Professional service firms have a reputation for being slow to change and highly risk-averse. Yet this view fails to take into account that the majority of professional firms are highly entrepreneurial organisations. Many professional firms have already developed innovations in online client services, new pricing models, and services delivery through offshore centres.
A recent Meridian West snapshot survey of the innovation activities of a range of a professional firms dispels the myth that professional firms do not embrace innovation. Contrary to the stereotype, the majority of professional firms have already developed innovations in a range of areas and many more are planning a significant innovation focus over the next 12 months. A noticeable proportion identify that they will focus on innovations in client journey mapping (41%), diversifying into new service areas (29%), and forming joint ventures with other suppliers with the intention to provide joint offerings to clients (29%) over the next 12 months.
Even artificial intelligence (AI) – once thought to be futuristic hype – is making its mark within the professional services sector. Although it does appear at the bottom of the list of innovations currently embraced by firms, as many as one in five (18%) are using AI today. A quarter of firms (24%) plan to do invest in AI during the year ahead, which means that soon over 40% of firms will be using AI as part of service deliver.
Adopting a more strategic approach to innovation
To thrive in the future professional firms need to take a more strategic approach to innovation. Firms that fail to put innovation at the front of their strategic thinking will find it increasingly difficult to grow, or even to survive, in a complex and challenging professional services market. In the case of AI, innovations will result in the automation of many of the tasks currently undertaken by manually professionals such as reviewing contracts, financial statements or company reports. In the legal sector, for example, innovative technology is being developed by start-ups and disruptors (such as ROSS Intelligence, which positions itself as a “digital legal expert”) as well as by incumbent law firms (such as BLP and Dentons, who have made significant investments through setting up innovation incubators).
What is important about innovations such as AI, online services and offshoring, is that cumulatively they are transforming the business model of the traditional professional services firm. There is a real concern, therefore, that innovation threatens the high margins historically enjoyed by professional firms, disrupts their source of competitive advantage and radically alters the fundamental nature of their relationships with clients.
Successful firms know that innovation cannot be left to chance. Finding, refining and launching good ideas requires a conscious focus on innovation supported by the right level of leadership, investment and process.
This How to guide draws on Meridian West’s two decades of experience helping firms develop innovative new services with professional and financial firms including PwC, Allen & Overy, Silicon Valley Bank, Canada Life, ACCA, Coutts & Co., and Citation. Our experience shows there are simple lessons that can help any leader of a professional service firm to adopt more successful innovation practices in their firm regardless of its size, area of specialisms or types of clients served.
The six phase “Innovation Lifecycle” for professional firms
When professional firms begin to think about innovation, they typically jump straight to the outputs of innovation thinking: the new technologies, business models, or service offerings that they would like to create for their clients. However, this focus on the what clouds the challenge of how firms will create these outputs, what we call the ‘practice of innovation’.
Organisations that are recognised as innovative adopt a systematic approach to the ’practice of innovation’ that works for their firm. This is not a dogmatic process, but one that is flexible and adaptable, yet consistent and robust. It helps the firm to articulate its innovation vision and to ensure that innovation practices are supported with the right people and resources and are given time and space to develop. This is particularly important where potential innovations, such as AI, may cannibalise existing revenue streams.
The six-phase approach we recommend that professional firms follow is depicted above. We call this the “Innovation Lifecycle”. It helps firms to think through the challenges and opportunities at every step of their innovation journey, from formulating their innovation strategy at Phase 0 through to Phase 5, the scale-up and successful roll-out of innovation ideas.
Phase 0 – Innovation strategy formulation
Professional firms should plan, resource, and deliver innovation projects with the same rigour and drive that they do client work. To create impact it is vital to properly plan the right innovation strategy for your firm. Innovation is not a one-size-fits-all game.
To help guide your thinking ask yourself the following questions:
- What is your firm’s innovation purpose and vision?
- To what extent is your firm’s approach to innovation linked the firm’s overall strategy?
- Are you looking at innovation as a portfolio of activities or as a stand-alone activity?
- What level of collaboration is right for your firm? Will this be driven mainly internally or externally?
- What is the right balance of incremental and radical innovation for your firm?
The answers to these questions have important consequences. For example, experience shows that firms which back only radical innovations run the risk of pouring too much resource into initiatives that may not work and hence they neglect the core business. Conversely firms that are too conservative are likely to miss the waves of transformative innovation that drive the biggest business growth.
Once you have set an overall innovation strategy, the next challenge is to identify the right execution team. Matthew Whalley, Director of Legal Risk at EY, believes that innovation needs people with passion if it is to succeed: “Innovation always relies on individuals to drive something through that they believe in. You need to have belief and passion to get other people on board and to deal with the bumps and the bruises that come with trying to do things differently.”
Formulating your innovation strategy is clearly only the first phase of the process. However, it is important to spend sufficient time at the outset thinking about your vision for innovation in order to maximise the chances of success of later phases of delivery. Firms that don’t do this typically find themselves investing time and money into innovation projects without a clear business case or without a real understanding of what they are trying to achieve.
Once your innovation strategy has been agreed and articulated, the next task is to create a pipeline of ideas. It is a myth that most innovations arise from lucky accidents. Neither is it true that innovation is just a numbers game, and that is if you come up with enough ideas then some of them will bound to be successful. In reality innovation success comes from having the discipline to take ideas, screen the good from the bad, and commercialise the good ideas quickly and profitably. This disciplined approach vastly increases the chances of success.
Successful innovators draw on multiple sources for their ideas, both within and without their organisations. They seek inspiration from their employees, from competitors, from their clients, from companies in other sectors and from other third party collaborators. To innovative successfully professional firms need to embrace the diversity of thoughts and ideas that a more open approach brings. Open innovators are a special breed: they are open-minded, inquisitive, have excellent networks and are good relationship builders.
Some firms find it important to put a structure around the approach of gathering ideas from staff. Often these innovation hubs take the form of an online platform where employees can pitch an idea or innovation. Using simple online tools employees can be encouraged to review each other’s submissions and comment on them. Ideas that pass a certain threshold of comments are then typically examined by more senior members. Darwinator is one example of an online tool designed allow employees to submit and vote on innovation ideas.
Innovators need space for creativity but also constraints. This concept is often referred to as an ‘innovation sandbox’ because a sandbox is not just an area where freestyle play occurs, it is a bounded zone where new ideas can be tested in a fail-quick, fail-safe way. As a leader it is your role to help your colleagues to ‘play’ as successfully as possible together.
This can be done by setting challenging goals, measures of success and timetables, by allocating finite operational resources for innovation, and by clearly defining innovation responsibilities and activities.
Some professional firms have taken this sandbox approach one step further by setting up a separate innovation entity at arm’s length from the day-to-day operations of their firm. This encourages innovators to stretch their thinking outside of the traditional professional service model.
When innovation ideas have been generated the next step is to prioritise the good from the bad and the indifferent. Prioritisation is a critical step that requires a robust balance between passion and objectivity. Often unsuccessful innovation ideas are not bad ideas, but are just not right in the current context.
One way of narrowing down a long list of innovation ideas is to have team members pitch their ideas to a panel of senior managers who will evaluate them and choose
which ones to take forward to the next stage of development. Here professional services firms have a lot to learn from other industries which typically take more disciplined approaches to evaluating innovation potential, including formal decision-gate moments when innovation ideas are evaluated and risk-profiled by the business.
A decision grid is an extremely useful tool to think through all the decisions that will need to be made when launching a new product or service, and to formulate a business case for budget approval. At the outset of an innovation project try listing all the questions that will need to be answered before launch to determine whether the innovation idea is likely to be successful or not. Each member of the innovation team should share their initial hypotheses on the right way forward. This process clarifies thinking and identifies whether the team are all on the same page or not. It also identifies where more research and analysis may be needed before an idea will meet the threshold to pass a decision-gate.
Phase 3 – Prototype
After prioritising innovation ideas, the next phase is to mock up a new service offering as a prototype. People tend to think of prototypes as only applicable to physical products, but the principles can also be applied to new services, and this is particularly appropriate for professional firms where clients tend to buy on track record, relationships and proven successes.
Build a prototype by mocking up how the client would experience the new service offering. This could include:
- Developing a website or other market material for a new service;
- Creating sample outputs to illustrate what clients will receive from your firm;
- Writing a script for how staff would interact with clients in key scenarios such as a sales meeting or delivery meeting; or
- Creating an outline guide for internal staff to help them to understand how to deliver key components of the new service.
Prototyping is an important stage that shouldn’t be skipped over. It helps professional firms to visualise exactly what will be needed to deliver the final service before you go to the expense of developing the real thing. Role-playing sales or delivery scenarios is also a good way of anticipating client needs and identifying potential challenges to the new service which can be ironed out before the idea is scaled up.
Before an idea is launched in the market, it is important to subject the idea to rigorous testing to ensure it holds up to honest appraisal from target clients. Just testing the idea with warm contacts is insufficient because they will typically provide overly positive feedback.
In our experience not only does research enable firms to establish likely demand levels, price points, and revenues streams, but also to calculate accurate forecasts for the costs of developing the service, and cost of sale and delivery. Without these numbers, it is difficult to create a convincing business case to sell ideas to sceptical colleagues within your firm.
Phase 5 – Scale
Perhaps the greatest milestone for any innovative idea is winning the first client. To encourage the first buyer it is often prudent to offer a discounted rate on the understanding that the first engagement is a beta-test. In exchange for a discount you expect the client to provide detailed feedback to help you continue to refine the approach for future clients. Having secured an initial client, it is important to prove the concept has a real market by finding at least a handful of people to buy into your service at full price and declare their commitment. This is the only way to prove that you haven’t just got lucky.
During this initial phase it is a good idea to try to capture as much feedback as possible, including from those who don’t buy the service as well as those who do. These market views will deepen your understanding of why clients don’t buy and what would make potential buyers say yes.
Many innovations die from lack of interest and sustained investment. New ideas are exciting at the beginning, people flock to brainstorm and make plans, but quite soon interest lags as the hard work of roll-out continues. Sustained investment is required to take good ideas and scale them up successfully. But leaders also need to know when to pull the plug. This requires objective criteria for evaluating which projects should progress and which to terminate, and rigorous enforcement of these decisions. In professional firms it is not uncommon to find that pet projects of senior people are given time and resources long after they should have been shut down.
Five lessons from innovation leaders
Throughout the six phases of the innovation lifecycle professional services leaders must be willing to spend substantial time and effort to create a culture of innovation within their firm. In our experience the most innovative firms accept the risk of failure, but are also able to guide innovative ideas through pitfalls by protecting them from managers in the core business who have a vested interest in shutting down ideas that may cannibalise their revenue streams.
Innovation isn’t easy, far from it. But there five simple lessons that you can adopt to maximise the success of innovation in your firm.
- Set internal expectations about what types of innovation are right for your firm.
Think strategically about innovation and communicate your intent to colleagues. It is important that people throughout your firm know where they should focus their time and effort: on incremental innovation to improve efficiency or on radical innovations that will fundamentally change how they work with clients, or a mix of the two. The right approach for your firm will partly depend on your partners and their risk appetite, and on the particular competitive pressures in your market.
- Embrace good ideas, wherever they might originate.
Successful innovators reach out to staff, clients and suppliers for new ideas, and always have one eye on competitors for alternative solutions that may spur a new innovation. Innovation ideas can be captured formally – through structured conversations, or online platforms – or through informal channels. However, it is important to have a structured process to evaluate ideas when they are brought to you.
- Give employees licence to engage in ‘structured innovation play’.
Employees who recognise the value of spending time on innovation are more likely to find opportunities in their busy schedules to set aside dedicated innovation time. However, even the brightest and best need to be given some parameters to focus their efforts. As a leader you need to set some ground rules. What is the innovation goal you want people to focus on? What activities and resources do you expect them to utilise to achieve that goal? Without some innovation structure, employees are less likely to generate successful ideas.
- Encourage prototyping and rigorous innovation decision-making.
Before going to the expense of creating a new service or developing a new business model, it is a worthwhile investment of time and effort to create a prototype. Rather than aim for a 100% prototype, encourage a ‘good enough’ mentality whereby people get feedback from potential buyers early in the process to iron out glitches as they progress. Successful innovators keep pushing their ideas forward and don’t get distracted.
- Involve clients at all phases of the innovation lifecycle.
It can be tempting to build and refine innovation ideas behind closed doors, launching them in the market when a firm believes it has designed a perfect solution. Too few professional services firms involve clients in the design and testing to help to determine the potential size of their market, propensity to buy, and priority target market segments for business development.
One firm that is well-regarded for its innovation capabilities is Allen & Overy. The firm is consistently ranked among the most innovative law firms in the Financial Times Innovative Lawyers series. A&O worked with Meridian West to develop a business case for developing and rolling-out new legal service delivery models, and to refine these ideas with clients before roll-out.
This How to guide re purposes some content from ‘Chapter 2: Innovation – How to reap the benefits of innovation in your firm’ in Professional Services Leadership Handbook by Alastair Beddow, Ben Kent, Adrian Furner and Nigel Clark (Kogan Page, 2017).