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Innovation in professional services – why, what and how?

May 20th, 2015

There are approximately 450,000 professionals working in businesses that come under the banner of ‘professional services’ in the UK alone. Within this group are lawyers, accountants, management consultants, IT specialists, architects and other professionals who provide services to businesses and individuals based on knowledge, expertise and intellectual property. In the USA there are about 400,000 practising lawyers and over 1 million accountants. Professional Services alone is reported to generate more than US$ 3 trillion in revenue globally and in the UK the sector employs almost 12% of the workforce and accounts for 8% of national output.*

So this is a key business sector and also one that is facing major challenges to both its business model and its operating methods from a combination of globalisation, regulatory changes, client demands and the impact of the internet and Information Technology. These challenges are driving progressive firms to respond through innovation in how they operate and the value they provide to their clients.

Responding with innovation
Many professional service firms would like to improve their innovation capability, but often do not know where to start or how to establish and sustain a culture for innovation. Some sectors such as law have enjoyed long term stability and have not needed to significantly innovate, but this is changing due to the new business pressures. This short article identifies some of the key approaches required for effective innovation in professional services and some of the common challenges encountered. It is based on our consulting experience with professional service firms over the past 10 years, together with insight from our academic partners.

Innovation farming diagram

Figure 1: Innovation – the farming of ideas

What is innovation?

Much time and effort can be spent arguing about what is and is not innovation. Whilst there is no ‘correct’ answer, it is key that there is a common definition and understanding across an organisation. In our experience the most effective definition is that innovation is anything that is ‘new to you’. This means that innovation includes incremental improvement as well as radical innovation. It also includes methods already in use elsewhere, (even within other parts of your business) that are adopted in your business. Whilst radical innovation gets the headlines, it is the much less glamorous regular small improvements that make up 95% of innovation ideas and can be massively powerful (witness Toyota’s rise to be the global automotive leader based on 50 years of Lean (i.e. incremental) improvement).

This inclusive definition of innovation is the most useful to business management who wish to establish a culture and system of innovation. Recognising the power of a high number of small ideas is at least as important as seeking the very few ‘game changing’ innovations.

At its simplest, innovation is about generating ideas and converting the best ideas to value for the business. We can consider a farming analogy for innovation (Figure 1), where an effective system and supportive environment are required to grow and harvest the best ideas. It is important to recognise that creativity alone is not innovation. Creative ideas that are not implemented do not result in innovation.

Innovation dimensions for prof services diagram

Figure 2: Dimensions of Innovation (Source: ‘Innovating professional services – transforming value and efficiency’ by Alastair Ross, published May 2015, Gower)

Where to innovate?

Firms have finite resources and need to best apply these resources, especially when it comes to innovation. But how should firms apply these resources when it comes to innovation—where should they focus? A useful model for innovation is one of ‘Innovation Dimensions’ as shown in Figure 2. This considers four ’dimensions’ where firms can innovate—where they choose to do so depends on their strategy and current practices. At the centre or ‘zero point’ of the circle a business is not innovating. It can innovate in any of the four dimensions—at a low (incremental) level or a high (radical) level:

  • Process
    A common area for business innovation is innovation in business processes which govern the ways of working. This has much potential in professional service firms where process definition and management can be lacking. Process innovation is an excellent way of engaging employees to come up with ideas for incremental improvements in their working methods. Bigger step change innovation can be driven through a re-engineering approach. Process innovation can involve waste reduction, reorganisation and ‘right-skilling’ of the personnel performing the process and the application of IT. The example in the model is of the insurance company QBE who applied 6-sigma improvement methodologies to process improvements in their business.
  • Offering
    Innovation can also be applied in the services provided to clients, either to improve existing services or create new ones. In the model, the example given is of the law firm Mills & Reeve who developed an iPhone App for their Divorce.co.uk offering. We have worked extensively with major UK law firms to help them re-engineer services such as Due Diligence, Employment Tribunals and Inquests to increase value and service to clients and reduce cost of delivery.
  • Market position
    Another way of innovating can be in the repositioning of the firm’s value proposition in the marketplace. To take advantage of deregulation in the UK legal market, the major UK law firm DLA Piper jointly set up a new vehicle, ‘LawVest’ to enable investments in new fixed price services for mid-sized businesses.
  • Paradigm
    The last innovation dimension is the hardest to exploit as it is quite simply the reinvention of the firm’s business model. The example given is that of IBM, who from the early 1990s, over a decade, transformed their business away from one based primarily on hardware to one based on software and services. The internet provides a powerful vehicle for firms seeking to develop new business models, enabling on-line services, with global reach and at substantially lower cost than personal services. Examples of new internet-enabled professional service businesses include crunch.com for online accountancy and freelancer.com for software and design solutions.

A system for innovation
If you want to have effective and ongoing innovation in your business, you have to proactively establish the conditions for it. Research and experience has shown time and time again that effective and sustainable innovation requires an holistic and systematic approach to innovation. This approach weaves together the threads of a number of key practices to create a strong and rich fabric of innovation capabilities. Exploiting these capabilities leads to long term superior performance. Best practice innovation thus requires an integrated system, (Figure 3) which is comprises seven key practice areas:

New Directions 18 - Figure 2Figure 3: The innovation system (Source: Codexx)

  • Leadership – Active support and encouragement from the top is key to innovation
  • Strategy – A clear business strategy is required to provide context and priorities for innovation
  • Process – A structured process to generate, explore, select and implement the best new ideas is key
  • Climate – The organisation’s culture and values can either energize or emasculate innovation
  • Resources – People time, methods, money and other resources are needed for innovation
  • Learning – Capturing and sharing learning across the organisation is key to effective innovation
  • External Linkages – No organisation is an island – ideas & resources from outside are key ingredients

The ‘Innovation System’ model is an effective way for a business to think about and develop their innovation system. We have helped a number of businesses improve their innovation system by using our ‘Foundations for Innovation’ (F4i) solution to assess their current innovation capabilities against 60 best practices underlying the innovation system model.

Innovation challenges in professional services—the ‘Top 6’
Innovation is difficult —for the simple reason that it is easier for any organization to continue ‘business as usual’ than to change. And innovation is about making change. Organizations that are effective at innovation are able to embed a culture that encourages ongoing change. So, many of the challenges that face professional service firms in innovation, apply to all businesses. But focusing on those common challenges that professional service firms face in our experience, together with comments made by professional service clients:

1. Poor supportive culture for innovation

“There is lip service to innovation at senior levels due to the difficulty of making the required cultural change.”  Partner, Law Firm
“People don’t want to take risky ideas to the boss.” 
Partner, Management Consultancy

Many firms effectively discourage innovation through a combination of leadership behaviours, organisational ‘norms’ (e.g. “more of the same has worked well for us for 20 years so why change?”) and resistance to change dominating the firm’s culture. A key challenge for professional service firms is that fee earners typically only value time that is chargeable, and therefore are disinclined to invest time in other activities (e.g. innovation) which will not be valued in their performance appraisal or bonus.

2. Limited understanding of client needs

“We’ve been in our functional silos too long and they’re too deep.” Manager, Business Services
“Our new offering was less successful as it took too long and had not enough client involvement.” Managing Partner, Law Firm

Engaging clients early in the development of a new product/service is an effective way of increasing the chance that the new offering will bring value to clients. Many new ideas come from firm’s clients or from an insight gained into a client’s business. This is why deep understanding of clients’ businesses is key to effective product/service innovation. However, many firms have a transactional relationship with clients and do not invest enough time and energy to understand their business challenges and so identify innovation opportunities

3. Insufficient resourcing for innovation

“Time is a big issue – we’re a cog of labour.” Partner, Law Firm
“Carving out real time for innovation instead of chargeable work is a major challenge.” Partner, Management Consultancy

The key resource required for innovation in a professional service firm is time – particularly the time of fee earners and key support personnel. Time is needed to reflect on the business, to gain insight from clients, to analyse existing methods and brainstorm new ones, to develop, implement and deploy new solutions. Few professional service firms have established dedicated ‘innovation teams’ armed with methods and budget who can be used to support innovation projects. Once an idea has traction, the other resource barrier that typically emerges is IT resourcing.

4. Poor innovation process

“By the time you get through all the bureaucracy the system will be obsolete or the idea will be dead.” Employee, Insurance
A core foundation for effective innovation is a robust process that links ideas with delivered value (e.g. a new or improved product/service, a new way of working or a new pricing model). This process must guide idea development, selection and investment using appropriate criteria, and monitor and support development and implementation. Whilst an innovation/new product development process is common in the industrial sector, it is less so in professional services. Its absence means that innovation ideas from employees can struggle to be heard and in comparison poor quality ideas can be pushed through if championed by a Partner or senior manager.

5. Ineffective execution
“People want to practice their legal skills. It’s seen as de-skilling them to ask them to be a project manager.” 

There is a distinct difference between creativity and innovation. Creativity may be required at the start of the innovation process (even if it is simply to borrow an idea from another sector), but it has no value without execution. Firms can be guilty of under-resourcing implementation – for new products this can include insufficient resourcing for marketing and selling the new offering. The ‘long slog’ of implementation can be less attractive for employees and managers than attending a few brainstorming workshops to generate new ideas…. Implementation needs to be a recognised critical part of a firm’s innovation process and resourced accordingly.

6. Resistance to systemization of work

“Current performance measures penalise efficiency and delegation.” Head of Knowledge Management, Law Firm
“Resistance is from middle management – senior management is supportive.”

A key innovation opportunity for professional service firms is in dramatically improving their cost performance by streamlining services and internal processes and ‘right-skilling’ work – with significant amounts of repetitive work being moved to lower skilled personnel, automated or outsourced. The use of ‘Standard Operating Procedures’ together with IT-enabled workflow means that work can be performed at a similar level of quality as before but at much lower cost. This frees up experienced personnel to take on higher value work and also to have time to spend on innovation and business development.

However, the flip side of this benefit is that these personnel will in the short term lose a significant amount of their work. This can create concerns about their long-term future and short-term compensation. Long-serving employees may also consider that the ‘professionalism’ of their firm is threatened by the use of semi-skilled employees now performing their work. But as I have said a number of times to legal partners – if they decide to buy a Porsche, they will expect high quality and high performance. But they will not expect that it will be built by the CEO of Porsche! They accept that it will be built by a semi-skilled worker on a production line, but following processes and procedures codified from the experience of the firm’s engineers…. This lesson equally applies to professional service firms. A key paradigm change for professionals is in separating their role into the two elements of design and delivery. A professional may bring more value to their firm by using their time to codify their expertise and supporting the design of new working methods) to enable it to be delivered by others or via an automated system) rather than delivering it themselves.

Getting started

Developing an effective capability for innovation is important in professional service firms as they seek to retain their competitiveness in an increasingly challenging global marketplace. Firms can learn from other sectors, but will need to ‘tune’ established methods for the services world.

Codexx has helped professional service firms improve their innovation activities in a number of ways, including:

  • Assessment of firms’ innovation health against our F4i innovation best practice model and developing an improvement strategy.
  • Training – of managers and employees in innovation approaches and methods.
  • Establishing key elements of an innovation system (such as a strategy, processes, resourcing).
  • Developing department/sector strategies using Strategic Road-Mapping to align innovation activities with market strategies.
  • Running user/customer/client collaborative studies to determine opportunities for value innovation.
  • Re-engineering existing services (and internal support processes) to improve efficiency and value.
  • Supporting the design and development of new service offerings.

We have seen that such approaches can yield major benefits for firms both in terms of increasing service value, reducing cost and giving the organisation increased competencies for subsequent innovation. The reality is that for many (most?) professional service firms, establishing effective innovation will be challenging, yet rewarding and ultimately necessary for growth in the new business environment.

For more information contact Codexx.

*This article draws upon materials in the book ‘Innovating professional services – transforming value and efficiency’ by Alastair Ross, Director of Codexx, published on the 8th May 2015 by Gower. For more information and online discount click here.

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