Professional Services

Generating New Revenue Streams

I have yet to run into a company that doesn’t have plenty of ideas. However, translating these ideas into valuable revenue generating business opportunities is quite a different story.

Running with an idea

Have you ever been tasked with “running an idea up the management chain”? An unclear and time consuming process in organizations, even without considering the proposal work and meetings that accompany this journey.

In most professional service firms it takes over 6 months to get approval just to act on an idea. Yet, time is the scarcest resource in these organizations and being able to act swiftly is a prerequisite for being innovative.

Generate new revenue streams with new service development

The best way for professional service organizations to generate new revenue streams is through new service development. However, many struggle to make new service development revenue generating and a thriving pillar of their organization. Which is becoming increasingly problematic in this era of the fourth industrial revolution, where clients are becoming more knowledgeable, more demanding, and expect higher value services.

To thrive, it is no longer sufficient to just focus on business as usual. Sofar, most of the American Law top 100 law firms have been around for over a century. [1]. The big four accounting firms were established more than a century ago. Most hospitals have also been around for over a century. While a beacon of stability in the past, the future of the professional services doesn’t look that promising, because technology has caught up. Nowadays, clients expect professional service firms to incorporate these novel technologies and use them to better their services.

Excel today and be ready for tomorrow

The ability to excel today and be ready for tomorrow is what the management literature calls ambidexterity. Service firms need to become more ambidextrous to survive. Which means that besides focusing on their current business, they also need to build capabilities that will help develop new business opportunities that address clients’ demands of tomorrow. For all companies, this is a very challenging balancing act in which many ultimately fail. Explaining why so few Fortune 500 companies remain in that list for more than 20 years[2].

Fourth industrial revolution

The first, second and third industrial revolutions – driven respectively by the power of steam, electricity and computers – did not bring much change to service providers. Computers introduced electronic record keeping, making live easier. However, computers did not significantly alter the way professionals interacted with their clients, till recently. The World Economic Forum labels the current era as the fourth industrial revolution, fueled by unprecedented technological change due to artificial intelligence and connectivity. This fourth revolution is going to disrupt service providers, and to a certain extent is already by companies like Uber and AirB&B [1, 3]. The professional services are not immune for this change either. Take for instance the opportunities telehealth offers. Patients can now monitor their own health, make their own differential diagnoses, and interact with specialists anywhere on the globe. In short, the current technological opportunities not only make clients wiser and more proficient, they also alter how professionals and clients interact. With client demands changing rapidly, the professional services must also learn to respond quickly to these changing needs.

Struggling to explore and develop new revenue streams

With an abundance of opportunities, it is the professional service provider who creates the bottleneck for bringing these ideas into practice. Simply stated, most professionals are too busy providing today’s services.

New business development does not come easily to professional services, nor has it delivered spectacular results such as the inspiring examples of the Googles and Apples of this world. Even McKinsey’s chairman Dominic Barton recently admitted that while McKinsey may excel at giving their clients innovation management advice, they struggle to apply their own advice themselves.

All ingredients already in-house

I have seen many professional service firms struggle with new service development. It is the main reason I left engineering contractor Fluor, to pursue a PhD and address the new business development challenges of engineering firms, now more than 15 years ago. At the time, I worked as chemical engineer for Fluor in the Netherlands. Fluor has all the capabilities to design, develop and build state of the art chemical plants for their clients, or plan for the most challenging revamps, yet, when it came to reinventing their own processes they struggled. There were plenty of ideas of how to make the services faster, cheaper, safer, and more client friendly yet, few, if any, of these ideas came to fruition. And if they did, it was more by chance than a deliberate process.

For the past 15 years, I searched through the innovation management literature, looking for solutions to this problem. Thinking, how can it be that professional service firms, who employ the smartest people, have access to a vast network of clients and suppliers, and make lots of money, are outperformed when it comes to developing novel services by entrepreneurs who lack access, expertise and funding?

How come, with all ingredients necessary to develop new services, these firms are struggling to create new revenue streams?

Is new service development the same as product development?

The product development body of knowledge offers some helpful insights in how to generate new revenue streams. However, most innovation management techniques focus on getting to know your customer, collaborating with suppliers and managing projects. Certainly a firm like Fluor, but in general most professional service firms, excel at these tasks. They interact with their clients on a daily basis and frequently interact with suppliers. While project management capabilities clearly vary between law firms and system integrators, all professionals are trained at questioning their clients to understand the real problem, developing a treatment plan to solve the problem, and implementing this solution given the allotted time and budget, which essentially is project management.

In theory hotbeds of innovation

Interestingly, according to organization management theories, professional service firms should be the hotbeds of innovation. They have all the traits of innovative organizations: decentralized organizational structures, highly skilled labor force, autonomous decision making processes and the characteristics of learning organizations.

Why then are professional service organizations not hotbeds of innovation? Or perhaps a more relevant and interesting question for the managers of these organizations; how to turn a professional service organization in a hotbed for innovation?

The value of a structured approach

We know from manufacturing companies and decades of research that innovation benefits from structure[4-6], also in the services [7]. So bringing structure to the development of new revenue streams is a first step.

The question that then soon comes to mind is, what type of structure? It is important to realize that professional services are very different than other types of firms. Like all service firms, their main asset are their people. As a result, what makes professional services different is the scale and what you invest in. For firms like Apple and Google, their main assets are their products. When they invest in new business development they invest in products.

Apple and Alphabet -the mother company of Google – literally spent hundred millions of dollars on innovation projects. They have the scale to earn these investments back. Most professional service companies don’t. Their new service will reach tens, or perhaps hundreds of clients, certainly not billions.

Your employees are your main asset

In addition, not products, but employees are the main asset in the professional services. When your main asset is human capital and innovation entails developing new services, then new business development requires investing in your employees and providing them the necessary tools or products to deliver these new services. The people component makes the processes and way the development process is organized and management significantly different than when innovation revolves around new product development. In other words, new business development is a different ball game in the context of professional service organizations.

Personal development

You may say, wait a sec, investing in our people is not new. We already invest in our people! Indeed, most professional service organizations spent between 5% and 15% of their revenues on training, education and professional development. However, in spite of this significant investment, the return of this investment on personal development is currently low [8].

Aligning personal development with new service development provides a much better opportunity to learn soft skills, as the learning is experienced based, it also provides the opportunity to create a measurable return, in the form of the new service offerings.

The mission of Organizing for Innovation

At Organizing for Innovation, our mission is to bring a structured approach to new service and new business development. Similar to the 1980-ties when organizations started to bring structure to their new product development.

Back then, manufacturing firms put a lot of capital in research and development, but did not have a structured approach to align input with desired outcomes. Without clear strategies, processes, and feedback loops to know what ideas and investment actually contributed to increased profitability and growth, a lot of this capital was wasted and did not lead to any return on investment. A lot has changed since. Research on the topic paid off. And a whole industry arose supplying tools and advice on how to develop new products more effectively and efficiently. Making that the development costs and timelines have significantly been reduced since. It now takes a fraction of the cost and time to get a new product to market than what it took in 1980.

New product development management gurus like Cooper, and organizations like the New Product Development Association, did a fabulous job improving the maturity of the innovation management capabilities of manufacturing firms over the past decades. Membership surveys held every 5 -10 years show each time that the best in class – that is the most profitable and high growth firms – have the most sophisticated processes to manage and guide their innovation processes.

Success stories

Although few professional service firms currently have a systematic process to innovation management and generating new revenue streams, those who do are examples of what is possible. Take for example IDEO, a design firm famous for the development of the computer mouse and many other indigenous products. They have used their innovation approach to renew themselves and have been able to remain very profitable and grow their business by apply design thinking to many other sectors.

In law, the example that comes to mind is Seyfarth Shaw. Their approach to Lean enables them to serve their existing client base better, remain profitable, grow their current business, and expand into new territories such as consulting.

Start exploring and generating new revenue streams

Why continue providing the same services that clients appreciate less and less, when there are more interesting and better paying service to offer that clients value more? Why risk survival of your organization and the future of your profession, when there is the opportunity to embrace new business development as an important and integral business process that will enable you to lead in the professional services?

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We at Organizing for Innovation keep working on enable professional services to sustain themselves and thrive in this era of the fourth industrial revolution. Visit our website for more information on our solutions.

If you are interested in learning more about our mission and services, please feel free to contact me, Dr. Floortje Blindenbach-Driessen, at fblinden@organizing4innovation.com.

 

 

References

  1. Susskind R. Tomorrow’s Lawyers. Oxford: Oxford University Press; 2013.
  2. Murray A. 5 things you did’nt know about the Fortune 500. 2015; http://fortune.com/2015/06/04/fortune-500-facts/. Accessed October, 2016.
  3. Christensen CM, Grossman JH, Hwang J. The Innovator’s Prescription: A Disruptive Solution for Health Care. New York: McGraw-Hill; 2009.
  4. Barczak G, Griffin A, Kahn KB. Perspective: Trends and Drivers of success in NPD practices: Results of the 2003 PDMA Best Practices Study. J. Prod. Innovation Manage. 2009;26(1):3-23.
  5. Griffin A. PDMA Research on New Product Development Practices: Updating Trends and Benchmarking Best Practices.J. Prod. Innovation Manage. 1997;14:429-458.
  6. Markham SK, Lee H. Product Development and Management Association’s 2012 Comparative Performance Assessment Study. J. Prod. Innovation Manage. 2013;30(3):408-429.
  7. Blindenbach-Driessen F, Van den Ende J. The Locus of Innovation: The Effect of a Separate Innovation Unit on Exploration, Exploitation, and Ambidexterity in Manufacturing and Service Firms. J. Prod. Innovation Manage. 2014.
  8. Rowland D. Why Leadership Development Isn’t Developing Leaders. Harv. Bus. Rev. 2016;94(10).