by Alastair Ross, Director, Codexx Associates Ltd
Part 4. Innovating to reduce process and service costs
Introduction
This is the fourth of a series of seven articles on professional service innovation. The objective of the series is to provide a basic introduction to innovation management for managers, partners and change agents working in professional service firms. This article discusses the opportunities for applying innovation to reduce the cost of operating internal support processes and external processes (i.e. services). To read the first article in the series go here.
The importance of process innovation
Processes and services are the most common opportunity areas for innovation in professional services firms (see reference study here). Business processes are the way work gets done in an organization and services deliver value to clients using internal and external processes. Therefore there are major opportunities for innovation in these areas. Of course process innovation has a long history from the industrial world, emanating in work study and Taylorism in the early 20th century and being re-energised by the emergence of Lean thinking (based on the Toyota Production System) in the mid-1980s and Business Process Re-engineering in the early 1990s. Some would call such process innovation ‘business improvement’ rather than innovation. I find it more effective to consider this as part of an innovation programme – as it meets the criteria of innovation, i.e. converting ideas to value (e.g. improved efficiency). By including process innovation as part of the firm’s innovation programme, common resources and management methods can be applied.
In my experience in working with professional service firms, there is major opportunity for significant cost reduction through process innovation, because process thinking and management are typically absent in these firms – unlike industrial organisations. The application of process innovation methods such as Lean and Re-engineering can yield significant reductions in the direct costs of operating a process. This is achieved through a combination of the following approaches:
- Making services and processes visible, using process mapping
- Eliminating waste steps (such as checking and rework)
- Defining standard process elements based on best practices to reduce the costs of unnecessary variation from the optimum
- Improving adherence to defined processes using procedures and training
- Automating process stages or workflow
- Perform process stages using lower cost personnel
In my work with professional service firms (particularly law firms) over the last decade on such process innovation, clients have achieved reductions in the direct costs of performing services of between 25-50% (and as high as 75% on one occasion). This level of cost reduction enables a firm to significantly improve its competitiveness. However, there is a challenge. If existing services are charged on an hourly-rate basis, then all the efficiency benefits will be given to clients, either as less hours required per matter and/or lower hourly charges. To avoid this and enable a firm to determine how much to keep (as increased margins) and how much to give away (as price reductions), it needs to introduce fixed fees for the service. This is typically welcomed by clients as improving price certainty at a time of increased budget pressures. But firms then need to apply new disciplines for delivery management to ensure that fee earners can work to the required cost targets to ensure profitability targets for services are met.
In addition to direct cost reduction, there is the opportunity to reduce indirect costs (i.e. overheads) that are applied to fee earner time. There are three major opportunity areas for indirect cost reduction for professional service firms:
- Office costs – through reduction in footage costs (lower cost location) or less footage needed (‘hot-desking’ and mobile working).
- Purchasing of external services and materials – through good procurement practices and effective commodity management, which have often been weak in professional services in comparison to industry.
- Support costs (e.g. IT) – through internal efficiency improvements (using process analysis) or outsourcing.
Overall, professional service firms need to reduce the share of their overheads taken by office costs and increase the share taken by IT. The latter is increasingly core to the effective and efficient delivery of professional services, the former is not.
In the next article I will show how firms can utilize innovation to increase the value provided to clients through enhanced or new services.
References and further reading
This article and the others in the series are based on the approaches, references and case studies detailed in my new book ‘Innovating professional services – transforming value and efficiency’ published by Gower in May 2015. This provides in-depth coverage and case studies of the topics featured in this series. For more information go to: https://www.codexx.com/2015/innovating-professional-services-new-book/
