Business Model for the Professional Service Firm

February 22, 2015

This post is part of the series: Managing the Professional Service Firm. Managers of professional service firms face many challenges. This series attempts to…

This post is part of the series: Managing the Professional Service Firm.

Managers of professional service firms face many challenges. This series attempts to provide a helpful collection of resources, concepts, and frameworks for understanding and addressing them.

The business model answers the question, "How do we create value for our customers and our firm?"

Value = Benefits - Costs

The purpose of this article is to canvas the the business model of the professional service firm. This method identifies the key partners, activities, resources, value propositions, customer relationships, channels, customer segments, cost structures, and revenue streams that make up the business model in a concise and easy to understand method.

The business model canvas — as opposed to the traditional, intricate business plan — helps organizations conduct structured, tangible, and strategic conversations around new businesses or existing ones. Leading global companies like GE, P&G, and Nestlé use the canvas to manage strategy or create new growth engines, while start-ups use it in their search for the right business model. The canvas’s main objective is to help companies move beyond product-centric thinking and towards business model thinking. Alexander Osterwalder, HBR

The business model canvas helps us to define the strategy. Picking markets, target clients, differentiators and services based on a clear and easily understood strategy is invaluable in getting everyone in the firm headed in the right direction. Without a well-conceived strategy everything else suffers.

Definition: The Professional Service Firm (PSF)

One of my favorite reads on professional service is by David Maister; the following definitions are from his book Managing the Professional Service Firm:

A professional service firm (PSF) is a firm in which professional skills form the basis of its offering to customers. Examples of such PSFs are lawyers, consultants and IT service firms.

Two aspects of professional work create the special management challenges of PSFs:

Customization. Professional services require a high degree of customization, so that approaches from the industrial or mass consumer sectors, based on the standardization, supervision and marketing of repetitive tasks and products are difficult to apply.
Client contact. Most professional services have a strong component of face-to-face interaction with the client.

In order to meet these challenges, a professional service firm must hire and retain highly skilled individuals, the firm’s talents. This means that the PSF must actively compete in two markets simultaneously: the product market for its services, and the factor market for its productive resources, the professional work force.

David Maister, Managing the Professional Service Firm

Modeling the Professional Service Firm

The following is a breakdown of the professional service firm into the business model canvas components. There are distinct differences between a service firm and other business models like manufacturing. This article highlights these differences and offers some tips.

1. Customer Segments

The better you can define and understand your target audience, the more you can focus spending and tailor your message. It’s important to target industries with good long-term growth prospects.

Conduct regular research on your clients. This is especially true of your target client group. The better you understand them, their needs and priorities, the faster you are likely to grow and the more profitable you can be — provided you adjust what you are doing based on the research results.

2. Value Proposition

After you choose what markets you want to serve and what important problems you want to solve, you must be able to bring value to these markets that is not widely available already. If these markets and their needs are growing, so much the better.

Stand for something. Make a promise to your clients. How are you different and better than other firms in the market today? Your differentiator should be an idea that resonates with potential clients — don’t confuse it with issues that are only important to the people in your firm. Be prepared to support your differentiator with convincing evidence.

Cultivate a specialization. Specialization is the easiest way to differentiate your firm from the rest of the pack. Many firms fear specialization because it will scare off potential clients in areas outside that focus. The reality is that specialization tends to be associated with higher growth and profitability. When you specialize, you can be much more efficient and targeted with your business development activities.

Develop a good elevator pitch. Avoid abstract, fancy, and hard-to-remember monologues. Just tell people, in plain language, what you do, who you do it for and why someone would choose your firm. If people ask you “What is it that you do, again?” then your pitch isn’t right. If you have a clear target client and a good strategy, developing a good elevator pitch should be easy.

Be consistent. Your promise must be clear and consistent on your website and in your marketing materials. Each one of your employees must understand what you are trying to accomplish and why. Your operations, processes and policies must also be aligned to deliver on your promise or you will dilute its power.

Commit to implementing your vision, even as you make ongoing adjustments. If you regularly review your client research, you will be better prepared to anticipate clients’ needs. Try to develop a powerful, proven solution, then deliver on your promise.

3. Channels

Invest in a more capable website. Your website often contributes to a prospect’s critical first impression of your firm. If you aren’t proud of the image it portrays, or if your site doesn’t clearly explain whoyou serve and what you do, you are handicapping business development.

4. Customer Relationships

In professional services, relationships are "sticky". Companies develop enduring relationships with service firms on the basis of personal and institutional trust. The successful professional service firm is fanatical in its pursuit of these relationships and capitalizes on them.

Leverage face-to-face contacts. High Growth firms are more likely to leverage relationships with referrals, personal visits to prospects and sales training for non-sales staff. Don’t waste these valuable resources on untargeted networking or tradeshows. Target your potential clients well, and then focus these powerful tools.

5. Revenue Streams

Primarily service hours with a balance of Senior, Intermediate, and Junior team members.

Non-service revenue can include fixed cost product sales like software and intellectual property.

6. Key Resources

People
Time-saving Processes & Tools: includes methodologies, systems, templates, technology, and procedures.

7. Key Activities

Service Delivery
Marketing
Sales

8. Key Partnerships

Subcontractors: A subcontractor is a person who is hired by a general contractor (or prime contractor, or main contractor) to perform a specific task as part of the overall project. Subcontractors can be an important assets for overflow and lowering costs. In some cases these are companies and others individuals. Use subcontractors as outside experts and consultants. They can add expertise and perspective that your firm may not have. They can keep your firm moving forward even when things get busy.
Strategic Business Relationships: A strategic business partnership is a type of channel partner relationship where the service firm forms an affiliation or partnership with product providers. The former agrees to use the laters product or technology in their portfolio in exchange for some preferred vendor status (e.g. referrals or discounts). This channel partnership helps bring their new product to market, increase brand visibility, and boost sales. For the PSF, it helps open the doors to new business with a lower cost and a smaller risk factor than producing their own technology or merging/acquiring to obtain the technology for their service portfolio. In this scenario, the PSF acts as a Managed Service Provider or VAR.

9. Cost Structure

[caption id="attachment_1648" align="alignnone" width="1049"] Key KPIs for Professional Service Firms - Via Transentis[/caption]

People
Marketing & Sales

Summary

This is only a beginning document. To become a high-growth professional service firm, you need to do your homework. Begin by developing a comprehensive, objective view of who you are as a firm and how you are percieved in the marketplace. This perspective will give you a foundation to build upon. To get a complete picture, it’s important to look at your firm from both the inside and outside. This means interviewing firm leadership, staff, customers, prospects and even lost prospects. You will probably need outside help to do this right. It’s far too easy to get a distorted message without a neutral third party asking the questions.