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The Future of the Professional Services Firm

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The professional services model has long been up for disruption. Better access to information, the availability of the virtual marketplace, and a steady flow of professional service providers heading out on their own means that professional services and consultancy is increasingly becoming a client’s market.


Brands have traditionally been the most valuable asset professional services firms possess, it is the basis on which the PwCs of this world rationalise their power.

Yet the professional services market is still dominated by the traditional behemoths of yesteryear – the volatility promised by the technological revolution hasn’t quite quelled their revenue: Increasing demand for consulting services across the government and private sectors fuelled double-digit revenue growth for KPMG, Deloitte and Ernst & Young in the past year.

So, in an age when restaurants, hotels and taxi rides are all chosen based on specific information down to an individual -- why, when shopping for real estate agents, lawyers or engineers are brand name firms still the starting point?
Brands and Lemons

Clients no longer want to pay fat fees for a bit of strategic advice from a senior partner and a lot of humdrum work from neophytes"

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The lemons problem in economics refers to the issues that arise in markets where buyers find it difficult to assess the quality of goods or services being offered by sellers. The name comes from Nobel Prize winner George Akerlof’s observations of the information asymmetry between shonky used car dealers and helpless buyers, unable to tell quality cars from lemons.

Brands act as a solution to the lemons problem. Cheaper and more efficient than the alternatives of cumbersome regulation or expensive warranties, brands work by providing a common reputation to all goods or services associated with the brand.

Economists argue that without the necessary confidence to transact, we’d all sit on our hands and bury our money in the backyard. Brands come to the economic rescue by giving us the confidence to list a property or bring a contentious piece of bet-the-farm litigation, without knowing anything specifically about the people who we rely on to deliver these services.
Professional Lemons
Professional services are often notoriously difficult for prospective clients to evaluate, making lemons hard to spot. Lawyers or real estate agents are only consulted rarely and it’s generally only after a service has been completed that the client is able to form a picture of the quality of service. The difficulty of evaluating these services drives up the reputation premium that “trusted” brands can charge.

In professions where a service is delivered largely by an individual professional, this sort of brand-based reputation seems misplaced. Firms have not gone out of their way to make this easier, remaining opaque about their methods, costs and outcomes. In this environment, a brand can represent the only widely available indicator of reputation pre-purchase.
Services brands and the internet

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The internet has enabled the distributed sharing of reputational information via platforms. A platform is an intermediary that brings together groups of buyers and sellers. In some markets, the reputation sharing ability of platforms has almost completely eliminated incumbents that traded on brand based reputation.

Uber created a platform that shares enough reputational information about drivers to make random strangers trust getting into their cars, in the process making taxi brands irrelevant. Hotel brands are being ditched as the reputation sharing power of Airbnb provides enough reputational trust for people to sleep in strangers’ homes.

In these markets, as soon as enough reputational data became available to make an informed choice, customers began switching, in droves. In both cases, customers now have access to more relevant reputation information than was previously available when the only evaluation criteria was brand-based reputation.

The Airbnb profile is the equivalent of a collection of reviews about each individual room in a hotel. The quality and comparability of the information is vastly superior to that provided by a Hilton logo.
How much can be squeezed from professional services brands?

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When I list my house for sale with a real estate agency, it’s not the agency who sells the house but an individual real estate agent. Similarly, if I sue my neighbour or need the load bearing capacity of a deck extension calculated, I rely on the expertise of the individual lawyer or engineer to deliver the service.

If real estate agents not

real estate agencies sell houses and lawyers draft pleadings, not law firms, then why are buyers of services still turning to brands?There are two ways to rationalise the current market dynamic:

  • Brands provide value in excess of the individual professional, which justifies the price charged in excess of the cost of the individual's work.
  • Brands provide a better or more efficient experience for customers than can be provided by individual professionals.

  • The value argument

    Professional services firms like law firms commonly operate under a "thirds" model -- ⅓ of revenue pays for salaries, ⅓ pays for overheads and ⅓ goes to partner profits. Some proportion of the ⅔ reserved for overheads and profits, is essentially a fee levied upon customers for the reputational confidence required to entrust the firm with their business.

    This high premium is proportional to the difficulty of establishing the quality of service in a market affected by a great deal of information asymmetry. Firms spend money on landmarks of trust - expensive offices, tasteful branding and golf days. Firms would naturally suggest that these costs are essential to building the trust required to win clients and the fee structure is proportionate to the value provided by the firm in this respect.

    The efficiency argument

    A perfectly disintermediated professional world exposes its participants to a great deal of inefficiency. The professional engineer with a comparative advantage in calculating load bearing capacities should seek to maximise time spent calculating loads - at the expense of other activities like finding customers who need their loads calculated.

    The efficiency argument simply stated is that the branded firm is the most efficient way for the professional to be able to maximise the time spent on their specialised skill. The argument would therefore only hold true if branded firms are the most efficient way of providing the necessary infrastructure layer required to service clients.

    However you slice it, the reputation premium charged by branded firms is, in the presence of a more efficient alternative, a deadweight loss and a major bullseye for disruption. Solving it should reduce the cost of traditionally expensive services and boost the overall efficiency of the markets for these services.

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    The solution to the reputation problem in other industries has been the networked platform. Where major markets like accommodation and transport have been disrupted by platforms, professional services have remained stubbornly resistant.

    The aggregating power of the platforms is a crucial ingredient for building the reputation trust required for individual professionals to be able to achieve the level of reputation confidence required for clients to engage their services.

    Once established, the potential advantage to clients is likely to make additional barriers significantly simpler to overcome. Many professional services have only experienced the most marginal change in the way in which they’re delivered for decades. Getting buyers to switch commonly requires a significant improvement, however in undifferentiated markets a significant cost reduction which preserves the level of service clients are accustomed to can be sufficient. In the case of ridesharing vs. taxis, a 20-40% reduction was sufficient – a figure that fits neatly with the “thirds” model discussed earlier.

    For individual professionals

    The supply side of professional services centres around one core commodity – the professionals themselves. A disintermediated market requires individual professionals to fulfil the role played by their branded firm. In doing so the professional should also be able to take a larger proportion of the overall fee, while being able to deliver services at a lower cost.

    Assuming a platform satisfies the trust criteria for clients to engage professionals directly, the transition requires an unbundling of the other jobs done by the professional services firm.

    If you take these apart, they start to look like this:

     There are a lot of jobs that your average practitioner does not want to do, and the economics of specialisation suggest, shouldn't be doing. In addition to superseding the reputational role of brands, disintermediation of professional services requires an adjacent ecosystem of infrastructure and services. The emerging cohort of technology-enabled solution providers can give almost any professional access to the service and infrastructure necessary to effectively service clients and thereby accelerate the flight from brands.
    The future
    It’s difficult to dispute the fact that networked platforms are a more efficient way of distributing reputational information than brands. The current delivery model of professional services, in its ability to command high reputation premiums as a result of the high value, high risk and low comparability of the services it provides leaves itself exposed to disruption by participants able to remove or replace the parts of firm value better delivered digitally.

    Significant opportunities exist for participants on both sides of the professional services market, as well as adjacent service providers to significantly disrupt the way professional services are bought, sold and delivered with the potential to improve the efficiency of these markets and the experience for clients and professionals.



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    Contributed by Chris Illuk

    .
    Chris is a former lawyer, founder and now product manager at OpenAgent. He writes at medium.com/@chrisIlluk/ and tweets at @chrisilluk. 
      

    The Urban Developer will occasionally

     publish opinion pieces written by outside contributors representing a wide range of viewpoints. 

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    Article originally posted at: https://https://theurbandeveloper.com/articles/future-professional-services-firm