CHAPTER 1
PROFITS UNDER SIEGE
Growing your practice in
tough times
DOG-EAT-DOG MARKETPLACE
The huge $900 billion dollar professional services marketplace has become a dog-eat-dog battleground, where you need more than a big bark. The winnersâthe hugely profitable fewâare getting richer while the restâthe vast majority of firmsâstruggle to maintain margins and growth. As a result, double-digit profitable growth for most professional service firms has become a distant dream.
Even practices such as the elite law firms once seen as immune to market forces are finding the going tough. A McKinsey Quarterly analysis of the worldâs largest law firms warns, âall but the most profitable are in peril.â1
The Virtuous Cycle of Growth
The high-profit winners are growing their practices around a distinctive value proposition that will sustain high profits and double-digit revenue growth.
These high-profit, high-revenue growth firms are locked in a virtuous cycle in which they can cherry-pick top talent from their less profitable competitors and invest in expansion, new services, and cutting edge technologies.
The Vicious Cycle of Decline
The low-profit, low growth stragglers are stuck in a vicious downward spiral, losing talent and prestige at an accelerating pace until they shrink, get acquired, or simply become bit âcommodity players.â
Day 29 Is Here
The drive toward commoditization and price contraction continues to accelerate. A childâs riddle, âThe Lily Pad,â captures the essence of the challenge.
On day one, a large lake contains just one tiny lily pad. But every day the number of lily pads doubles, until on the thirtieth day the lake is completely clogged with lilies. On what day was the lake half full?
The answer, as bright children love to exclaim, is day twenty-nine. It takes twenty-nine days for the first half of the lake to fill with lily pads. But it takes just twenty-four extra hours for the rest of the lake to become submerged in vegetation.
Day twenty-nine is here. Three giant lily pads in the form of globalization, deregulation, and technological change are choking the professional services pond.
LILY ONE: GLOBALIZATION
Globalization has caused the creation of huge global professional service firms that can service clients across the planet. To meet client demand and stay ahead of competitors, professional service firms have merged and consolidated at breakneck pace. More than 50 percent of the worldâs accounting services are now provided by the top ten firms. In HR Consulting, the top ten firms control 80 percent of the total market. In IT Consulting, the top ten players share is 45 percent. In Management Consulting, the top ten control 35 percent.
Only the legal profession, where the top ten firms control less than 5 percent of the total world market, has largely been able to resist the pull. Even so, worldwide practices such as Linklaters & Alliance have formed consortiums based around a global network of offices.
At the same time, mergers and acquisition activity has exploded. Between 1985 and 1990, there were 1,140 professional service firm M&A deals in the United States worth $27 billion. Between 1995 and 2000, the number rocketed to 7,638 worth $471 billion.
The evidence is compelling. Firms in every professional service sector have aggressively invested in size and geographic coverage. A few representative examples: In 1975, strategy consultants McKinsey & Co had twenty-four offices. Today McKinsey has eighty-two offices in forty-four countries. Accounting giant PwC, formed from a merger of Pricewaterhouse and Coopers & Lybrand in 1998, has 140,000 staff and 8,000 partners in offices crisscrossing the planet. IT services giant IBM Global Services has more than 150,000 staff serving 150 countries. Advertising and communications giant Grey Worldwide has offices in 159 cities in 90 countries. Executive search firm Korn Ferry has more than 70 offices across North America, Europe, Asia Pacific, and Latin America.
Global giants such as these have the financial muscle, talent, and global stretch to compete aggressively in any market they enter.
LILY TWO: DEREGULATION
Deregulation, the second lily, has further increased competitive intensity. The Big Four accounting firms are the best example of the forces of deregulation in action. Even though they have been forced to shed their huge consultancy practices, collectively the âBig Fourâ still employ more than 400,000 staff. Together they still employ more lawyers than the four largest specialist legal firms combined. They still compete directly with the merchant banks for M&A work, and they still challenge HR consultants for their most lucrative consulting work.
LILY THREE: TECHNOLOGICAL CHANGE
Technological change is the third lily engulfing the lake. Accountants, for example, have watched bargain-priced software such as QuickBooks and TurboTax damage margins for certain types of routine accounting work. Clients no longer need an expensive law firm to conduct basic research when they have access to sophisticated electronic legal databases such as LexisNexis and Westlaw. Who needs to talk to a fee-charging recruitment consultant when you can skim a low cost collection of online CVs?
While the Web hasnât caused the terminal damage to relationship-based services that some pundits predicted at the peak of the dot-com boom, the Internet has spawned a new generation of firms, such as E-Law.com, which provide commoditized professional services. Online recruiting has become a billion dollar industry. Online recruiting now accounts for nearly 40 percent of recruiting giant TMP Worldwideâs U.S. revenue. Even the Big Four accounting firms will deliver cut-price fixed tax advice via the Web for answers to routine questions.
The firms that have flourished in this new hypercompetitive world have made marketing a central focus. They live and breathe Peter Druckerâs precept: âBecause its purpose is to create a customer, the business has twoâand only twoâbasic functions: marketing and innovation. Marketing and innovation produce results; all the rest are âcosts.ââ
By contrast, the underachieving laggards suffer from what I call âMarketing Deficiency Syndromeâ (MDS).
Marketing Deficiency Syndrome is a âdiseaseâ that can afflict any lethargic, sclerotic, professional service firm. MDS is usually contracted by leadfooted firms that fail to inoculate themselves against market-driven changes caused by globalization, deregulation, and technological change.
The Symptoms of MDS
The symptoms of MDS appear whenever profits and growth rates stagnate and decline.
Firms suffering from MDS typically:
⢠Compete primarily on price, selling undifferentiated, commoditized services
⢠Remain heavily dependent for their survival on the continued loyalty of a few key clients
⢠Have a dangerously high percentage of their clients who are at risk of defection
⢠Lack a defined strategy for their high value clients and highly growable clients
⢠Hold onto their unprofitable and toxic clients far too long
⢠Suffer from serious deficiencies in rainmaking talent
⢠Lack a distinctive brand persona
⢠Use an inadequate and misleading set of marketing measures to track performance.
SYMPTOM 1: FIRMS COMPETE PRIMARILY ON PRICE, SELLING UNDIFFERENTIATED SERVICES
The âsurplus societyâ has a surplus of similar companies, e...