Why we are reaching the Ides of Maturity for professional services firms
February 22nd, 2014 | George Beaton
In the same way the Ides of March marked a turning point in Roman history (1) with the assassination of Julius Caesar, the Ides of Maturity for professional services firms heralds an era of life cycle maturity and the start of decline for many firms.
This post is an abridged version of my keynote address to the 2014 Client Choice Awards ceremony in Sydney on February 19, 2014. The post explains the causes and consequences of maturity and points to the coping mechanisms available to professional services firms.
It’s a rare and special occasion when 200 leaders of Australia’s leading professional services firms gather. There are no organised forums for large scale cross-profession sharing and learning, making the annual Client Choice Awards
a significant occasion for this and many other reasons.
The professions have many features in common. These include high ethical standards, serving the needs of clients, enhancing the public good, being based on knowledge and having substantial and profitable and private enterprise firms.
Another shared phenomenon – and the subject of my address – is the fact the industries constituted by the firms in each profession are all now entering or already in the mature phase of their lifecycles. The stages of an industry’s life cycle are generally well documented and understood; but not in my opinion by the professions.
Indicia of life cycle maturity for professional services firms
Being in life cycle maturity means the unit or volume growth in a given industry – accountancy service to corporate clients for example – at best increases no faster in the long run than that of the economy. That is, when a perspective that looks beyond the peaks and troughs of the economic cycle is taken, aggregate client demand for these services is stagnant.
Some argue the current stasis being experienced by professional services firms in the developed markets of the world simply reflects a longer than customary recessionary period. The evidence suggests otherwise. Where statistics exist, it’s clear volume growth had slowed well before the GFC struck in 2008. Hyper-competition is the norm; Beaton’s time series data shows Australian corporate clients’ perceptions of fees levels for audit services and legal services have been falling steadily since the peak measured in November 2007. There are many signs that clients are increasingly exerting their buying power. And alternative business models (ABMs), or in Michael Porter’s terminology substitutes, are emerging in at least law, accountancy and consulting services.
These substitutes use business models that can deliver many of the same services as traditional business model firms with the same quality – and at or below the break-even point of the incumbents.
All this adds up to a diagnosis of industry maturity. In consulting engineering maturity has been a fact of life earlier than in accountancy and consulting; and in law maturity is now clearly in place too.
Consequences for professional services firms
Maturity means for a firm to grow faster than its competitors it must take share from them. And more often than not this means choosing to compete on the basis of price more than it would historically have done. In turn, this means firms become less differentiated in the eyes of clients. And increasingly clients view firms’ services as commodities. Famously, this trend has been called the commodity magnet; it is a very slippery slope down which most firms are inexorably drawn.
For the majority of firms as price falls and volume growth slows costs continue to rise. This is especially true of professional labour for those firms that continue to regard their staff as a fixed cost. The resulting margin squeeze means reduced profits, whether measured as earnings per share or profit per partner. Beaton’s modelling
suggests, at least in law, firms’ profit per equity partner will halve within a decade.
Confusion and denial amongst work-a-day owners of professional services firms are major consequences of these developments. While some firms’ leaders are grasping these unpleasant facts of life, the average owner and employee are not.
The changes in business strategy and practitioners’ behaviours required to cope with the new order of client power and competitors’ conduct are formidably large. And first, new mindsets must replace the old. Understanding and playing successfully according to the new rules are formidable asks.
Sadly, many will not learn to change sufficiently fast, but a few will. The result will be some winners and many more losers. In this context ‘winning’ means sustainably maintaining or even increasing profitability. While ‘losing’ means experiencing permanent and large reductions in profitability – and the dissolution of some.
Stages of coping with maturity for professional services firms
Professor Richard Susskind OBE and others have suggested there are three stages in the coping process. These are akin to the stages of grief
described by Elizabeth Kubler Ross.
At first – and for a long time in this context – firms and their owners and leaders deny the trends.
They argue and sway themselves and the institutions of the profession – professional societies, universities, media, even regulators – to believe the indicia of maturity are temporary, the good old days will return, and like all recessions this one eventually end.
Based on this hope, firms engage in cost-cutting to prop up owners’ profits. And they discount to retain clients and preserve the jobs of as many valuable staff as possible to be ready for the upturn when it comes. The trouble is cost and price reductions are limited to irreducible minima. That is, as both fall there comes a point when neither can go any lower. The fundamental problem is the business model of traditional firms, as I have explained in detail for the legal industry in NewLaw New Rules
, an e-book published in December 2013.
In my opinion, nearly all firms and owners in the developed economies that Beaton studies are largely in denial. One bright aspect of this scenario lies in the way many clients are moving faster than the firms that supply them. This is sending a compelling signal, a wake-up call.
The second stage is one of re-sourcing.
Often led by client demand, the firms move into alternative sourcing in the form of off-shoring, out-sourcing and co-sourcing. They learn from and seek to emulate the thriving ABMs. Adopting a ‘if you can’t beat them join them, approach, innovator and early adopter firms experiment. They learn from the likes of Cast Professional Services
and Eden McCallum
in management consulting, Two Degrees
and Resources Global Professionals
in accounting-related fields, a-connect
in project management, and Axiom
For those firms that enter the re-souring stage with long-sighted determination the possibility of re-invention beckons. Others lose many of their top practitioners who breakaway, often to form ABMs, which is the case for most of the examples in the previous paragraph.
The third stage is one of industry disruption, one which Beaton terms the ‘kaleidoscope scenario’.
By this time clients have integrated backwards, ABMs of many types flourish, some traditional firms have not gone the way of Kodak and have successfully reinvented themselves, but most are languishing able to extract little more than wage returns from their investments.
Technology plays a major role in disruption. Artificial intelligence applications and e-marketplaces abound. IBM’s Watson
is about to revolutionise medical care; the same will be true in the business professions. One has only to read Tomorrow’s Lawyers
by Richard Susskind to realise this.
Conclusion: Beaton’s role
Beaton Research + Consulting
, Beaton Capital
and Beaton Executive Coaching
serve, partner with and invest in many forms of professional services.
Our people and companies are dedicated to helping professional service remain relevant
and vital. We seek to help professional services firms avoid the adverse consequences of the Ides of Maturity.
(1) The Ides of March is well known a day in the Roman calendar corresponding to 15 March. It became notorious as the date of the assassination of Julius Caesar by Brutus and other Roman senators in 44 BC. Caesar’s death made the Ides of March a turning point in Roman history as an event that marked the transition from the Roman Republic to the Roman Empire.
If you found this post of interest, you can find more on related topics here
+ How to recognise a NewLaw firm
+ BigLaw at sea. Red Ocean or Blue Ocean?
+ Firms need reinvention in tough times
+ Is anything really changing in BigLaw?
Dr George Beaton is a director of Beaton Capital
and Beaton Research + Consulting
and may contacted at firstname.lastname@example.org.
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