Innovation in professional services not yet driving significant revenue growth
Spiranti have released the findings of an innovation benchmarking exercise in which they benchmarked over 70 firms across a range of sectors and turnovers. At a well-attended breakfast event led by Ben Kent, firms including the Big Four and Magic Circle discussed the findings. There were many interesting dimensions but in this article I will draw out some of the key findings. There are also bespoke Innovation Lab events for those firms that want to understand where they sit against the benchmark and to work on practical next steps to improve their positions click for more information. The innovation benchmark seeks to understand whether firms are building the culture and infrastructure for sustained innovation. It explores areas such as the technologies people are using, the innovation approaches being adopted, the barriers encountered, budget levels, and the outcomes that firms are achieving.
The net result of not having the right processes, investment and culture means that most firms are focusing on incremental innovation at a time when clients are expecting more
Ben reviewed the six essential elements needed to drive innovation successfully and called out the highlights for each area from the survey. The data model from the survey means that firms will be able to review their performance against each of the essential areas of leadership, investment, innovation process, technology, collaboration and people:
Although in many areas firms are getting results, only 16% have seen significant revenue increases.
The most positive outcome has been 60% saying that innovation has made employee’s lives easier, which ties to the overall trend that much of the innovation across firms has tended to be more around an internal focus. The overall picture is that many firms are still feeling their way, and do not have a structured approach to driving innovation focused around the client. Although 62% of firms feel that their leaders provide a mandate for change, in over 50% of firms there is no structured process to drive innovation. This is perhaps in contrast to the changing demands from clients,
“43% of professional services buyers would now prefer a technology-led solution, even if this would mean less face-time with advisers.” Source Business Buyers Barometer
Despite the fact that consumption patterns are changing in professional services, with a drive towards greater productisation, firms are not yet spending at a level to deliver this change. The benchmark revealed that on average firms are spending only 2% of turnover on innovation currently, despite 39% of firms stating that the reason they are innovating is to improve the quality of the service they offer. The firms in attendance discussed the reasons for the low levels of investment, which often centre on the challenges of the partnership structure when it comes to long-term capital investment. It can often be hard to persuade current partners to have their near-term profits impacted to benefit the partnership 10 years down the line when they may not still be a partner. Almost a third of firms surveyed felt that their short-term view of investment decisions held back their innovation efforts.
“Firms are often unwilling to invest because in effect they have a 100 percent dividend policy. You are asking the leaders of the firm to take a hit on their own money for the benefit of the firm after they have left.” Survey respondent
Firms are also being held back by the innovation techniques that they are using, with 70% of firms relying primarily on idea generation from staff, with far smaller percentages using techniques such as agile/lean (41%), design thinking (26%) and incubators (25%). In addition to the lack of formal process in the majority of firms, another key barrier cited is the poor implementation and change management capabilities.
79% of firms have a culture that encourages the sharing of ideas … but 86% say that staff are too busy to spend time on innovation
In addition to the challenges of time constraints another area the group discussed over breakfast was the statistic showing that only 20% of firms have a culture of taking risks, failing fast and trying again. There is a clear gap currently between inviting busy staff to submit ideas, with a cultural perception that failure will not be accepted.
“The question to any firm is how much of your revenues each year are you prepared to put at risk for innovation?” Survey respondent
In discussion around what is really holding back the firms’ innovation agenda it is interesting that 34% of people surveyed felt that it was due to the perception there was not a burning platform yet. It is highly likely that this perception coupled with the lack of process, lack of investment, cultural challenges of people being “too busy” and not prepared to fail, is leading to the low percentage that are seeing revenue benefits from their innovation efforts.
Firms are however making real progress in adopting a more collaborative mindset. When asked about collaboration techniques, 64% said that they have collaborated with clients to co-develop new approaches, 51% have collaborated with technology companies and 30% with universities.
“It is best start with a blank sheet of paper on what I’m trying to achieve rather than trying to retrofit my current processes into something that the client might buy.”
On use of technology to drive innovation, there were varying perspectives with the most used being areas like data visualisation or dashboard software, self-service portals and tools for clients, and document automation. The least used currently were chat bots for self-service advice and predictive analytics tools to identify risks and outcomes.
“The question is whether you have the structure or mechanisms to leverage the investment in technology? Or is it just another tool?” Survey respondent
However, much of what was discussed is dependent on where firms are at on the innovation maturity curve as depicted below. The majority of firms are sitting in a trend-following position at a time when client demands are changing rapidly, which should give many a reason to consider their innovation approach;
The discussion concluded with examples of what successful innovators are doing and what should be avoided. They are avoiding innovating in silo’s, taking a perfectionist approach, just buying the latest technology and ignoring incentives. Those seeing success are:
- Creating a long term vision for transformation, providing relentless and enthusiastic leadership, adopting a culture of perseverance and embracing failure;
- Starting with the pain points not the technology, using design thinking and other innovation techniques, and collaborating with clients;
- Creating sufficient budget to drive innovation but applying it through a proper innovation process;
Finally, some of the most interesting elements of the benchmarking are some of the respondents quotes from across the professions such as those below in addition to those referenced already;
- “The legal profession is terrible at macro innovation. It’s really bad. Nobody does it because everybody is doing the micro and that’s where they focused.”
- “It’s essential to have a passionate person that wants to make the idea reality.”
- “You should always have a measurable outcome. You’ve got to be out to measure so you know what success looks like.”
- “You could see people cutting back hugely on their recruitment. But they will need data scientists and people who can build algorithms and understand the technology. You will also need people that can communicate and engage with clients.”
- “There will be a huge revolution because a lot of the economic power of consulting firms is at the bottom of the pyramid and they will potentially lose a lot of profit.”
- “The Big Four firms and technology companies are converging on the same point.The technology businesses really good software but don’t understand audit. The big four understand audit but don’t necessarily have cutting edge technology. “
- “I think we have reached the high water mark of in-house lawyers. The reason legal functions grew is because they couldn’t find an efficient and cost-effective solution to doing it externally. Technology will change this.”
If you are interested in finding out more details and seeing where your firm sits on the maturity scale against the six essentials then do check out the Innovation Lab event.