LinkedIn Article by Tim Williams
Published on May 15, 2019

A few thousand years ago, the average human would have to chop and gather wood all day every day for a week to produce 1,000 lumen-hours of light. That’s the equivalent of one modern light bulb burning for about an hour. Even after the invention of candles and oil lamps by the Egyptians and Babylonians, it would have required the wages of almost a full week’s work to cover the cost of producing just one hour of room lighting by today’s standards. In other words, light used to be incredibly expensive. 

Today, just a single day’s work can provide enough money to keep an average light bulb burning for ten years. The price of light, as studied by Nobel Prize-winning economist William Nordhaus, has fallen by a factor of 500,000 since ancient times. As noted by Tim Harford in his column in the Financial Times, “A thing that was once too precious to use is now too cheap to notice.”

Magician or Logician?

From a business standpoint, the moral of the story of the price of light is this: what is "magic" today will eventually become “logic.” By "magic" I mean products and services that are high-value and hard to find. “Logic” solutions are lower-value and easy to find. In a professional services context, much of what law firms do qualifies as “magic,” but there is an ever-growing body of “logic” work as well. Constructing a convincing criminal defense is “magic,” but much of the required discovery work could be classified as “logic.” The Pennsylvania Bar Association publishes a continuing education booklet titled Courtroom Magic, an apt characterization of the high-value work done by talented attorneys in complex cases. But the vast majority of work leading up to a courtroom appearance can be done by people with less expertise. And in some areas, like family law, self-representation is becoming more and more common.

When CPAs advise their clients about tax strategy, that’s clearly “magic.” Compiling the information for a tax return is “logic.” When an advertising agency develops a game-changing marketing idea, they’re acting as “magicians.” But it’s the “logicians” in the firm that produce the elements of a marketing campaign.

The relentless forces of disintermediation

The forces driving this constant disintermediation are well articulated by Harvard’s Clayton Christensen, who observes “Their growing sophistication leads clients to disaggregate services, reducing their reliance on one-stop providers." Clients are becoming savvy about assessing the jobs they need done, says Christensen, and funnel work to the people and firms most appropriate for each particular class of work.

The line that divides magic from logic is constantly moving. What used to be "magic" 20 years ago may be "logic" today. In the days of Mad Men, most companies were completely dependent on their advertising agencies to produce even the simplest print ad. Today, most marketers possess the technology and resources to produce every imaginable element of a marketing campaign, from digital banner ads to highly produced corporate videos. As a result, the number of marketers possessing significant in-house capabilities has been growing dramatically, with more than 70% of U.S. companies now having some form of internal “agency.”

For professional service firms, the implications of this phenomenon are immense. The economic woes of many firms can largely be explained by their futile attempts to extract "magic" revenues from what has become “logic” type work. Senior professionals are curiously mystified by the pushback they get on pricing for work that sophisticated client organizations could do more cost-effectively in-house or outsource to more cost-effective providers.

Redirecting human talent

In the marketing world, most companies know that to get top shelf creative work, they still need the talent and objectivity of an outside business partner like an agency. But when an agency tries to charge higher-end prices for both high-value and low-value work, they’re likely to spend a lot of time and energy arguing with client-side procurement professionals. 

The failure of most professional firms to identify and separate these two different classes of value produces a confused revenue model where higher-value people are also doing lower-value work (a waste of talent and intellectual capital). A recent research study for which I was interviewed titled The Future of Pricing, published by Source Global Research, concludes that professional service firms should “Protect margins by automating work at risk of commoditization and redirecting human talent to work that requires technical expertise not currently present in client organizations.” In other words, firms must be much more diligent in deploying the appropriate talent and resources to match today's increasingly "decoupled" marketplace for professional services.

Oscar Wilde’s famous definition of a cynic — someone who knows the price of everything and the value of nothing — is instructive here. As the forces of disintermediation continue their march through businesses of all types, the most successful firms will continually adjust and align the price of their services and solutions with shifting perceptions of value. Much of what was exceptionally valuable to client organizations just a few decades ago is worth much less today.