The Modularization of Professional Services

LinkedIn Article by Tim Williams 
January 18, 2015

Is your firm a one-stop shop? If so, you’re likely experiencing a decline in revenues and an even steeper decline in profits. Today’s sophisticated buyers of professional services don’t expect to find “all your legal needs under one roof” because they’re smart enough to know that no single firm can be good at everything.

Increasingly, client companies are seeking what they consider to be “best-in-class” specialists to fulfill their marketing, accounting, legal, and IT needs. The result is the disintermediation of business models in industries ranging from advertising to consulting. To meet its specialized marketing needs, Procter & Gamble employs the services of 15 creative/branding agencies, three media agencies, six digital marketing agencies, ten public relations firms, eight direct/shopper marketing agencies, and nine multicultural marketing specialists. Gone are days of large companies having “an agency” or “our law firm.” Enter the age of modularization in professional services.

The decline of the one-stop shop

In an insightful piece in a recent edition of the Harvard Business Review, Clayton Christensen observes that we are seeing a shift in the competitive dynamic from the primacy of integrated solution shops, which are designed to conduct all aspects of the client engagement, to modular providers, which specialize in supplying one specific link in the value chain. He explains that the growing sophistication of clients leads them to disaggregate services, which reduces their reliance on one-stop providers. “They are becoming savvy about assessing the jobs they need done,” says Christensen, “and funnel work to the firms most appropriate for those jobs.”

What are the dynamics forcing specialization in the modern business world? For starters, the wide availability of information, which enables the buyers of professional services to locate and evaluate experts who specialize in the very thing they’re looking for. In effect, the Internet gives clients access to a global talent pool of best-in-class service providers, not just the local providers with “full service” offerings.

Also, because today’s clients are more knowledgeable and sophisticated, they want greater control over the provision of professional services. These types of clients generally know the exact type of help they need, and are prepared to play the role of integrator rather than expecting any one firm to act as a central resource. In effect, the client is the general practitioner who enlists the help of various specialists to solve a particular business problem.

Beyond custom solutions to productized knowledge

The disintermediation of service providers has even reached the hallowed halls of world’s best business consultancies. Knowing that some smart clients are increasingly able to diagnose their own business problems, McKinsey has productized some of its knowledge as “McKinsey Solutions,” which allows clients to buy modular, off-the-shelf solution sets rather than embarking on a traditional consulting engagement. Productizing knowledge one way to meet the needs of sophisticated clients who aren’t looking for a long-term retainer-based relationship with a single “integrated” provider.

Some progressive firms are turning this productized knowledge into valuable assets that produce recurring revenue streams (vs. episodic consulting fees) through licensing models (think software firms). This is a fairly radical departure from the traditional customized “work for hire” that has been the bread and butter of most law firms, accounting firms, and marketing agencies. Developing these types of new revenue streams requires not only a different approach to business development, but a different business model altogether. In the world of increasingly productized, modular solutions, professional firms will need to learn how to develop, sell, and support the IP they create, which is very different from process and techniques involved in custom consulting assignments.

Is there still a need for firms to play the role of general practitioner, to help clients diagnose their problems and then dispense at least some of the solutions? Of course there is. And this need is especially prevalent among smaller client organizations in smaller markets. The question for you and your firm is whether that’s the kind of client you want; the unsophisticated patient who only needs the services of the country doctor, or the larger national/global company who seeks the help of a world-class specialist.

No doubt the majority of firms still think of themselves as capable “integrated” providers. But as the late C.K. Prahalad once observed, “During a company transformation, the forgetting curve is sometimes more important than the learning curve.”