Marketing Asia

Developing a Profitable Practice in Asia (an excerpt of my new book)

Developing a Profitable Practice in Asia (excerpt of the new book published by the Ark Group and written by Robert Sawhney of SRC Associates Ltd, Hong Kong)

Details of the 230 page report/book can be found at the Ark Group web site here.

Why Asian Legal Markets?

 

The onset of the global financial crisis (GFC) has been a wake up call for many law firms. The declining legal markets in the West are now making many Asian markets look very attractive for Western law firms. There has been a relative explosion in new law firms coming to Asia from the West, or those already here solidifying their position. For example:

 

• Uria Menendez became the first Iberian law firm to set up an office in China when it opened its Beijing office in early 2010
• Italian law firm Chiomenti formed a pre merger with Hong Kong firm CdB and JC & Co which it expects to complete after three years as required by the Hong Kong Law Society. They also opened an office in Singapore
• Clayton Utz from Australia opened an office in Hong Kong by associating with local firm Haley & Co
• As part of its stated Asia strategy, Norton Rose merged with Deacons Australia which led to the severing of ties with Deacons in Hong Kong, its sister firm
• Lang Michener LLP from Canada partnered with Angela Ho and Associates and can now practice Hong Kong law
• UK firm Eversheds opened offices in both Hong Kong and Singapore to supplement the office previously opened in Shanghai
• US firm Mayer Brown cemented its legal relationship with Hong Kong firm JSM on the 1^st May 2010
• US firm Russin Vecchi Berg and Bernstein LLP has offices or affiliations in China, Thailand, and Vietnam

 

Why Asia? The answer is relatively simple. Within the south, east and south east of Asia, economic recovery has been earlier and stronger than most other world regions and the economies proved more resilient during the down turn. FDI to, from and within these regions is spreading to more countries and more sectors. According to the World Investment Report 2010 recently released by the United Nations Conference on Trade and Development (UNCTAD):

 

• Flows to the region dropped a modest 17 percent in 2009
• The region now accounts for one fifth of global FDI flows
• The regions three largest recipients – China, Hong Kong, and India, now rank second, fourth, and ninth respectively in the world
• FDI started to recover as early as mid 2009
• China and India led the recovery
• Inflows likely to grow in 2011
• Outflows from the region only dropped by eight percent
• The regions sovereign wealth funds remain on a buying spree
• New policies are easing both outward and inward FDI
• Intraregional FDI now accounts for as much as half of the regions total inward FDI stock

 

The top ten FDI recipients for 2009 in the region were;

 

1. China
2. Hong Kong, China
3. India
4. Singapore
5. Thailand
6. Korea Republic of
7. Indonesia
8. Vietnam
9. Iran
10. Taiwan

 

The top ten FDI sources for 2009 in the region were;

 

1. Hong Kong, China
2. China
3. India
4. Korea, Republic of
5. Malaysia
6. Singapore
7. Taiwan
8. Thailand
9. Indonesia
10. Philippines

 

Entry Options

 

Essentially, foreign firms have three options. In markets that allow it (such as Hong Kong), firms can set up alone (either through representative offices or other investment forms) or create some sort of alliance (which is necessary to access the closed markets of India, Indonesia, or South Korea for example) These alliances may also involve the many law firm alliances such as Lex Mundi, Terralex, or Globalaw. In any case, some sort of alliance is almost always necessary to be able to provide local law advice to clients. The third option is for firms to engage in international work through a virtual office. Australian firms for example conduct work in a number of Asian markets but have often relied on their professionals flying in and out of a country based on project needs. Clayton Utz has been reliant on this approach for a number of years.

 

Going it alone – there are many advantages to setting up a representative office (RO) or other invested vehicle by oneself, autonomy being one of the key factors. The fact that so many alliances fail also inhibits foreign firms seeking out some sort of partnership with local firms. For instance, since six foreign firms were issued licenses in Singapore to practice local law (by hiring locally qualified lawyers), a number of the original alliances have been broken up. White & Case separated from its Singapore ally Venture Law whilst Clifford Chance broke from its joint venture with Wong Partnership. Although it is interesting to note that Linklaters did not attempt to win a local license and continues its relationship with Allen and Gledhill (one of the 'big 4' in Singapore).

 

When compared to having no local presence, the ability to build relationships and contacts on the ground in Asia is a massive advantage. In the Asian context, building trust between parties takes time and Asians do not separate business and social activities as clearly as Westerners do. Hence the ability to interact with key target audiences in various social functions can be a significant factor in the on going drive to build a local revenue stream. These types of business development activities can take time, firms without a local presence often face great challenges in building the right contacts that may yield work one, two, or three years down the line.

 

Firms that have taken the plunge in setting up Asian offices recently are not always ones you would expect. Italian firm NCTM is planning to open an office in Shanghai in the summer of 2010. This will be the first office outside of Europe for the firm. They follow another Italian firm, Chiomenti, which has a presence in both Beijing and Shanghai. NCTM is expected to have its license to set up in China approved in the next few months and according to the firm's managing partner Vittorio Noseda, the firm is looking to be recognized as a full Italian legal practice while maintaining a relationship with its current Chinese alliance partner, Allbright Law (which incidentally just acquired the services of former Lovells Beijing managing partner, Robert Lewis). Ashurst law firm opened in Hong Kong in 2008 and is making overtures towards opening a China office. Spanish firm Garrigues is also considering opening an office in Beijing in the near future. Boutique off shore firm, Thorp Alberga also set up a Hong Kong office in early 2010.

 

Setting up foreign offices can be time consuming and expensive. In China for example, foreign firms can only open a new office every three years subject to the fulfillment of a three year probationary period for a firm's first office opening. Additionally, Beijing is now starting to pressure foreign service firms in terms of setting up more investment heavy entry offices. According to the Wall Street Journal (May 10^th 2010), the central government wants service firms, including law firms, to increase capital commitments that will require a move towards a wholly foreign owned enterprise (WFOE) or a locally incorporated subsidiary. Such firms will then be plugged into the tax and pension systems. Forming legal entities in places like China can be expensive and complex requiring firms to make large pledges of investment capital, property rental, and employee size.

 

Law Firm Alliances and Culture

According to Fons Trompenaars and Peter Woolliams in their book Business Across Cultures, relational aspects like culture and trust account for 70 percent of alliance failures. These problems are caused by differences in both corporate cultures and national cultures. From an Asian perspective, there are key cultural considerations which need to be taken into when gauging the potential of alliance success. Although frameworks such as Geert Hofstedes [6] national cultural dimensions (including power distance, uncertainty avoidance, individualism vs collectivism, masculinity vs femininity) are well known and extensively cited, it is often criticized for failing to consider diversity within nations and firms themselves. Law firms engaged in international alliances are often manned by staff that come from various countries, have wide ranging work experience and have studied in countries outside of their birth place. Hence national cultural attributions of behavior can prove to be explanatory to the point where they in fact explain very little. These theories tend to be static whereas culture may in fact be changing and fluid depending upon a number of factors.

 

National cultural differences may also play a more limited role in alliance success when compared to firm or professional cultures. One of the few articles that has looked at the varying roles of culture on alliance performance was written by Simon and Lane and published in the Journal of International Business Studies. The authors posited the impact of national, organisational, and professional culture on alliance success and developed a framework in the professional services context that could easily be applied to law firms. The model identifies differences in national culture which are are likely to magnify differences in firm culture as well as professional culture. These differences will negatively affect the value creating activities of the alliance. Law firms can use such a model by using well accepted inventories of national, firm, and professional culture to measure the cultural compatibility of potential alliance firms.

 

The New Practice Creation Process

 

There is some belief that law firm work moves from high value to lower value over time as knowledge becomes increasingly ubiquitous. This leads to areas of work becoming commodities and hence law and other professional service firms are under some pressure to continually develop new or innovative knowledge structures that can be leveraged in delivering client value. One of these areas can clearly relate to international diversification. In the case of law firms, many foreign firms have entered Asia to escape the slow growth of their home markets and create additional value to existing and potential clients. As with the start of any new practice, firms will need to evaluate the market needs and potential in relation to their overall objectives, expertise, and capabilities. According to Tim Morris from the Said Business School at Oxford University in the UK, there are four generative elements that have to be place for the successful creation of a new practice in a professional services firm. Although he was not specifically referring to the development of international practices, his ideas provide valuable insights for any law firm looking at starting a practice in Asia. The four elements are:

 

• Social agency (partner champion) – as professionals become more senior, they are under increasing pressure to build their own client base and revenues in order to demonstrate their value to the firm. Professionals are compelled to align their career objectives with that of the firm and the start of a new international practice can signal the lawyer's readiness for more responsibility or enhance their overall standing in the firm.
• Differentiated expertise – the new knowledge or expertise needed to be successful in Asia may come from experiences the firm has had with clients or referral type work processes. Other firms may have to develop new knowledge and capabilities from a lower knowledge base.
• Defensible turf – this relates to the ability of the new practice creators to be able to demonstrate the importance of an Asian practice to other key firm partners whilst assuring them of the benefit without encroaching on their existing clients and practices. For example, a partner may use client demands for an Asian presence as leverage for the need to set up an office or strategic alliance
• Firm support – firm wide support is crucial as the need to use a variety of resources (both financial and human) is integral to the potential success of a new practice.

 

Strategic Law Firm Expansion in Asia

Generally, there are numerous factors that affect the degree of success firms will have when entering foreign markets and of course, measures of success vary among different firms. Some firms will look at short term revenue generation and base strategic decisions around these factors whilst other firms may have a longer term view and consider the building of firm capabilities and social capital as key elements to their longer term success in a market. The range of factors that separate winners and losers in internationalization efforts are numerous whilst the choice of location for international law firm offices is a mixture of market demand and regulation. There are also movements over time that impact outcomes. In more liberal legal markets (as Asian markets gradually move in that direction), foreign law firms are increasingly staffed by local lawyers and this provides the firm the ability to practice local law in some cases. This is evident in the comparison of Hong Kong and China whereby foreign law offices in Hong Kong are heavily staffed by local lawyers where the regulated legal market of China seems to predicate the use of foreign lawyers (who may in fact be Chinese but studied overseas) who cannot advise on domestic law. Additionally, the longer a firm has been in a location the more it tends to staff the office locally and integrate itself into the local legal and business community.

 

Possible factors that impact law firm success in foreign market entry:

 

• Entry mode choice and applicability
• Ability to learn and adapt
• Integration of new offices and firm culture
• Measure of success
• Top management commitment
• Firm resources
• Industry clusters, client base, and trends
• Local and international competitors
• Cultural distance of home and host country environments
• Business, cultural, economic, and regulatory conditions of host country
• Strategic choice and business strategy
• Degree of market orientation
• Access and retention of key talent
• Practice focus, marketing strategies and business development
• Application of knowledge to work product and client value
• Communication intensity and quality
• Differences in the systems of law (legal jurisdictions)
• Leadership and management practices
• Reputation and size
• Specialty

 

The list is far from exhaustive but it does highlight the number of factors that can influence the success of an internationalizing law firm entering Asia. It is important to point out that success in international markets is not only a function of objective outcomes and choices. When law firms enter foreign markets they frequently lead the office with an expatriate that has come from the home office. That individual will have pre set cognitions about the potential for success and hence it is crucial for the firm leaders to educate the relocating partner regarding the abilities of the firm in foreign markets related to the value of its services, resources, and pricing strategy.

 

For law firms, success is largely determined by their knowledge since value is created through the leveraging of intellectual capital. The role of face to face interaction for knowledge sharing and integrating lawyers across offices has already been discussed above. Research conducted by Hitt and colleagues who examined the largest 100 US based law firms, found that both social capital and human capital had a positive effect on performance but not in the anticipated ways. Human capital (which was measured by education and experience) was found to be a better predictor of success. They found that human capital had a positive effect on international diversification as well as financial performance. Level of international diversification was only positively related to financial performance when human capital was appropriately leveraged. This suggests that law firms which expand into too many countries without a clear strategy on how they will utilize human capital to build new work may experience lower performance levels than their peers. The research also found that weaker levels of human capital led to lower returns on international diversification. Many law firms follow existing clients into international markets and these clients are considered to be part of the firm's social capital. It is interesting to note that the authors found that social capital had a negative impact on the relationship between international diversification and firm performance. This may highlight the perennial problem for many law firms who perhaps over rely on existing clients to build international revenues whilst failing to learn about new markets and hence lacking the capabilities to build sustainable revenues on the ground. Overall, the results suggest that law firms entering Asia should be cautious about relying too heavily on existing clients and ensure they are able to develop a strategy based on human capital to leverage knowledge in order to build a local client base.

 

Management Structures

 

As law firms do expand in Asia and grow in size then the complexity of managing the increased scale involved in a transnational business often leads to changes in management structure. Traditionally, law firms have been organized according to a P2 (professional partnership) configuration which focused on collegiality and consensus decision making. As Faulconbridge and his colleagues point out;

 

"The P2 ultimately merges ownership, management and work execution in the small number of

partners who collectively and informally govern the long term direction and everyday

administration of their firm. Over the last 20 years or so, exogenous changes including

de-regulation of professional services markets, globalisation of professional services and

technological development, have been said to conspire to push professional

organization down the route of radical structural transformation. This can be

characterised as an archetypal shift from the P2 archetype to a new configuration: the

Managerial Professional Business (MPB) which characterised by rising levels of

standardization, bureaucracy and centralization. Thus, a more hierarchical and

specialised division of labour emerges, decision making is expected to become more

concentrated, structures refocus around matrixes and multi-disciplinary groups, practices

become increasingly standardised and centrally coordinated rather than ad-hoc and

idiosyncratic whilst the emergence of a managerial structure with executive powers

signifies the demise of collegiality and beginning of the separation of ownership and

control".

 

The author also point out the development of hybrid configurations such as the Global Professional Network which is most relevant for the largest global law firms. As the work of law becomes more complex and the scale of law firms grow, we are beginning to see more traditional management structures within law firms which attempt to give formal authority to executive decision making whilst trying to maintain the philosophy, values and practice of a legal partnership. In Asia it is interesting to note that foreign firms which have set up here have used varying approaches to managing Asian offices, with the majority sending over senior partners to run the office (or finding suitable senior lawyers in the region) and a few (such as Eversheds) hiring an executive to build the office.

 

The adoption of LLP status by a number of firms is a sign of the move to more formal management structures although within Asia there are still limitations on this form of business organization for law firms (soon to become a reality in Hong Kong). Whilst many lawyers seem disapproving of this move to corporatization there seems little doubt that the scale and complexity of cross border legal work and the value demanded by clients has in many cases outgrown the ability of the P2 configuration to meet these changing conditions.

 

Law Firm Choice in Asia

 

There are a number of research studies from the west that identify the key factors that affect in house counsels choice of law firm but little that reflects Asian views, and the differing views within various Asian countries. One of the few studies that does take a look at various markets in Asia is conducted by Asian Counsel magazine. The key findings of their 2009 results are identified below:

 

 

Figure 1: The factors that most influence choice of external counsel in Asia (percentage of respondents)

(Source: Adapted from Asian Counsel In House Survey, Representing Corporate Asia, 3^rd Annual Survey of Asia's In House Counsel, Pacific Business Press 2009)

 

The figure shows that for most countries, expertise in a specific area, responsiveness, and fees are still the overriding factors that affect choice of external counsel. There is also some emphasis on relationships and reputation of both the individual lawyer as well as the law firm. The only four countries which rated personal relationships as important factors were Thailand, Japan, Singapore, and South Korea.

 

There are a few key points to consider from these findings. Relationships have always been important in the marketing context in most Asian countries and the results here suggest this to be no different in the legal sector. Building relationships in the Asian context works on both a personal and business level and foreign lawyers should be prepared to spend a considerable amount of time investing in relationships and often being involved in social functions prior to any business dealings. For law firms, there is a need to balance and integrate the branding of an individual lawyer and the law firm so that consistency of the brand for both entities is built hand in hand over time. In many domestic law firms in Asia, there is a significant difference among partners even within the same firm and hence reputation of the individual lawyer plays an important role in business development.

 

In terms of expertise, there is a general trend globally for law firms to become industry experts and develop strong thought leadership and this approach is gaining ground in Asia. Demonstrating knowledge in both a practice and industry is becoming an increasingly important component of law firm strategy which requires a cultural change for most firms. Thought leadership is also becoming a valuable mechanism for firms to demonstrate their industry capability. The fact that responsiveness ranks as highly as expertise demonstrates the importance of both functional and technical quality. The issue for most law firms is their inability to build a market driven culture and knowledge based firm which can imbed responsiveness as a firm wide competence as opposed to relying on a few partners who seem to have a natural tendency towards proper client servicing.

 

Relationship Marketing - An Asian View

 

Customer relationship management (CRM) is a marketing buzz word that conjures up all sorts of images. Ask ten people about CRM and you will get ten different answers. Some will say CRM is a database, others will say CRM is about customer loyalty and programs that maintain it. Unfortunately, it is that kind of thinking that has led to CRM initiatives being some of the biggest failures in recent business history. What these organizations fail to realize is that CRM is none of the things described above. It is a business philosophy, an entire way of thinking about yourself and your clients. It is about recognizing that your firm is a client satisfying organism that must live and breathe a marketing culture in order to benefit from any of the technicalities involved in building a systematic CRM program. According to Edmund Thompson of the Gartner Group [2], A CRM program is typically 45% dependent on the right leadership, 40% on project management implementation, and 15% on technology. Perhaps one could go even further and replace that 15% technology with the same percentage but of the professional's mindset.

 

Much has been written about relationship marketing in the Western context both for services and consumer goods. Unfortunately, very little work has been done in the professional services context and none in the Asian context. One must consider whether relationship strategies which are prevalent in the west are transferable to the Chinese or Asian context and if so to what degree. In their book, Marketing of Professional Services, Philip Kotler, Thomas Hayes and Paul Bloom suggest four building blocks to developing stronger client relationships. We will look at these building blocks and view from them from the perspective of what is known about relationship marketing and guanxi in the Chinese context.

 

Trust

 

Trust is certainly a key variable in building and maintaining relationships and has been the study of much empirical research. According to Kotler and colleagues, trust can be built by helping clients with contacts and referring business to them, sending articles of interest to them about their industry, providing free seminars etc. One can view these acts as types of favours and this fits well with the idea of trust and building reciprocity in Chinese society. Oliver Yau and colleagues in their paper, Relationship Marketing the Chinese Way, state that Chinese seek to determine whether another party can be trusted and if favours are received they are morally bound to return these favours. Such reciprocity may be long term and firms should not act in a manner that shows them to expect quick reciprocal acts but be patient in building social bonds. Trust can be built through direct service experiences and through the recommendations of the others. In collectivist cultures like those in many Asian countries, building networks of contacts and talking the time to develop trusted relationships can be very beneficial since buyers rely so heavily on word of mouth and also tend to be more loyal once they are in satisfying exchange relationships.

 

Client Knowledge

 

According to Kotler and colleagues, client knowledge involves research to understand clients and their operating environments, developing an organizational memory through appropriate databases and procedures, and to then make use of that information it obtains. Certainly, as part of an overall CRM program these suggestions are excellent. In the Asian or Chinese context however we can extend these concepts. According to Yau and colleagues, empathy must be developed in order to see situations from another perspective. Understanding clients and their business more deeply can help in developing empathy but in the Chinese context one must attempt to develop a relationship first before attempting to develop a transaction, which is often what occurs in the Western context. Informal discussions and not only business related discussions is key as a firm can more deeply understand the factual and inner feelings of clients. If one can reach this deeper level of relationship it may be beneficial in developing complex service strategies. Sharing information is also a common occurrence in the Chinese context and helps widen the network of firms. Sharing information is a sign of bonding and trust and not collusion as viewed from a Western perspective.

 

Client Access

 

This is the process of making the firm easy to do business with and involves giving clients every opportunity to communicate with members of the firm. In the Chinese context we can extend this beyond traditional business meetings and client contacts. According to Yau and colleagues, social interactions can be a meaningful way of building bonds between business people and events such as attending a Chinese dinner can help extend a relationship from the social level to the business level. Building such relationships and networks should be seen as an investment and form of social capital. Aside from direct clients, it will be important to initiate access for other stakeholders. Building personal relationships with gatekeepers or administrators can help smooth business transactions and extend ones network, this can be highly beneficial since bonding in certain social bases can be transferable. Intermediaries, which act as bridges between parties can also be a guarantor of trustworthiness.

 

Technology

 

Here, Kotler and colleagues talk about the importance of software and hardware that can be used to better understand, communicate, and serve clients. In the Asian context, the importance of technology in building client relationships is no less important but perhaps the information can be used in ways that reach beyond the traditional thinking of Western professionals. The ideas of bonding, reciprocity, trust, and empathy discussed in the previous sections can all be enhanced by collecting and utilizing information for acts such as gift giving or favours which may be used with a number of different stakeholders in order to build the network social capital that is of real use when doing business in Asian contexts.

 

Mutual benefit and building shared goals is an important element of doing business in Asian societies and hence fundamental to relationship marketing strategies for law firms. The relationships identified in the box below provide a framework for developing marketing relationships in the Chinese context. The relationship building and maintenance variables are aimed at building dimensions such as trust and reciprocity and should not only be targeted at persons in charge but at a wider network of business associates in order to smooth the business process. It takes time to build trust levels that are bonding in nature and Western professionals should be patient in waiting for a return on relationship marketing activities. People in Asian societies do not distinguish between business and personal relationships as clearly as Westerners and are more likely to develop business from personal relationships.

 

Working within the Context of Strategic Alliances – Creating Value

 

Many law firms choose to enter the emerging markets of Asia through some type of strategic alliance. Alliances can be beneficial in Asia due to the regulatory restrictions placed on law firms in many Asian countries and the difficulties firms face in learning about the culture and business environment. In many cases, an alliance can provide a law firm a relatively low cost and quick way to enter a foreign market. Such alliances can be informal or formal, exclusive or non exclusive, but in all cases successful outcomes rest on the ability of the alliance firms to engage in some degree of cooperation. The degree of cooperation will depend upon the alliance type and the work it involves yet all alliances should share the same objectives; the building of mutually cooperative relationships.

 

The rate of alliance failure is often reported to be over 50 percent which highlights the importance of careful alliance planning and implementation since alliance formation can be a resource consuming process. The high profile alliance failure between two power house Asian law firms (Allen & Gledhill of Singapore and Azmi & Associates of Malaysia) is a prime example of the problems that can occur even between firms of close cultural and geographic proximity. These two firms signed an agreement in order to take advantage of the increasing intraregional trade within Asia but the differing objectives of the two firms led to the demise of the alliance less than 18 months after it was signed. Firms wishing to avoid the ignominy of failed alliances and wasted investment should consider a number of factors including fit between alliance firms cultures and objectives.

 

Costs and benefits of alliances:

 

Given the complex business environments in Asia and the restrictions placed on practicing local law in many Asian legal jurisdictions, an alliance can provide a number of benefits for a foreign law firm wishing to access the Asian market;

 

• Enhanced access to local markets, clients, and local law practice
• Shared resources, knowledge, and IT
• Shared costs and risks
• Speed of access
• Reduced competition
• Gradual learning and knowledge accumulation about foreign markets
• Possible ease of market exit

 

The benefits of alliances are in many ways their weaknesses. By gaining access to a new market through an alliance partner one automatically gives up a certain degree of control and revenue potential in return for the reduced investment and risk associated with entering an unfamiliar market. Should the market prove not to be viable, the foreign firm should have a relatively easy exit assuming the alliance contract is not overly rigid. The costs associated with alliances are;

 

• Coordination costs of integration and administration
• Potential knowledge leakage and appropriation
• Loss of independence
• Potential slowdown in decision making and responsiveness
• Risk to reputation and quality of work
• Opportunistic behavior by alliance partner

 

The deeper the level of integration between the alliance partners, the greater the need of knowledge sharing and integration which can be both beneficial and problematic. Knowledge sharing between the parties can significantly add to the capabilities of the alliance firms and hence develop their competitive advantage. Building the trust and integration necessary to leverage knowledge sharing to this degree takes time and there is always the risk that the law firm alliance partner in Asia will appropriate technical and client knowledge and then attempt to dissolve the alliance and carry out the work independently. Ensuring the compatibility of a potential alliance partner and the scope of work that the two firms will share is an important part of the alliance building process.

 

Law firms have, and continue to build, a multitude of alliances and referral networks across Asia. Firms have the option to develop any number of alliances and flexibly reconstitute their alliance networks based on needs and changing conditions. Small firms can gain access to international markets that their limited resources would often restrict and these types of relationships can be assuring to potential clients who require international support. Of course, whether these alliances really do add value to what the firm does and provide benefits above what the client could achieve by instructing firms independently will very much depend upon the governance and management of the alliance.

Strategy and strategic planning in professional service firms: what is it and do I need it?

Corporate strategy, business strategy, strategic planning, strategic marketing, vision, and mission – quick, can you tell the difference between them. OK, perhaps it's an unfair question but it seems that many writers and consultants use these words so freely and without adequate explanation that most managers probably feel somewhat foolish for not knowing. In reality, many of these concepts are overlapping and are extremely relevant to the PSF if one accepts the context of the PSF and its unique nature.

The word strategy comes from the Greek word 'strategos' and refers to the art of the general. In modern business, strategy is about considering the longer term future of the firm in terms of what clients you would like to serve and in what markets(and hence those you do not) and how you would like your firm to look, say in 5 years time. Much of strategy is about being effective, making the right choices and doing the right things. Strategy thinking and concepts have gone through a number of progressions in the last 40 years from what could be called highly programmatic and prescriptive schools of thought to views that see strategy as more organic, intuitive, and iterative. The western view of strategy and strategic planning as a yearly activity that in the past (at least in large corporations) was dominated by strategic planning departments (which have all but disappeared) and decisions made being basically fixed, has been infused with eastern concepts primarily stemming from Japanese management that see strategy as an evolving concept based on the unfolding of events. This view of strategy as being both hard and soft is a view that I believe holds most relevance to the PSF in Asia due to the unique aspects of the PSF and the cultural distinctiveness of the region.

I Strategy in the PSF

In traditional organizations and theory, strategy has been considered the domain of top management and that their job is to strategize and once developed, sell the strategy and get buy in from the rest of the organizational members. In the PSF, there are problems with this type of approach. Firstly, top management (or partners) are really part time managers at best as they are responsible for driving the majority of revenue for the firm by working on the firms key accounts. Secondly, professionals are highly intelligent and independent workers and do not take well to what they perceive as an undue top down influence and control. David Maister suggests that firms take a bottom up approach to strategy meaning that practicing professionals at all levels have a major say in the strategy process, particularly for their own practice areas. Senior partners should act as facilitators to ensure that strategy is being taken seriously. It is important to note that eliciting each technical area of the firm to embark on their own strategy process can contribute to the fiefdom mentality that already exists in many firms. Strategies at each practice area level should fit into the firms overall strategy and incentives for information sharing etc should be put in place to encourage the necessary team work. Additionally, most professional firms have a number of practice areas and may require different strategies for each due to the necessities of the market place. Finally, professionals are the most vital asset of a PSF and it is their knowledge that sets them apart. There is strong case for strategy to be set at the individual level also in terms of what the professional should be achieving and how that ties into the firms overall strategy.

Another issue that seems specific to the PSF is the very close interaction between provider and client and the high degree of customization. Since serving and satisfying clients individually is such a high priority for professionals most firms will willingly take on additional work offered by the client even if that work is time consuming and out of line with what it wants to do. At first this may not seem like a problem but when one considers that all firms have finite resources and distinctive capabilities, working on projects that take up time and fill billable hours means potential opportunities elsewhere are being missed. This can come back to haunt you a few years down the road. Whilst it may not be too late for the laggard firms to play catch up it certainly makes things harder and whilst you are playing catch up your competitors are developing the strategies that will keep them one step ahead. Its very tempting for a PSF to ignore strategy when times are good and all sorts of work is coming in the door but it is important to realize that strategy is about trade offs. No firm can be all things to all people (or many things to a few clients) without having a clear understanding of the risks presently involved in what the firm is doing and not doing for the future. Developing a competitive advantage that can be sustained over the longer term takes time and will be based on the core competencies (distinctive strengths) of the firm, recognizing and harnessing those competencies in order to leverage the right business opportunities is not a one shot affair. Another problem for the PSF is the lack of tradition in terms of cross functional communication between different practice areas and even partners handling different clients. The partnership structure can be a major inhibiting factor here and each firm must figure out how they can best develop a suitable strategy. Another factor that impacts the PSF is that of regulation. In recent years, accounting firms have been fairly aggressive in treading the turf previously covered by law firms but with the implantation of the Sarbanes Oxley act (2002) there has certainly been a slow down in this trend.

II Strategic Planning, Marketing, and Competitive Advantage

The concepts of strategic management are well developed in manufacturing industries as well as more typical services such as banking etc, yet little is really know about effective strategic planning and management in the PSF. Certainly, strategy is part of strategic planning and involves the commitment of firm resources that are not easily reversible and affect the long term future of the firm. This distinguishes something which is strategic to that which is merely tactical (i.e. lowering prices). The traditional view of strategic planning is that a company finds a fit between itself and the environment. In essence, the firm would analyze both its macro and micro environment and based on its objectives and capabilities, develop a strategy and plan to create this fit. The problem with this line of thinking is that strategic planning is often thought of as a one shot affair whereby a firm can take a 2 day retreat, and with follow up, create a strategic plan that remains in place and untouched for a significant length of time. However, we know that competitive advantage erodes over time and what was once a successful strategy may no longer be appropriate. Another issue revolves around the involvement of marketing in the strategic planning process.

Take this example:

A mid sized law firm based in Singapore generates the vast majority of its revenue from domestic sources. Recently, several of its clients have been expanding their business into China and have asked the firm to provide legal services to its international operations. The firm has done this on an ad hoc basis for a while but as competitive intensity has increased in its domestic market the firm is considering internationalization along with its clients as a viable growth strategy.

The kind of questions that the firm should ask are:

1. Who are appropriate partners and how can they help us to provide the needed service to our clients?
2. Shall we set up an office or develop a network based on independent partners?
3. What services will the client need and could we leverage these into business with other firms in the region?
4. What capabilities will we need to develop to sustain this strategy?

 

There are all good 'strategic planning' questions, aren't they? In my view, they are but they are also essentially marketing questions as they refer to the value created for the client. Perhaps in some companies the divide between strategic planning and marketing is acceptable (although I can't really fathom how) but in the PSF it absolutely cannot be as the 'firm management and marketers" are one in the same. The professionals live and breathe a plan everyday in their interaction with clients and other stakeholders. In this respect, marketing and strategic planning questions are essentially the same questions as value created for the client is at the heart of all strategic management and marketing. Within the PSF, close collaboration between senior partners, practice group leaders, and dedicated marketing staff is absolutely essential to the creation of a strategic planning process that is going to be effective. That process must be flexible and ongoing and one that does not involve masses of paper or bureaucracy. From my experience, many professionals are unsure of the strategic planning process in terms of its value to the PSF. These reservations are understandable when viewed from the perspective of traditional strategic planning and the inflexibility it can create which is at odds with the highly customized and flexible approach needed by professionals when dealing with clients. It is also the perception that a strategic plan is an all encompassing firm wide force that does not allow for the idiosyncrasies of different practice areas and market conditions. This dynamic between a formally defined strategy and strategic direction and the necessary flexibilities inherent to the PSF are dynamic forces that require careful consideration in the adoption of a formal strategic planning process.

At the heart of strategic management and planning is the creation of a competitive advantage. A competitive advantage is basically a set of superior assets and capabilities that allows your firm to provide customer value that your competitors cannot easily match. For example, the Big 4 have networks of offices on a global basis that allows them to provide seamless services to their clients when and where they need it. Coupled with their ability to enforce high levels of consistency and quality control through myriad independent partners provides them a sustainable advantage which is hard to match. These firms have not stood still however, they are continually reevaluating the value they provide to clients through new services and continued global reach. The idea is that an advantage does not stay an advantage forever as competitors develop new ways of doing business or play catch up with incumbent firms. The concept of sustainable competitive advantage is depicted in the figure below:

 

 

 

 

Competitive Advantage Cycle

(Source: George S Day (1997) Maintaining the Competitive Edge: Creating and Sustaining Advantages in Dynamic Competitive Environments. In Day, G.S., Reibstein, D.J., and Gunther, R (eds) Wharton on Dynamic Competitive Advantage. Wiley)

A sustainable competitive advantage (SCA) is one that gives you a long term advantage over your competitors and cannot be easily copied. It is based upon the idiosyncratic bundles of resources of the firm (known as the Resource Based View of Strategic Management). These resources are the assets, capabilities, knowledge, and business processes of the firm that are combined in such a manner to create core competencies which are essential to continued operations of the firm. According to George Day, the creation and sustenance of advantages is an iterative process with on going demands for investment dollars and management energy and foresight. It is the intangible resources of the PSF that are likely to be the most important and lead to the creation of core competences that are distinctive from competitors and hence the basis for SCA. According to Constantinos Markides (of the London Business School), there are 3 major characteristics of competences that define whether they are strategically valuable:

• It is rare – for instance, the success of the Big 4 is partially based on their international network of independent firms operating under the banner and standards of their coordinating entity (i.e. KPMG). The skills and processes needed to manage such a global network is something that takes substantial learning and is a major barrier to other firms wishing to adopt similar business models.
• It is not easy to imitate – because the exploitation of intangible resources leads to a firms services and culture, it is not made up of one activity or of individual pieces of knowledge. The knowledge and capabilities are part of the fabric of a firm and exist within the social context that is not easily understood or articulated by even those within the firm. This intricate weaving of resources creates competences that are very hard to replicate by other firms. Firms such as McKinsey and Co often go on unscathed even if large numbers of consultants leave at the same time (which has happened in some offices).
• It is not easy to substitute – if existing competences cannot easily be replicated then firms may look to substitute other assets to search for a SCA. For example, if a PSF stands out because of its ability to provide services across a broad scope of practice areas or industries, a competitor can begin forming alliances with other firms to create the same type of service provision for its own client base.

 

I have seen many PSF's list their core competences as their practice areas. This is clearly ludicrous and fails to take into account that a distinctive competence is one that is valued by the market place. If you have specialized skills or knowledge in certain practice areas due to extensive industry experience or other factors then that is what should be stated in a manner that demonstrates clear benefit for the client. In terms of this resource based view of strategic management, firm leaders must consider what competences lead to a SCA and how they can be nurtured and managed for the future. Much knowledge in the PSF is tacit and whilst the typical apprenticeship programs aim to pass on this tacit knowledge, it is great importance to codify valuable types of knowledge and imbed these within the processes and structure of the firm. Any PSF will want to consider how the firm learns and accumulates new skills which in turns needs consideration of how incoming work affects the resources of the firm and whether that work is strengthening or weakening the strategic position of the firm. One can also see a number of professional service associations (such as the ABA) starting to develop individual competency systems that help professional focus on developing the needed skills to compete effectively in the evolving professional environment. This is a good thing and could be tied into the firms overall competency assessment and strategic planning processes.

I am sure that a number of professionals reading this section are still thinking what are typical examples of competitive advantage in the PSF? Research by Sharmistha Bagchi-Sen and Linda Kuechler (2000) found that SME accounting firms used a number of bases for competitive advantage. These include flexible specialization, speed of delivery, collaboration with other provider firms, and specialized skills. The authors found that those more successful firms did not compete on price and were more proactive than their less successful counterparts. Pro activeness is an important facet of strategic planning in terms of analyzing and responding to environmental challenges and trends.

The resource based view (RBV) of strategic management is particularly pertinent to the PSF due to the high reliance on intangible sources of advantage that create a firm's competencies. PSF leaders must realize that strategy is dynamic and should never be set in stone whilst at the same time providing a coherent direction for the firm. Strategy is also a creative process based on internal and external factors with a good deal of intuition and foresight thrown in.

III Strategy & Performance in the PSF

Performance measurement for the PSF is an area that whilst beyond the scope of this post, is an area of considerable controversy. Financial return is not the only measure of performance used in most commercial organizations and particularly for the PSF, other measures are extremely important. This section deals with existing research on professional firms and the strategy – performance linkage, as well as concepts in strategic thinking developed specifically (or highly relevant) for the PSF. Readers are referred to works such as Client at the Core (by Bruce Marcus and August Aquila) for more ideas about performance management.

The following extract is from the Wall Street Journal Law Blog:

Thirteen years ago, this newspaper asked "did success spoil Skadden Arps?"

The article questioned the firm's evolution from an M&A shop to a full-service firm, with multiple practice areas and offices far beyond New York. As the firm increased its overhead, conflicts and the number of lower-margin practice areas, it took a slide down the American Lawyer profits-per partner ranking. "What the hell's wrong with us?" the article quoted an M&A lawyer as asking. The same question wouldn't be posed today. Skadden topped the 2007 AmLaw survey of U.S. firms, as measured by gross revenues. With the M&A market now struggling, diversification is a good thing with their broadening strategy into numerous practice groups. Their profits, by the way, weren't too shabby either.

One may infer from this article that putting all your eggs in one basket is not advisable and that a diversification program that spreads risk over several business practices is a logical strategy. On the other hand you have firms like Slaughter and May which rakes in over two million pounds in per partner profits by limiting itself to about 12 practice areas and relying on an international 'best friends network' to serve clients overseas. Both firms are obviously successful yet follow quite divergent strategies. Using the matrix identified in the figure below we can begin to get some insight into these firm strategies. The four alternative growth strategies have varying degrees of risk. A firm using a market penetration approach would likely upgrade its selling effort (as well as cross sell) to get clients to use the firms services more frequently or market to non client firms in similar businesses with similar needs. This requires little adaptation on the firms part and has a high chance of success. When selling existing services to new markets, a firm would be involved in market development. For example, an accountancy firm that has traditionally offered services to commercial organizations may find that non traditional businesses such as non profits or educational institutes to be viable targets for their services.

 

                    Markets/Clients

 

Existing                New

Market Penetration	Market Development
Service Development	Diversification

Existing

 

Services

 

     New

Service and Competitive Development Matrix

(See Zeithaml, V.A, and Bitner, M.J (2003) Services Marketing: Integrating customer focus across the firm. 3^rd Ed. McGraw Hill, Irwin)

Service development involves offering new services to existing clients or markets served. Hence a law firm may offer litigation services on top of its existing family law services. The fourth alternative, and probably the most risky, is that of diversification. This involves creating new services and marketing them to new clients/markets. If we take a look at the strategy of Skadden, one can see their strategy falls into the diversification quadrant of the matrix as they have experienced both geographic diversification as well as creating new practice areas to serve new types of clients. Diversification is often considered the most risky approach as a firm is entering unfamiliar markets by offering services it has little experience in offering. On the other hand, diversification may offer a substantial upside in revenue growth. How does one decide which approach is suitable, and in what situation? Much will depend on management's world view and how they see the firm as well as the competitive environment. For example, how does one go from what is essentially a single practice firm in one geographic area to a multi practice firm operating on an international basis? If you view your firm's services as the competences of your firm then you are unlikely to see possibilities that allow you to create superior performance. Referring back to the RBV of strategic management, one can consider your services as end branches of a tree that stem from the roots of that tree. The roots are your core competences and are the basis of your competitive position. Similar to a firm like 3M, which has taken its competences in substrates and coatings and applied them to a number of industry leading products, a PSF can study and understand its true competences and leverage these to tap as yet unexplored opportunities. Hence a firm which has successfully diversified either geographically or service wise (or both), may seem to outsiders to be involved in haphazard expansion or unrelated diversification, but may in fact be leveraging its core competences in areas such as research, practice group management, client management skills etc and successfully applying those in previously un tapped markets. This is not to say that all firms should engage in diversification but rather to consider their strengths as bundles of resources that can be studied, understood and used in a strategic management framework. According to Gary Hamel and C.K. Prahalad (Harvard Business Review, 1990), a core competence should potentially provide access to a variety of markets as well as make a significant contribution to customer benefits of the end service.

In terms of actual strategy decisions and PSF performance, some studies have identified key aspects of those firms that could be considered more successful than their counterparts. For example, in a study of global law firms, David Brock and colleagues (2006) found that firms which utilized a balanced approach to diversification outperformed other firms in terms of per partner profitability and profitability growth. This balanced approach is known as an analyzer strategy (based on the Miles and Snow typology) and is a combination of a firm which defends its existing service market domains and concurrently searches (prospects) for new opportunities. The study supports the contention that excessive diversification has a negative impact on firm performance due to the dilution of firm resources known as the costs of excessive scale and scope. Whilst the results of this research maybe hard to generalize to other professional settings or smaller law firms, it does highlight the advantage of taking a proactive strategic management approach which outperforms firm using a reactive strategy (known as reactors). The research cited earlier in this chapter (Bagchi-Sen and Kuechler, 2000) examined the strategic orientation of SME Public Accountancy firms. The authors found that firms which could be classified as proactive, functionally diversified, and /or internationally oriented fared better than their reactive counterparts. The competitive advantage of the successful firms was based on customization of services for specific groups of clients, speed of delivery, collaboration with other producer service firms, and specialized skills. One could think of these bases of competitive advantage as core services that lead to the end services that clients actually buy. One must then, as a PSF leader, consider what are the core competences that create these core services? The point of highlighting these two studies and posing questions on core competences is to demonstrate that strategic management practices which are applicable to the PSF are indeed workable and that any group of professionals involved in the strategy process of their firm can take these concepts and ideas and use them to enhance the strategy process of their firm and their overall strategic competitiveness.

IV Conclusion

Strategy is not a one time search for competitive advantage or an annual exercise that is based on a two day retreat facilitated by an outside consultant, it is an ongoing process that realizes positions that are at best temporary and require on going adaptation and innovation. Many traditional strategic management concepts are not applicable to the PSF and this chapter has tried to highlight those that indeed do work in this context and are highly practical. Additionally, strategic management as discussed here is highly relevant to the PSF and does contribute to successful performance although defining firm performance is perhaps somewhat more difficult for a PSF than it is for traditional organizations. PSF leaders would do well to take a proactive approach in determining the future of their firm and not rely on external pressures that often force a firm to change when it is already too late.

New Service Innovation and Success in Professional Service Firms

Innovation and creativity are perhaps words that do not easily fit with the traditions of the PSF. 'If it isn't broke, don't fix it', are the words that most professionals live by and if customers are not complaining, then everything must be fine. Hopefully, if you have got this far in the book, that myth has been firmly laid to rest. The late Peter Drucker once said that a firm has only two functions: marketing and innovation, the rest are costs. This book has already laid out the importance of marketing as the lead driver of firm performance and innovation is not far behind. In reality, the two are strongly interlinked as innovation is a process that is driven both by the market and within the firm.

When we talk about innovation, we are not necessarily talking about radical new services or change. There are in fact many types of new service innovations as described by Valerie Zeithaml and Mary Jo Bitner in their book on Services Marketing:

• Major innovations: these would be new services for yet undefined markets. Ernst and Young's EYO service would fit here.
• New services for a currently served market: offering existing clients services that maybe offered elsewhere but have not been offered by the firm.
• Service line extensions: augmentations of existing service lines such as a CPA firm adding tax advisory services to its audit services.
• Service improvements: changes in features of a service that are already offered that improve the service such as a law firm allowing clients to access documents online to speed up approval.

 

Clearly, developing a major innovation represents the greatest risk for a PSF as client acceptance is highly uncertain, yet it is often these types of innovations that provide the greatest return in terms of revenue growth as well as providing the firm a competitive advantage and a way to differentiate itself from competitors. Introducing new services is not easy, the failure rate of new services exceeds 50% and in the process costs the firm substantial time and resources. Additionally, a firm does not want to develop new services without serious thought as to the market need and fit with the firm's overall strategy. Excessive service proliferation can dilute the firm's capabilities and create confusion for both internal and external market places. Hence it becomes important for the firm to have some understanding of the new service development process and the key success factors for new service innovation.

I New Service Success

If you take a look at the product marketing literature, there is a substantial amount of information on the key success factors for new products. Unfortunately, there is little evidence beyond anecdotal that defines the reasons for success or failure in the professional services field for the development of new services. One of the very few studies that has looked at this area was conducted by Brentani and Ragot (1996) who looked at a wide variety of professional service firms including accountancy and consulting. They found 8 factors to have a significant impact on the success of new services in the PSF, some being external to the firm with others being internal issues:

 

Fig 8.1 Determinants of New Industrial Professional Service Success

 

(NSD = new service development. See de Bretani, U. and Ragot, E (1996) Developing New Business to Business Professional Services: What factors impact performance? Industrial Marketing Management, 25, pp.517-530)

Figure 8.1 identifies 8 variables that the authors found to have a significant impact on the success of new services in the B2B professional services sector. The factors identified in grey circles are external to the firm whilst those in blue are internal ones.

External Factors:

Service superiority – this was found to be the most important factor in explaining the variance of successful new services. Those services that were unique in the market place and offered real benefit to the client over existing services had the most chance of success.

Market and marketing fit – this is a combination of both meeting client needs as well as capitalizing on the resources and competencies of the firm.

Customer participation – since professional services are highly customized and clients are an integral part of the service equation the research shows that having clients participate in the development of new services is important.

Market size/potential – having potential for volume sales was found to be somewhat important.

Internal Factors:

Effective new service development (NSD) culture – top management support and active participation from different levels of the firm as well as functions was the most important internal issue. This includes encouraging and rewarding innovation.

Service expertise – having specialized knowledge beyond what the client could do themselves is probably common sense due to the complex nature of professional services.

Service newness to firm – those services that require the firm to generate new capabilities or serve new markets were the most risky. In other words, this has a negative correlation with success.

Planned NSD experience – having a formal process that includes proper planning and market testing was another factor that merited some attention.

The results of this study show that it is a mixture of both external (market factors) and internal (firm factors) factors that determine whether new services will be successful or not. Of all the variables identified, service superiority was found to be the single most important factor. Again, this has its roots in the marketing concept and the acceptance of a marketing culture. It is imperative for a firm to take an outside-in perspective and scan the environment in order to search for the latent needs of clients that may not even have been expressed yet. In many cases, clients are not adept at expressing their needs or have yet to recognize a need. It is here where the PSF can act proactively and look at changes in the environment (both their own as well as client industries) in order to develop services that will be valued by the market place and in the process allow them to differentiate themselves from their competitors. A good example of this type of innovation is when top US law firm Wachtell, Lipton, Rosen and Katz developed the poison pill to deter hostile takeovers. Much of what has been described here can be thought of as the innovators dilemma. In his book of the same name, Clayton Christensen (a Harvard professor) found that when incumbent firms listened to closely to their existing customers they often failed to capitalize on new opportunities and were surpassed by new incoming firms. This dilemma is can be thought of as the dynamic between market driven and market driving. A market driven firm (which is akin to client driven) pays close attention to the needs of its customers and the market place and creates new products and services to meet those needs. Often these types of changes can be described as incremental and whilst beneficial do not provide a platform for a leap in firm performance. Market driving on the other hand is where the firm sees a yet unexpressed need in the market place based on both a deep understanding of the market as well as its own intuition (consider the Sony Walkman) and develops new services that creates a market that essentially did not exist. This type of radical innovation allows the firm to reach new levels in performance. Clearly, radical innovations do not come along very often and in reality, a firm should seek a systematic development of new services that fit with the descriptions of new services given at the beginning of this chapter. It should be pointed out that new services which fit under the label of major innovations also present the most risk, particularly if the service area is beyond the current competencies of the firm. Hence the PSF should take a structured approach to developing new services that is based upon the objectives of the organization and its overall strategy.

According to Harry Mills (The Rainmakers Tool Kit), there are 6 criteria which a new service should be tested against:

1. Target market – who and how will they purchase the service?
2. Need – what is the real value?
3. Unique advantage – what are the unique advantages?
4. Speed – can we launch to gain first mover advantage?
5. Sustainability – is the service easily copied, can we maintain our advantage?
6. Management commitment – will top management commit the needed resources?

 

Some of these fit the research cited in figure 8.1 and provide an easy reference list for firms wishing to consider the introduction of a new service.

One question that I am often asked in my work with professionals is whether there is a need to change when business is good and things are going well. This links into the strategic management of the firm. Strategic management and a long term orientation is often at odds with most professionals but it should not be. Looking ahead and considering new services when business is good is probably the best time to do it as the firm will be able to commit the necessary resources and take a hit if the service does not work out. The business world is filled with firms that were leaders in their field only to suddenly evaporate due to short sighted management. In fact, in his book Practice What You Preach, David Maister shows that a long term orientation is one of the key factors for success of the PSF.

II Managing Innovation and the New Service Development Process

Developing new services of any type should not be a hit or miss process, such innovation should be built into the fabric of the firm whereby compensation is linked to development of new ideas and the overall firm culture supports the necessary processes and activities for successful new service development (NSD). The PSF must consider the rationale for NSD in terms of meeting both internal (staff) and external customer needs as well as fit with the overall strategy of the firm and its objectives as well as capabilities. The PSF competes in two markets, one is for clients and the other is for talent. Whilst a firm maybe happy providing standardized services for the same clients in the same industries over a long period of time, this may lead to stagnation amongst professionals within the firm which could eventually lead to a lack of intellectual stimulation and higher staff turnover. On the other hand, developing services in areas that the firm lacks expertise may give professionals the chance to learn new skills but will require the firm to import those competencies either through additional hiring or joint ventures. This can disrupt the culture of the firm and create other types of problems. It is therefore crucial for the professional firm leaders to consider carefully the NSD process and the impact it will have on the firm overall. These types of considerations tend to be unique to the professional service industry.

Having taken into account these considerations, the professional will still need some type of framework and guidance as to how to decide on what new service development direction to take as well as managing the process. The NSD direction will be based upon the growth strategy of the firm (assuming it has one). Essentially, there are two growth strategies that are related to new services:

Service development – offering new services to client markets currently served. For example, a CPA firm may wish to start offering management consultancy services to client markets that it already serves for tax and audit services.

Service diversification – offering new services to new client markets. For example, a law firm decides to target the commercial real estate market when it previously only focused on family law.

These two approaches could span any number of the new service innovations identified at the start of this chapter. Clearly, service diversification with a major innovation would be the most risky type of NSD as there would be little precedent both within the firm or market and the chances of success are unknown. What type of approach the firm takes will largely depend upon its risk culture and its overall growth strategy. This growth strategy should be based on the strategic plan of the firm which in turn is largely based upon the firms competencies it has and wishes to develop (and of course the market environment). These issues are dealt with in other chapters.

In terms of managing the NSD process, Valerie Zeithaml and Mary Jo Bitner provide a framework which is specifically designed for the service firm. This framework (fig 8.2) describes an iterative process by which a firm can consider the stages in the NSD process and integrate these into the overall strategy of the firm.

 

 

Fig 8.2 New Service Development Process

(See Zeithaml, V.A, and Bitner, M.J (2003) Services Marketing: Integrating customer focus across the firm. 3^rd Ed. McGraw Hill, Irwin)

Front End Planning

Initially, the firm must determine its strategic direction within which its new service strategy will fit. If the organization develops aggressive growth plans that involve entering new markets then that will predicate its need to engage in some type of diversification. This in turn will make the firm consider how it will acquire the competencies to serve those markets.

Idea generation is the first step in developing a new service. Ideas can come from many sources including staff, changes in the operating environment, competitors and internal brainstorming. However, probably the most powerful source of ideas will be the business problems and issues that target clients face. Having a deep understanding of your client industries and the challenges they face will provide a lens with which to view the idea generation process. Once ideas have been screened and initially accepted, they can refined in order to be tested. The service can be tested with key clients but will require input from multiple stakeholders in order for something concrete and specific to be developed. The intangible nature of services makes them much harder for customers to visualize hence the benefits, value proposition, and how it works will take a number of iterations before it is viable as a concept to be tested properly. Once a service concept passes this stage then its feasibility and profit potential needs to be examined. This will include costs of development and managing the service as well as demand potential and overall revenue forecasts.

Implementation

Now the fully developed service can be tested on a larger market and further refinements can be made based feedback received. Again, the difficulty involved in implementing new services suggests that multiple stakeholders should be involved in order to assess and critique the service from both a delivery and usage perspective. You can also gauge the demand to some degree from the response of clients who were included in the test and see whether your financial estimates are accurate. If response is poor you may have to go back several steps in the process or abandon altogether. At the launch and commercialization stage you are basically going live and can examine all aspects of the service process including the interaction with other services already offered by the firm as well as the degree of acceptance by the market place. One can still make changes here based on feedback if the overall response is positive but requires some changes to the design of the service, its benefits or the process. Many firms create service blueprints that depict in substantial detail the service process, interaction with clients and the evidence of service as the client experiences it. Launching takes careful consideration of timing and markets as well as extent. In other words you can launch a service with much fanfare and at many markets or you can take a low key approach and steadily increase the activity associated with the service as acceptance grows and success seems more likely. Whatever is chosen, it is crucial that the firm has the resources ready to capitalize on the opportunity it has created. Do not create a need then fail to fulfill it as your competitors will benefit from all the work you have done!

III Conclusion – measuring success

In manufacturing firms the use of financial measure such as ROI dominate the landscape when measuring success of new products. In the professional services sector there is a strong case for a wider criteria when measuring success. Firstly, using ROI as the major indicator of success maybe inappropriate for the PSF for a number of reasons such as the need of the firm to develop critical competencies as well as the fact that the major assets of the PSF are human, intellectual and social. Hence other factors should be considered such as the impact of new projects and services on the competencies of the firm, its image, and its relationship with clients. Peter Drucker called measuring organizational performance only by financials a fallacy. For the PSF, this may be particularly so.