Question: “How many consultants does it take to change a light bulb?”

Answer: “Let me think, what’s your budget again?” … Or so the old joke goes. But perhaps not for much longer.

I have talked about Deloitte’s excellent Short Fuse, Big Bang case study a few times; see here and here for example.

There is a lot to like about this report, but if there is one thing that stands out to me above all else it is that Deloitte, professional consultants that they are, actually identify their own industry Business & Professional Services as  being one of the most at-risk in the face of digital disruption.

Across the board, we see firms offshoring more of their basic-to-mid-level tasks and turning to freelancers, trying to drive costs down and either compete on price or capture more margin.

In the legal industry, we see businesses like Pollenizer portfolio company LawPath changing the way people find lawyers and AdventBalance providing more cost-effective and flexible legal advice. Whether we understand the difference between Debits and Credits, we turn to cloud-based accounting software like Xero and Saasu instead of traditional bookkeepers. In recruiting, we see startups such as RecruitLoop provide a new “elastic recruiting” approach which better aligns the interest of service providers and their customers… And these are only the very beginning.

So, what is it about Professional Services that leaves the industry ripe for the picking?

Structure

The traditional law or accounting firm is a partnership. Staff work their way up through the ranks, billing never-ending hours and earning their stripes over the years in the hope that one day they too will become a partner. #payday

One of the metrics by which successful firms are compared is “Revenue per Partner”. That is all well and good, but when there is pressure to distribute as much income as possible to partners each year, that becomes a de-facto fixed cost. Firms’ business models are less flexible; they become more exposed to fluctuating revenues; and they have less incentive to retain funds and invest for the firm’s long-term sustainability… After all, if I have been conditioned to focus on billable hours and annual income my whole career, and I don’t expect to be in the business for the rest of my life, why would I jeopardise this year’s distribution and take a risk investing in disruptive new business models which might conflict with the status quo?

Death to the Billable Hour

Before I get into this, I want to tell you a quick story…

I once had occasion to seek legal advice – don’t worry, I didn’t do anything wrong (well, not this time anyway!)

I was travelling overseas and time was tight; phone access was difficult, and timezones made life even harder. After much back-and-forth trying to schedule a teleconference, I asked what I thought was a pretty simple question:

“Can’t we just do all this via email?”

The lawyer refused, which I thought was strange. Despite what the old adage says, the customer doesn’t always have to be right, but I thought mine was a pretty basic request in this day and age.

Apparently not… When I told a legal buddy this story a few weeks later he explained that emails suck because clients always query how long they actually take to write; telephone calls, on the other hand, have a clear record of when they start and finish. #DERP

Stowe Boyd wrote a thought-proving piece last year Why Do We Still Charge By The Hour. A choice excerpt:

We know that the work hour is a fiction, on many levels. First of all, all hours we spend at work are not equal. Yes, you can track what project you are working on so that 10am-11am was work for the Johnson account and 1pm-2pm was dedicated to the budget project, but the value created in each of those hours is variable, to say the least. Besides, why should a client care how much time — or how little — is spent on their project? Shouldn’t it be about delivering value?

Startups are 100% focused on creating value. It is hard enough to sell a new product to an existing customer in an established business; when we are selling a new product to a new customer in a new business, we need to convince them our product is 10x more valuable than whatever they currently use.

When someone charges me in discrete $x/hr units, there is too much emphasis on the when-and-how work gets done, and not enough focus on what comes out the other side. That sucks.

Process, People and Products

The combination of these three elements is what makes professional services firms succeed. Could it be, though, that one day they will also be their downfall?

• Processes are important. The help make us efficient and predictable.
• People are crucial. Combined with our processes and IP, they are the input by which we make our money.
• Products are what we sell. If we have established a relationship with a new customer, our job is to introduce them to new products and increase the depth (read “price”) of our engagement.

If professional services firms do their job too well, their people become somewhat commoditized. They bundle as many services as they can into each customers’ “package”, send the workers out to do the work, and wait for the invoice to be paid.

But what does that look like in a world where the internet is bringing the work direct to workers; and the product direct to customers?

The notion of The Great Unbundling has been around for a while but we are only now starting to see it play out at the enterprise level. Fabian wrote about unbundled business models on our blog recently, and my favourite investor/blogger in the world, Fred Wilson, spoke about it late last year as one of the three key trends which underpin his investment theses.

Whether we are a provider or a consumer, we are all just “a node on the network”. And whether it is entertainment, information or advice, those of us who want something have come to expect it “a la carte”.

We don’t need all the bells and whistles. Just give us what we want – faster, cheaper, better.

If you don’t, someone else will. And that is the challenge faced by professional services firms the world over thanks, as always, to our good friend the internet.