What makes innovation at professional services firms unique

I’ve been doing a lot of research into innovation at professional services firms lately. (Think law firms, accounting firms, consulting firms, engineering firms, technology consultants, marketing agencies, etc) I wanted to supplement my hands-on experience in management consulting with some actual scientific research into innovation at professional services firms.

One thing that struck me is that innovation research has centred around manufacturing firms for a long time. It’s only fairly recently (on the scale of management ‘science’) that innovation research has branched out into other types of businesses, including the heavily knowledge based businesses such as professional services firms.

In this sense it’s very similar to work management more broadly. A lot of the patterns of work we still observe in business today were developed in the industrial era to be optimised for engineering and physical product businesses. Even Agile is based on engineering - software engineering. But that’s something to unpack another day.

Anyway, back to innovation management.

As I’ve been reading articles online (like this one from Dr Floor Blindenbach and this whitepaper by King’s College London and collaborators), I’ve been reflecting on what makes innovation at professional services different. This is in comparison to your average product business (digital or physical).

What follows a few factors that makes innovation for professional services unique. They identified from my own reflection and my research so far. If you know of any factors that are missing, add them in the comments or hit reply to the email copy of this article.

1. The ‘raw materials’ are knowledge and human ingenuity

For product businesses, the raw materials are physical and digital components. These components have known limits and configurations and even though research is expanding those limits, there’s a level of predictability to engineered solutions based on these components.

For professional services, the services are made up of the knowledge and smarts of the people that deliver the services. Certainly, these can be augmented by physical and digital components and in this respect, traditional innovation methods can be effective for professional services. However, there’s far more variability in services delivered by people, than in products made up of components.

2. The partnership business model disincentivises future-based decisions

This one came up in the King’s College paper. Innovation involves the use (and perhaps waste) of today’s resources for a possible improvement in profitability or quality in the future. For businesses that work for shareholders or private owners who will go on to reap the rewards of future profitability (or selling their share on the promise of future profitability), innovation can be a risk worth taking.

For many professional services firms, they operate under a partnership model. Each partner has to make the best use of their teams, resources and times to make profit while they work at the firm. Very few professional services firms have structures that focus the partners decision-making on outcomes that will benefit the firm after the partner has retired from the firm.

3. Pricing models seldom include slack for innovation in the first place

Even if a professional services firms doesn’t operate on a partnership model or their partners are seeking to innovate, often they find resources are still limited. A big part of this is due to pricing models that focus on fee for hours. When firms are being paid for hours worked on client projects (a.k.a billable hours), little time or money is left over to spend on innovation.

And further, clients are unlikely to want to overtly pay a premium for hours to benefit from an innovation. More likely they will expect a discount due to efficiencies from your innovative tech product or productised service offering. And they expect that some other client will have paid for the hard learning that enabled today’s efficient service offering.

4. It doesn’t pay to use innovations to be more efficient

Further to the above point, when firms are being paid by the hour, innovative solutions that reduce the number of hours to deliver a service tend to negatively impact the firm’s metrics around revenue and profit. Without a mature pricing strategy, fewer hours means lower fee. Clients expect savings in time to be passed on as savings in fees (never mind they might be getting higher quality advice, faster!)

This disincentivises innovation and the adoption of technology-based solutions. Unless there is extreme cost pressure meaning a service offering is already at or below cost, there’s little benefit to taking less human hours to deliver a service.

5. Professional services are often risk-adverse by nature

This is especially true of legal and financial advice, but many types of advice-based industries are services designed specifically to reduce risk. Clients are looking to their expert advisors to help them avoid their own risks, and in some cases, for the advisor to take on the risk on behalf of the client.

At face value, this can create a sense that any experimentation with those risk-reducing services runs counter to the service. Additionally, there’s a deeper behavioural dynamic where often people with low risk appetites take on the jobs at the professional services firms.

Innovation often requires risk-taking, or at least a willingness to be wrong or waste resources. These factors can become big barriers in the context of professional services.

6. Ill-fitting innovation techniques mean innovation has never worked in the past

This one comes more from my personal experience watching initiative after initiative roll out at a professional services firm, for my work to be materially the same today as it was when I started over 10 years ago. Except now I use Google Slides for the report instead of Microsoft Word.

This is because all these initiatives have been introduced using the same innovation techniques that were designed for product businesses or corporations without the same business model challenges. The more failed innovation initiatives a team sees, the less likely they are to want to take on any new ones. Or indeed try to come up with their own innovations.

The “way it’s always been” becomes entrenched not because teams want it to be, but because they know they can reliability produce client results (the ultimate end of consulting businesses) using the tools they’ve been using for 10 years. The end justifies the means.

7. Client engagements often aren’t repeatable enough for effective standardisation and experimentation

A massive push in professional services is to standardise and productise the services. Rather than “reinventing the wheel” every time, firms create tools and processes to make it easier to deliver the same advice again.

However, professionals are often brought in to deal with the specific nuances of a clients’ situation. Rather than reading an article (or trying to use Dr Google or Google Esq. or Google, MBA), the client requires a human who can analyse their specific situation and get the right answer.

Further, many many professional services firms aren’t narrowly enough positioned for their client work to be truly repeatable. Therefore the standardisation becomes wasted time as the wheel needs to be reinvented each time.

I believe this represents an opportunity to peel back the layers further and get back closer to ‘first principles’ to create efficiencies. (But this isn’t the article for answers. We’re focused on highlighting the challenges)

8. Centralisation of ‘back office’ functions moves innovation too far from the customer

Many large professional services firms centralise any business function that isn’t client-facing. The main role of the satellite offices and teams is to have people physically located where their client is. Finance, HR, technology, strategy and innovation all tend to be centralised in an effort to save the time of the client-facing staff (see points 3 and 4 about the other ways utilisation hampers innovation). Even in smaller firms, these functions may be centralised to a handful of people - the principals, founders or the office manager.

However, the client-facing teams are all operating in their own contexts with their own clients and own specific challenges. This means the centralised innovation function (or person) is often missing key data about what the real problems are and whether the proposed solutions will be effective for the client-facing teams. This is as true for internal innovation as it is for external innovation, as the internal work is ultimately to make life easier for teams to deliver for clients.

9. Successful service innovations can be intangible, making it very difficult to measure

Because the raw materials of the professional services firm are intangible (see point 1), often innovations and their benefits are also intangible. This can make measuring success very subjective.

But won’t we see it in improved profitability and higher fees to clients? Well, no. Unfortunately if the firm is still working on a fees-for-hour pricing model (which most are), the benefits of innovation won’t even be realised. This is similar to issue 3 above.

10. …

I can’t believe it, but I couldn’t identify a tenth barrier to innovation specific to professional services firms. How frustrating to be one short of a nice round 10. I’d love to hear from you if you know of another issue. Add your thoughts in the comments or email me at workupgraded@substack.com.

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Part of my research is focused on building a capability framework for innovation in professional services firms. If you have seen something like this in the wild, or if you’re interested in contributing to such a framework, reach out to me on LinkedIn.