Innovation Strategies and Methods for Professional Services Companies

Highlights

  • In the highly competitive services industries, clients often view services as substitutable, commoditized and largely indistinguishable among firms.
  • Research shows that innovation is the single most effective business growth strategy to demonstrate differentiation and achieve increased client acquisitions, price premiums and a barrier to switching providers.
  • Innovation creates increased client and firm value and a sustainable competitive advantage.
Johnny Grow Revenue Growth Consulting

How Service Firms use Innovation as a Sustainable Competitive Advantage

Innovation is an answer for differentiation and a response to commoditization. It is the process of converting a novel idea into a unique service, product or experience that delivers value.

For professional service organizations this may include new services, improved services, or new ways for clients to acquire, consume, use, experience or benefit from services. Service firms achieve competitive advantage when apply their knowledge and capability to deliver new or increased value for themselves and their clients.

Start with Strategy

Innovation begins as a business growth strategy that takes a twostep approach.

First, the strategy identifies where growth comes from. Then the execution identifies the specific methods to achieve that growth.

The right strategy confirms you're doing the right things. The right execution confirms you're doing things right.

The three innovation growth strategies that identify the impact to revenue growth are incremental, transformative and disruptive.

Revenue Growth Strategies

The two dimensions to grow your business are service growth and market growth. Expanding your services or customer markets in various combinations will reveal up to four options.

You can i) sell more of your existing services to your existing customer markets (a market depth strategy), ii) you can repeat your existing services to new markets (a market growth strategy), iii) you can expand or create new services to sell to exiting customer markets (service growth), or iv) you create new services for new markets (disruptive growth).

Each option offers different levels of risk and revenue impact. Your innovation growth strategy explores, models and identifies the optimal combination of these growth options.

Methods Support Systemic Execution

Professional service firms have long been considered innovative laggards. That's in large part because it is most frequently considered a business growth strategy for companies that produce goods. In fact, manufacturers dedicate substantial resources to research and development (R&D) and protection such as patents.

Services innovation is different. For example, it is generally an intangible, such as knowledge, processes and know how. It's delivered from human capital and often not transferrable without skilled resources. That's why trying to mimic manufacturing methods doesn't work for service industries. What's needed is a services-centric mix of innovation methods.

The services mix is built on the three pillars of company, services and processes.

Services Innovation Methods

Company innovation is sometimes referred as business model transformation. There are three primary means to transform a services business model.

  1. Strategy includes efforts such as advancing the company's unique value proposition or altering the company's sustainable competitive advantages. More so, strategic innovation seeks out fundamentally different ways to leverage core competencies and limited resources to exploit external opportunities.

It's a tenuous exercise to determine how to best focus the firms limited capital on the biggest growth opportunities. It requires tough tradeoffs and ceasing established and comfortable but lower priority programs. In the wise words of Michael Porter, "The essence of strategy is choosing what not to do."

Some of the largest professional service firms such as Accenture and IBM routinely reinvent their strategies and business models. Their pursuit of continuous reinvention is not the same as a company reorganization, which is more often the result of under-performance.

When we filtered the Business Growth Report findings by industry, the data showed that the Best-in-Class professional service companies (e.g., the top 15 percent) applied strategic innovation strategies 2 times more often than their lower performing peers. The data also showed that these top performers included or complemented their innovation strategies with at least three of four other service growth strategies – being corporate culture, customer affinity, digital transformation, or mergers and acquisitions (M&A).

One other standout data point was that every top performer had a definitive customer relationship management strategy. Customer affinity is built on customer relationships and is particularly influential in services industries that sell an intangible solution, and where buyer evaluation is based on the provider as much or more than the intangible service. Since the service cannot be physically inspected, the provider will be.

  1. Markets are often referred to as target markets. No services firm can be all things to all people so the most successful service firms identify the markets where they provide the greatest value. They focus on markets defined by firmographics, customer segmentation, industry and geography. The highest growth service firms use merger and acquisition strategies to accelerate market growth.
  2. Go-To-Market is all about execution. It defines the market access strategy, such as whether the sales function is direct, indirect or a hybrid model. It determines whether alliance or partner channels can accelerate growth objectives. It defines the tactical measures such as the right offerings (trials, assessments, pilots, MVPs), methodologies, aids (assets, accelerators, IP or templates), battle cards and competitive intelligence.

A particularly powerful go-to-market method in the professional services industry is marketing. However, unlike manufacturers promoting goods, service providers promote their brand to build reputation and create differentiation. Techniques such as thought leadership or other eminence are designed to position the services firm as an industry leader.

It was Peter Drucker that said, "because a business's purpose is to create a customer, it has two – and only two – functions: marketing and innovation. Marketing and innovation create value, all the rest are costs." This is especially true in the services industries.

Services innovation creates added value via new and better services, finds new ways to deliver services or discovers new pricing methods that increase value.

  1. Many service firms create new services as a matter of routine. However, the litmus test is whether those services are valued by customers. Customer value is most influenced by measurable business outcomes. The solutions that create competitive advantage are built on proprietary knowledge, delivered through developed capabilities and measured in customer outcomes.

Services can be separated (i.e. ‘a la carte’ services), componentized, modularized or bundled in different ways. Changing the packaging may create incremental innovation. New services become transformational when they create order of magnitude changes.

  1. Fulfillment or delivery may include virtual services, noncontingent staffing (i.e., contractors, multi-firm staffing or the Gig economy) or alliances with unnatural partnerships (e.g., partnering with competitors, or coopetition).
  2. Pricing innovation seeks to change client value. That doesn't necessarily mean pricing is reduced. Non-traditional pricing and billing models in the services industry may include value-based billing, milestone billing, billing based on performance results or shared outcomes, or billing based on a medium other than time. Clients often make decisions based on perceived risk so a billing method that reduces risk may create new or added value.

Process innovation is the most common form of operational modernization. It's mostly internal in nature and offers both the lowest risk and payback. When performed piecemeal any process improvement will generate an incremental gain. However, when done as part of a continuous process improvement program the results can become cumulative. The three process categories are technology, talent and transactional.

  1. Technology seeks to automate manual processes, accelerate business cycles, create information reporting for improved decision making and facilitate scale. Inexperienced innovators tend to apply technology to achieve efficiency goals. More experienced professionals apply technology to increase some type of process or outcome effectiveness.
  2. Talent innovation seeks out human performance improvements. Talent management governs the employee hire to retire processes. Improvements in recruiting, on-boarding, compensation management, performance management, learning and development, or succession management are prime sources for talent management transformation. Professional service firms are people-based companies so improvements to culture, productivity or processes can deliver very big impacts.

The Business Growth Report reveals that corporate culture is the single greatest contributor to sustained talent improvement programs. Culture is made up of the implicit shared values, unspoken behaviors and social norms that recognize what is encouraged, discouraged, rewarded and penalized. It's developed over time, either by design or happenstance, and guides staff behaviors and contributions.

Every service company has a culture. Most low performance cultures are a consequence of unplanned actions and random outcomes. On the flip side, high performance cultures are intentional, proactively designed and in a constant state of awareness and improvement.

A high-performance growth culture drives the behaviors that determine the quality and volume of employee discretionary effort, which in turn determines staff productivity, and the quality and amount of work that gets done.

Innovative services firms promote open-minded curiosity and empower their staff to seek out new and better ways to do work and deliver client results.

  1. Transactional innovation seeks to account, automate and accelerate business transactions. It's complimentary to the technology pillar but more limited to transaction processing. Back-office transaction processes include workflows such as quote to cash, procure to pay and record to report.

Improving these processes tends to achieve cost savings. Front-office or customer facing transaction improvements such as marketing or customer service tend to focus on increasing customer value.

Front-office software technology applications that deliver the most significant payback include Customer Relationship Management (CRM) and Professional Services Automation applications. Back-office apps that deliver big include Human Capital Management (HCM), Enterprise Resource Planning (ERP) and business intelligence (BI) solutions. Disruptive technologies such as the cloud, mobile, artificial intelligence and the consumerization of business IT are blurring the distinction between front and back-office transaction systems.

See how the best-in-class service firms innovate to achieve differentiation, revenue growth and a sustainable competitive advantage.

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