Can anyone please share some research, or thought leadership on the future business model and value proposition of professional services such as management consulting, accounting, in specific. The current prevalent model is chargeable hours, whereas in the future, much of the work done today will be commoditized by technology. What will be the new business model? What will be the revenue sources? What do firms need to do to position themselves for the future? What skillsets do they need to by acquiring?
What's the future business model of professional services, (i.e. consulting, accounting, etc.)?
Answers
The hourly billing model is SKEWED against the client. Think about it....the fact is, aside from ETHICAL considerations, there is NO incentive for the professional service firm to be more efficient. They will eventually bill it anyways...or to put it bluntly, their inefficiency is passed on to the client.
I believe that a structured or tiered subscription model, maybe even an ala carte model, is emerging. Think....emerging/changing cable (channels) subscription. I have heard some "rumblings" (ie, unconfirmed "gossip") that some firms are already trying this.
Example....For an accounting/bookkeeping firm...
1. A basic subscription
2. Fee goes up depending on number of transactions.
3. Fee goes up depending on specific transaction help.
The possibility on how you structure the subscription is endless.
I had a "rant" about this in one of the previous threads. I believe that the industry is RESISTING this change as it affects REVENUE. It is counter-intuitive. The AUDIT part is on the precipice. Ever wonder why your audit contract is NOT on an hourly billing model yet other services are? Because clients are now pushing back on audit fees, audit firms are learning to be more efficient.
Here is the thread... https://www.proformative.com/questions/efficiency-billable-hours
Emerson
I appreciate the reply. There's certainly a shift approaching, but the industry is resisting the change.
I've had the pleasure of working in different types of professional services companies during my career and there are 2 broad types of firms.
The 1st is the "traditional" type of company which is the one that you are referring to where the company bills the actual hours worked and (to Emerson's point) does not have a great deal of incentive to be efficient assuming that clients continue to pay. They are able to charge in this way because: that's the way that they have always charged, there is "safety in numbers" (ie all firms charge based on this model) and the clients tend to be smaller and therefore have a less negotiating power.
The 2nd type of company is what I call the "advertising/brand consulting" type of company. These companies also sell the skills and expertise of their staff but 99% of their work is done on a fixed price basis. This is because their clients tend to be large corporations with strong negotiating power (many of which have procurement teams) and demand fixed price work. There was a time when they also sold their staff on a "retainer" or time & basis but the clients got wise to it a while back.
I believe that the "new business model" for all professional services companies will be much closer to the 2nd group of companies. This is because consumers/customers are becoming more and more business savvy and demanding value for money. All firms are on the web now and consumers are less "loyal" and more likely to change their business advisors than ever. It just takes a few "disrupters" to create the change in business model.
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If more companies move to the "advertising/brand consulting" type of company, won't the disrupters then be more like the traditional type? If I were running a service business and all my competitors were charging one flat rate per job, I'd market an hourly rate, based on honest hours. I'd be upfront with how long it takes to accomplish the goal, and then give status updates along the way so that the client knows I'm putting in honest hours. I believe this would get the smaller jobs back as a client won't want to spend x dollars if I could do it for less.
Steve,
"based on honest hours."
Hours/Time is not the only variable. Salaries too and most importantly EFFICIENCY! What incentive is there to keep salary levels down or to do the job faster. Of course with the assumption that quality/accuracy is a given/constant. One can be "honest" about the hours and still remain INEFFICIENT.
And as to your point, you are assuming the limited business models in this case (Mike's response), two. The disruptor can have an entirely different model and not just limited to the 2.
The flip argument hasn't been considered, and that's the contract drift.
The hourly model can absorb this drift, whereas a fixed price soon becomes untenable.
And as a preemptive argument -
Telling the client "no", no matter how elegant the refusal sometimes gets the contract cancelled. With the hourly model you can determine what your write-off is as opposed to working more hours and having little or no control.
Anyone heard of Value Based Pricing?
Len - who sets the value? I have found that the customer almost always feels (I do this as well) that prices for professional services are too high versus any real or perceived value.
For prof services I'm not sure it works.
Wayne- the customer has to see the value and therefore sets the value.
That's the short answer.
Customers who can't see value won't likely hire you on a VBP arrangement, for obvious reasons. So then they are obliged to go T&M and make sure they control scope.
It also depends on the nature of the engagement; e.g. serving as interim CFO for 6 months vs implementing an ERP system.