect visibility into provider cost structures in the time and material model, aka billable hours, this should not come as a surprise. Procurement functions are also keen to keep their seat at the table in the related sourcing processes and decisions, and are already making sure to leverage RfPs, auction models, or marketplaces. With a severe economic downturn ahead in the aftermath of Covid-19, we can expect many clients to be increasingly price-sensitive and open to alternative providers and service delivery models.

Secondly, in recent years, smaller disruptive players have already entered from the lower end of the market, as per Clayton Christensen’s theory. However, the opportunities posed by rapidly maturing technologies like machine learning, process automation, and low code tools are enabling new entrants to emerge with even stronger momentum. They now successfully position themselves right across the table from the well-known ‘big players’.

This may reflect what Anita McGahan describes as ‘intermediating change’ within the industry; a pattern typically underestimated by executives. McGahan explains this oversight may be down to the assumption that’long-time customers are still satisfied,’ while in fact, these relationships may have become stagnant or fragile. Growing activity by venture capitalists, private equities, and start-ups mirror these developments with professional services now ranking as the 5th largest sector in terms of AI investments, globally.

Impending disruption seems an inevitability, not only due to the changing needs of clients and new market entrants, but also as a result of increasing pressure from regulatory bodies. We are observing heightened interest by regulators to change the guardrails, with the audit industry being a prime example. Echoing recommendations made by the Brydon report in 2019 on how to increase confidence in the audit sector, the Financial Reporting Council’s recent review on ‘The Use of Technology in the Audit of Financial Statements’ in the UK, found a third of audits to be ‘unacceptable’ and concluded that audit quality and supervision would be improved with greater ‘explainability and interpretability’ of data.

Different jurisdictions and professional domains are recommending differing approaches, but undoubtedly, there has been a clear shift in tone of voice from many regulators with an emphasis on technology enabling a higher quality of service. The professional service industry has reached the same conclusion as the FRC and as a result, has been proactive in the creation of technology-led solutions to resolve the inherent issues affecting the entire market.

Consequently, the often preached but rarely practiced focus on clients must be transformed into something new. It is not about spending more time drinking coffee with clients, burning the midnight oil, presenting shinier slides or fancier dashboards. It is about maximising value and preparing to fundamentally challenge traditional business models through technology and data. The daily or hourly rate is not compatible with this next generation of solutions and the underlying ingredients and delivery models.

Perhaps the biggest accelerator has been the arrival of Covid-19, and the wide-scale disruption brought about in its trail. The pandemic has presented many challenges but has undeniably eroded the time and material model even further and expedited the rate of digital transformation, making the need for forward-thinking professional services even more urgent. The transition towards ‘throughput’ or ‘output’ oriented compensation models is now welcomed by both clients and employees, who have long dreaded the default ‘on-site’ delivery model. While companies around the world are reconsidering their need for office space, employees are actively shaping the new reality. Many younger professionals, in particular, have already grown used to collaborating through tools like Microsoft Teams and Slack at university. They are now entering law or consulting firms and openly questioning the old ways of working, life in a cubicle and the traditional challenges of balancing work and the ‘rest’ of their lives.

The professional services industry must brace itself for imminent disruption — or at least a new reality. Firms across legal, audit, accounting, and tax services are beginning to recognise these drivers for change and are warming up to the new benefits of this revolution, albeit with differing urgencies. Perhaps the realisation that the ‘product’ is no longer the ‘professional’ will be the first of key takeaways from this, leading to a much broader range of options on how professional service firms can position themselves in the market. The pace of innovation around solutions, services, and digital products will hasten as professional services learn how to launch, scale, and manage next-generation ‘solutions to client issues’. Solutions that are based on professionals, data, and technologies coming together in novel ways, virtual and hybrid delivery models and subscription and XaaS business models. It is clear that this will require a new range of capabilities and many firms will not possess all of these. An ecosystem strategy and management approach around sourcing, collaboration, cooperation, and co-creation will redefine the concept and the borders of the firm itself.

Professional services as an industry is being reimagined. For the better. However, nothing less than a complete transformation of firms’ business models is needed if they are to become fit for purpose.

Authors:

Title Picture „Spinning Dream” by Christoph Hautier — and selected in reference to the award winning movie „Inception” … and in case you need a reminder about the spinning top, here’s the link to a YouTube clip of the final minutes: https://youtu.be/XQPy88-E2zo (Yes, it’s a bit geeky — but we are very passionate about this topic 🤓)

Originally published at https://www.linkedin.com.

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