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Going Non-Linear

Moving beyond the billable people hours business model.

 

Ian H Smith

Knowledge-intensive services firms have an inherent constraint: as they grow revenues, so too, their costs grow in the same straight line trajectory. This is Linear Revenues.

Any unbilled hours are an instantly perishable asset in the services firm: you cannot warehouse time. No wonder services firms barely reach x1 revenues valuations, whereas cloud software firms regularly achieve x5-10 revenues valuations on exit. With this stark difference in mind, there is a compelling business case for knowledge-intensive services firms: it's called Going Non-Linear.

From Analog to Digital

As a knowledge-intensive services firm you may be focused on marketing, IT services, legal, accounting, or management consulting. Whatever your specialisation is, taking the first steps towards Going Non-Linear is very clear: it's the journey from analog to digital.

In a Harvard Business Review article, entitled Putting Products Into Services, the author talks about how tech product firms, such as Google and Adobe achieve gross margins of 60-90%, whereas consultancies, law firms, ad agencies and other professional services firms struggle to achieve anything above 40%. Here, the argument calls for applying the power of 'algorithm-driven automation' and data analytics to productise services.

With the emergence of Artificial Intelligence (AI) and Machine Learning (ML) Platforms, the concept of algorithm-driven automation becomes a pragmatic reality for knowledge-intensive series firms who want to get beyond the constraints of the billable people hours business model.

In this journey from analog billable hours to digital subscriptions from technology, knowledge-intensive services firms can apply Mutual Value Discovery to create technology from know-how and, crucially, validate the relevance to clients, by engaging them from day one in this process.

At the heart of Mutual Value Discovery is a Design Thinking method.

Technology Enablers

When client and firm come together in a Mutual Value Discovery, the key to enabling a digital outcome in short order is the selection of the right Platform. Conceptually, the Platform should be a number of layers of prebuilt business logic in the cloud, enabling subject matter experts, data scientists, user experience (UX) designers and software developers to come together to create a new product from know-how of the services firm.

In detail, this Platform may include emerging technologies: a choice of prebuilt business logic, sitting on top of robust cloud infrastructure. It may be based, in part, on an emerging Artificial Intelligence (AI) and Machine Learning (ML) Platform. 

 

This underlying technology provides the Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service (IaaS) layers, supporting what will become a Software-as-a-Service (SaaS) product outcome - typically delivered via desktop PC, tablet and smartphone user devices.

This is now referred to as high performance application Platform-as-a-Service (hpaPaaS) by industry analysts Gartner, and as a Low-Code Platform by Forrester. What matters here is reusability of business logic, reduction of ground-up syntax coding - and leveraging a trusted cloud partner who operates at global scale, yet offers local data residency.

Pricing Models

Going Non-Linear means either augmenting or even replacing services based on the billable people hours pricing model with scalable subscription fees, where price is aligned to measurable value outcomes. In practice, this needs detailed validation to be generated through creating a series of ROI Models for the Mutual Value Discovery engagement between the firm and would-be early adopter clients of this new productised service.

The pricing model could be a simple usage model - e.g. per user per month. However, it is likely that clients will increasingly insist on payment (or at least part-payment) for outcomes. This obviously presents an opportunity for knowledge-intensive services firms to disrupt business-as-usual offerings, where billable people hours are typically based on a time and materials consumed approach. The Mutual Value Discovery engagement will enable the right pricing model to emerge.

Next Steps ...

Going Non-Linear starts with the first Mutual Value Discovery engagement: applying a Design Thinking method to understand which services from the analog billable people hours world can be readily converted into a digital solution, as recurring revenues from subscription fees.

This is the pragmatic journey from analog to digital for the knowledge-intensive services firm: creating a win-win for clients and services firms alike. Remember, it's called Going Non-Linear.

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