The future of branded professional services
The market for buying and selling professional services between large organizations, what I will refer to as ‘branded’ professional services, is imperfect. Really imperfect. Opaque pricing and availability, difficult to find and compare offerings, limited competition, little or no buying-data. By and large, the market is almost entirely relationship-driven. Who do I know, and who do I trust?
Not surprisingly, that’s the way branded professional service firms want to keep. And why not. Partners in those firms across legal, accounting, consulting etc. earn millions of dollars a year in take home partnership profits. Nice work if you can get it (which I used to – sad face). No burning platform here.
But it doesn’t really make sense. How is it that organizations that spend tens if not hundreds of millions of dollars a year on branded professional services are less equipped to make buying decisions in relation to those services than those at the consumer and retail end? Online market places are giving those latter buyers choice, competition, market pricing and ratings for the professional services they need, in much the same way that online market places for goods have been doing so for many years. What’s available, how do the offerings compare, what’s the best price, what has the market said about each offering, what else have people like me chosen that I might also like? There is simply no place to go to find the answers to those questions in the context of branded professional services.
Now let’s project out 2, 5, 10 and 20 years into the future. What will the market for the buying and selling of branded professional services look like? In my view, there is one certainty. The market will move from a supplier-led purely relationship based one to an availability-led buyer-centric and data-driven one. Buyers will be able to send their requirements out to the online market place and receive back tailored, competitive, market priced proposals in response. The marketplace will tell the buyer what the true market price for the services in question is, the difference between the various offerings, alternative services that the buyer had not thought about but which might also be suitable to get the job done, what other ‘buyers like me’ have said about the various offerings. And so on.
Now none of that is revolutionary or rocket science. It’s just a natural extension of what we’ve seen in the market place for goods and consumer/retail level services. By being able to show what’s available on the supply side, and what other customers think of that supply, online marketplaces have been able to create competition and pricing transparency. Shame on you if you bought an overpriced TV because you didn’t check what it was going for on Amazon.
Translate that to branded professional services. At present, the supply side ‘availability’ (which I will refer to as ‘capacity’) is effectively hidden. If I am the CEO of a Fortune 500 company and I need management consulting services, I will rely on my existing relationships or perhaps just head for the safe brands. I have no way of finding the ‘capacity’ which will get the job done for me at the most competitive market price. Likewise, if I am the General Counsel of a company and have a major class action that I have to defend, I will typically choose one of my panel law firms, or perhaps ask for proposals from those firms. However, there might be a law firm out there that could have been perfect for the job, with capacity to take on the matter at half the cost of the panel firms – the non-panel firm having just completed and successfully defended an almost identical class action, and now with lawyers sitting ‘on the bench’
The problem therefore for the buyers of branded professional services is hidden capacity. Basic economics and experience from existing online marketplaces tell us that it’s only when the supply side is available for us to see, warts and all, that we can achieve transparency, competition, true market pricing and best ‘fit’ to get the job done. Natural and inevitable market forces eventually deliver transparency around that capacity. That’s not up for serious debate. What’s more interesting is the when, the how, and the consequences for the branded professional services market. Here is some speculation on the ‘how’ and the consequences. The ‘when’ is somewhere between now and 5, 10 or 20 years. Not very helpful, I know.
There is the potential of existing online marketplaces that ‘aggregate’ professional services at the consumer and retail end to start working their way up the food chain. That’s certainly not uncommon. The marketplace learns more and more about the goods or services that it is helping parties transact on and the related buyer/seller behaviors and starts working its way up the value chain and attracting more sophisticated buyers and sellers.
An alternative approach is that it happens on an online platform where the market participants are already transacting, in one form or another. (Full disclosure. I prefer this theory because it’s consistent with the long-term vision of PERSUIT). To flesh this out a little, if Fortune 500 companies are already scoping their requirements, receiving competitive proposals and buying their professional services requirements on a single platform, it’s not a stretch to imagine the supply-side of the platform getting smarter about selling its capacity. In other words, rather than waiting for the next time the supplier receives an invitation to respond to a specific need of a buyer on the platform, the supply side will start to be more proactive in its approach. What might that look like?
How about this. ‘Dear Marketplace. I have a class action defence team that has just had a massive win defending a Fortune 500 company. Here are some details about their experience. Because they’re all sitting on the bench right now after that win, we’re prepared to offer them out at 50% of their usual rates. Any takers?’ There you have it. A small window into the capacity of one supplier, communicated to the marketplace. For the supplier, discounting their usual price is a no-brainer. Each additional hour of capacity sold which would have otherwise remained on the bench drops to the bottom line. For the matching buyer, it’s also an easy decision. The team offered has the skill and expertise required in order to get the job done, and now at half the price the buyer might have otherwise paid. Win-win.
This now starts to catch-on. More suppliers start doing the same. And why not. Professional service firms have one thing to sell. Their capacity. They’re finding it hard to sell all their capacity because the buyers (using an online platform) are getting smarter about pricing, options and alternatives. Their competitors are winning more deals and getting more profitable because they’re working out smarter ways to make their expertise – and capacity – known and available to their buyers. Their competitors are also getting smarter about the way they’re finding out what their own capacity is (and they’re motivated to do so because they’ve seen the jump in their profitability from their early successes). Soon they’re not only really good and finding their own spare capacity, but they’re also learning how best to bundle it up and offer it to the marketplace, including the price at which to offer it. They sell all their capacity and the buyers pays market price. Everybody is happy. Everybody, except of course the firms that are stuck relying either on a purely relationship driven approach or on a buyer stumbling upon their capacity.
Now the supplier firms that are getting really good at pricing and selling their capacity are becoming the most profitable and are able to attract the best talent from their competition and from the available talent pool (graduates and all). And because they’re getting the best talent, they’re getting the best and most profitable work. And that happy circle continues to feed off itself. Luckily, they worked out early how to proactively find and sell their capacity, and how to price it optimally at any given point in time.
Now from the demand side, it’s only good news. As a buyer, I can go to a single marketplace any time and see what branded professional service capacity exists where, what the price of that capacity is across different disciplines in different jurisdictions and what the comparative offerings are. The market has moved from being opaque and supplier-led to transparent and buyer-centric. But for the buyer, it gets even better.
Because I have been capturing all my buying data over the last few years, as well as improved on my ability to predict my company’s future needs, I can now, with confidence, buy and ‘bank’ capacity for my anticipated future needs. Here’s an example. ‘Dear Marketplace. I am the GC of a Fortune 500 company that plans on doing 10 significant M&A deals this financial year. Because my company has captured all relevant data around our M&A deals over the last 5 years, I know that it will take 2,500 partner hours, 4500 senior associate hours and 6000 junior hours to run complete these deals. Please give me your best team and price for this opportunity’
Here’s another example. ‘Dear Marketplace. GC of a Fortune 500 company here again. In the last 5 years our company has on average bought 25,000 partner hours, 45,000 senior associate hours and 60,000 junior hours of time (We know because my team is data-driven). Based on the level of corporate activity we anticipate in the next 12 months, whilst I cannot say precisely what we’ll need assistance with, I can say that we won’t be buying less hours. Therefore marketplace, please provide me with your best team and price for 25,000 partner hours, 45,000 senior associate hours and 60,000 junior hours of corporate capacity’.
Now this naturally starts to catch on with other buyers. They’re motivated to get better at predicting their future professional services needs because they’ve seen the benefits (and cost savings) achieved by other buyers who have done so. Those buyers leading the pack are buying the best professional service teams and at the most competitive prices because they’re able to predict in advance what they need and are buying and ‘banking’ that capacity up front. Other buyers have got no choice but to learn to do the same. Otherwise, they’ll be left with poor or expensive pickings.
So now things are getting really interesting. A transparent, two-way competitive and buyer-centric marketplace for branded professional services is starting to develop, and soon is really humming. The supply-side capacity is available for the demand-side to see, as is really efficient at responding to demand-side requirements. The buyer simply chooses from the available capacity, or if there is no capacity which matches their current requirements, the buyer asks the marketplace for proposals. And because there is pricing transparency and competition, the buyer always pays a true market price to get the job that needs to get done. Just like today’s online marketplaces for goods and some basic level services.
Now sceptics will disagree. ‘[Long-time partner of Big 4 professional service firm] Garbage. Branded professional service firms are built on relationships of trust. Fortune 500 company is not going to go to an online marketplace to find a trusted adviser. The will reach out to someone they know and trust. Someone they know they can rely on [read ‘me’]. The problem with this response is that it assumes that there is no-one else out there that the Fortune 500 company can trust. Now that’s garbage. There are a countless number. The problem is that they cannot be easily found. To the detriment of the buyers in the market, their expertise and capacity is hidden, delivering to the supply side super profits. But like any industry which delivers its suppliers super profits, the market has a way of eliminating those profits. It’s just a question of time.
So there you have it. One person’s view of what the ‘how’ of uncovering branded professional services capacity might look like. Now for taking a stab at what some of the consequences might be.
On one view, professional service firms will simply become ‘body-shops’. Collections of expertise that are effectively dispatched to corporate buyers to get a job done. Nothing revolutionary there. That description is probably not too far off the mark to describe the current position. But here is the kicker. Like any market that becomes more transparent and competitive, chipping away at super-profits, the supply side gets forced to cut costs, and come up with more innovative and efficient ways to deliver their service offering. To do away with all the trappings that are not relevant to the quality of their service and the way in which it is delivered. Fancy artwork, fancy office space, generous pension schemes to former partners – all gone. At least eventually. Unless there is a direct and measurable relationship between a cost incurred by a supplier and the service the customer is buying, that cost is history.
That raises interesting questions about what the future branded professional services firm looks like. What is it that will distinguish one brand from another, and what is it that effectively defines and holds a brand together (if it’s not a fancy office)? In the (very) long terms, a perfect market will clearly delineate the type and quality of its offerings and the price of each. Alphas, Betas, Gammas etc. But that is indeed very long term. What’s more interesting for us is what the journey over the next 5, 10 and 20 years will look like.
One thing I am confident about is that the terms ‘relationship’ and ’trust’ will not carry the weight that they used to. That’s not to say those attributes will be irrelevant. Not by any stretch. Branded professional services is the delivery of specialist expertise by people. There are many touch points between those delivering the service and their buyers. All things being equal, given a choice between hiring someone you have a trusted relationship with and someone you don’t, it’s a no-brainer to hire the person you know and trust. The problem today is that it’s impossible to know that ‘all [other] things are equal’. In all likelihood, they are not. The market just hasn’t found a way (yet) to uncover how. But it will.