By Mohanbir Sawhney
High-end professional services firms that cater to corporate clients have a clear upside: Because they provide specialized expertise, their offerings can be very lucrative. But there’s a less obvious downside: If a consulting firm, say, or a law practice wants to double its revenue, it has to double its staff of consultants or attorneys. Consultancies, law firms, ad agencies, and other professional services firms struggle to nudge their gross margins above 40% as they achieve scale. Contrast that with product companies like Google and Adobe, which don’t have to deal with the same cost structure and which enjoy gross margins of 60% to 90%.
Technology offers professional services firms a way out of their predicament. By leveraging the power of algorithm-driven automation and data analytics to “productize” aspects of their work, a number of innovative firms are finding that, like Google and Adobe, they can increase margins as they grow, while giving clients better service at prices that competitors can’t match. Productivity rises, efficiencies increase, and nonlinear scale becomes feasible as productized services take over high-volume tasks and aid judgment-driven processes. That frees up well-paid professionals to focus on jobs that require more sophistication—and generate greater value for the company.
There are distinct challenges, however, in developing products to embed in services. The nature of a product and its role in a business’s value proposition are not the same for a services firm as they are for a company that manufactures goods. This means that services firms must take a different approach to creating, managing, and monetizing products. (Read More...)