When I started my service firm in 2012, I had no clue what I was getting myself into. I could not have imagined the constant pressure of finding the right collaborators who not only had a good head on their shoulders, talent, and the skills I was looking for, but also embraced the values of our organization. How could I have guessed that I’d be under constant stress to account for every hour, do all the billing, maintain good working relationships, educate my clients, and constantly be on the lookout for new prospects?
A service firm is not a factory that continues to produce while managers take a break. Time is literally money, and grey matter is our raw material!
There are many such Quebec entrepreneurs running firms based on this very model. In fact, according to recent data from the RFSPI, over 336,500 people work for a service firm in the province, contributing a whopping $24.4 billion to the GDP. They can be found in such industries as law, accounting, recruitment, architecture, technology, engineering, advertising, management consultancy, and much more.
As our mainly manufacturing-based economy continues to evolve into one based on knowledge, these numbers will only keep growing. It’s not surprising that the government is going to great lengths to attract international service firms to Quebec, such as consulting firm Slalom last summer. The government knows this transition to a new economy is creating opportunities to position the province as fertile ground for resources and creativity.
The issue—over and above our dire labour shortage—is that fierce competition, especially since the pandemic, has led many service firm managers to operate in permanent expediency mode. That is, taking on any and all clients and saying yes to any request, simply because—as they say—any business is good business. This approach often goes hand in hand with a complete misalignment of the “firm positioning – resource – client” axis and also leads to client dissatisfaction, a high turnover rate, and plenty of headaches for management. And once you step into this vicious circle, it is really hard to get out.
Any business is not good business.
The positioning of a service firm
As part of their life’s work, two professors from Harvard Business School observed thousands of service firms and interviewed hundreds of leaders over the course of two decades. They came to the conclusion that a service firm—no matter what industry it’s in—will be positioned somewhere within four practices.
On one end of the spectrum, there are commodity services, which are mainly oriented towards costs and production capacity. In the legal field, a standard agreement is a type of commodity, which can be quickly and systematically put together by a junior resource, or simply replaced by an automated online form. The profit driver here is volume.
On the other end of the spectrum are the forward-thinking firms who are always in the know about the latest theory models. These will inevitably cost more, but are used much less frequently. The profit driver here is the ability to bill by the hour at the highest possible rate.
Your firm finds itself somewhere within these four areas, and probably in more than one. And to add to the complexity, the study shows there’s a strong chance that the perception you have of your firm’s positioning does not in fact reflect reality. For example, I like to think Poudre Noire falls somewhere between “grey hair” and “druid,” since I am plugged into the world of academia and always have a new theory model to share with clients and partners, which leads to serious innovation approaches. That said, because 80% of my revenue fits within the “procedure” category, I can’t justify an hourly rate of $350 for druid service and $110/hour for the rest… especially when both are on the same estimate! The “procedure” positioning dictates all my activities.
Another interesting tidbit from the study: This chart is a long, meandering river from “druid” to “commodity.” For example, the firm BCG—which gained success in the 1990s with such models as the “BCG matrix”—was originally positioned in the druid category. Today, this model is widely used and BCG has flowed to a spot between “grey hair” and “procedure.” The same can be said for law firms. A contract in the 1980s may have been considered a “grey hair” service, whereas thanks to technology, today it’s more accurately a procedure service, with some variables falling under the grey-hair category! Which means law firms still billing $350/hour for commodity services better start evolving, or they will lose their positioning.
This study is extremely important, as it shines a light on hidden areas that are often hard to identify, and may create friction within a firm. If the “firm positioning – resource – client” axis is misaligned, even if the company is profitable, it can implode due to:
- frustration between colleagues
- high turnover rate
- bad hires
- client dissatisfaction
- misunderstanding of the offer
- inconsistent brand image
In other words, your position in the chart determines how you manage, who you hire, and who you choose to work with. It also dictates most of your company culture. For example, a commodity firm hires good operators and reliable personnel who work better with clear guidelines than a vague framework. A “druid” type company hires experts from different backgrounds, who tend to be creative, curious, and get bored quickly if not faced with new daily challenges.
In short, this study was extremely insightful for me, and has encouraged me to take a new look at the positioning at the core of my own firm. I hope it helps do the same for you!
This blog is inspired by an article written by Professors Nanda and Narayandas in HBR in March 2021, titled “What Professional Service Firms Must Do to Thrive.”