With clients becoming more demanding and competition increasing, professional services firms need to look for a new pricing strategy.
Instead of billing by the hour, more and more services organisation are working to a fixed fee. But to stay within budget, they require a new skill set and digitalised processes.
The professional services industry has changed dramatically in recent years, partly due to the economic crisis. The number of firms has grown to such an extent that they are now competing in a very homogeneous market, all offering similar services. On top of this, clients are more price-sensitive, have complex service needs and expect shorter delivery timescales combined with higher quality.
To operate in this complicated market and drive up their revenues, professional services providers need to look for new ways to outsmart their competitors and stand out from the crowd.
Many firms have started to rethink their pricing strategy. Erzsebet Soos, Business Manager at Page Executive, believes that the large audit firms, such as Deloitte, Ernst & Young and KPMG, are a good example of this new approach: “Like all firms in the professional services industry, they used to bill their services by the hour. But the pressure on service rates has increased.”
She explains, “For clients, it´s not always easy to see the relationship between the cost of a service and its value. They prefer to know in advance exactly what a certain service will cost them. To meet this demand in the market, professional services firms have to price on a fixed-fee or value-based basis. This trend is happening everywhere in the industry. If one company starts, others need to follow if they want to keep up with the competition.”
If the service is not executed efficiently, the offered price might not cover the actual cost of delivering the service.
A different skillset
There is, however, a danger in offering fixed fees: if the service is not executed efficiently, the offered price might not cover the actual cost of delivering the service, especially as the sales force of professional service providers will try to keep prices in their proposal as low as possible to win the business.
“Business leaders observe the gap between the list and actual prices growing,” writes George Cressman, President of consulting company World Class Pricing, in The Journal of Professional Pricing.
He argues that to overcome this challenge, firms need to invest in the skill set of their people: “Delivering professional services requires great skill in diagnosing customer needs and understanding the relationship between very diverse components of a customer’s business. It requires skill in tailoring a solution to precisely meet a customer´s needs, and communicate that effectively.”
Project management to the fore
One of the skill sets most needed for this new approach is project management. Scope, timing and budget – the basic ingredients of a good project plan – are extremely important to keep the executed service within budget.
Investing in their employees’ project management skills will benefit business leaders in more ways than one way. Clarifying the costs and deliverables upfront not only reduces the perceived financial and outcome risks of the client, it also forces them to understand and communicate what they really want before entering a contract. Moreover, by including project management in their offering, companies can ask a higher price for their services.
By including project management in their offering, companies can ask a higher price for their services.
Another important component in a profitable pricing strategy is streamlined and standardised processes. “The big audit firms, for example, have all invested in standard processes and operational systems,” says Page Executive’s Erzsebet Soos. “Partly, that is done by digitalising some processes or services.”
…and digitalising services
By digitalising elements of services, companies can dramatically reduce their costs and improve quality, without creating overhead. “If a consulting firm, for example, wants to double its revenue, it has to double its staff of consultants,” explains professor in business innovation professor Mohanbir Sawhney in the Harvard Business Review. “Contrast that with product companies like Google and Adobe, which don´t have to deal with such cost structures and enjoy gross margins of 60% to 90%.”
Technological innovation can help providers to find a way out of this predicament. There are numerous examples of firms finding smart digital solutions to offer clients better services at a price that competitors can´t match.
There are numerous examples of firms finding smart digital solutions to offer clients better services at a price that competitors can´t match.
CEOs – initiators of change
In order to successfully implement this new business model, the CEO will need to take the lead. Good governance starts at the top: a CEO who makes innovation part of the business strategy, puts their money where their mouth is, initiates programmes, puts the right people in the right places and supports them. Successful innovation requires clear governance and strict management.
The innovation strategy should eventually lead to more streamlined, rescaled and restructured operations. Business leaders should, for example:
- Centralise and standardise financial processes to improve profitability reporting
- Build systems and processes to efficiently access resource channels
- Implement initiatives for talent management
A head start for professional services firms
When it comes to implementing new business models, the professional services industry has a number of advantages compared to certain other industries. By their very nature, professional services companies are more open to change and fresh thinking than other businesses. They have a highly educated workforce, which is more likely think innovatively and embrace new ideas.
By their very nature, professional service companies are more open to change and fresh thinking.
Providers collaborate closely with their clients, so they know what it takes to be successful. On top of that, the industry has a high level of diversity. “In that sense, professional services are ahead of other industries, especially when it comes to the participation of women,” says Erzsebet Soos. “Long before diversity became a hot topic, the female voice was already well represented in the industry.”
The benefits of a diverse workforce, especially regarding change and innovation, cannot be overstated. A good project team should be as diverse as possible. The more diversity in the team’s background and interests, the easier it is for new ideas to thrive. There´s no bigger threat to innovation and change than a team where everyone agrees and likes things just the way they are!
Faced with the challenge of offering fixed-priced services competitively yet profitably, CEOs need to lead the way in digitalising and streamlining their firm’s processes.
Professional services providers should look for opportunities to deploy digitalisation wherever possible to track the client’s interactions with the firm, diagnose their present needs, and cut time-consuming manual processes out of service delivery. Tight project management and cost control have become essential to running a profitable business.
- Professional services providers are replacing billing by the hour with fixed-fee offerings
- Firms need to ensure that the agreed price covers their actual costs
- Project management skills are critical to tight cost control in this new business model